| Amara Raja Batteries Limited | ||||||
| Ratings reaffirmed at 'CRISIL AA+ / Stable / CRISIL A1+ ' | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ratings on the bank facilities of Amara Raja Batteries Limited (ARBL) at 'CRISIL AA+/Stable/CRISIL A1+'.
The company’s performance improved in fiscal 2022, after two years of sub-dued demand conditions on account of covid-disturbances on industrial activities and slow down in automobiles sector. The company’s revenue grew by 23.5% for FY 2022 supported by strong volume pick-up in both automotive and industrial segments. Margins have however declined by 350 bps to 12.5% in fiscal 22 due to steep increase in prices of key raw materials (mainly Lead and other materials including , plastics, acid, separator etc) and increase in freight costs, which could not be completely passed on.
Revenues are expected to grow by 10~11% in medium term driven by the expected steady offtake by automobile OEMs, pick up in industrial activities and focus on exports. Margins are expected to improve supported by the benefit of higher volumes, likely proposed price hikes in the H1 of FY23 to offset RM price increase and expected softening of lead prices especially in the H2 of FY 23.
The rating also factors in the company’s healthy financial risk profile which is marked by expected high accruals of over Rs 1000 Cr per annum and negligible debt on the balance sheet, despite annual capex of over Rs.~500 Crs. The company will continue to fund all its capex and working capital requirement from its internal accruals and will hence will continue to have negligible reliance on debt. Healthy net worth, prudent funding of capex and working capital requirements have resulted in comfortable debt protection metrics and expected to remain at similar levels in medium term.
CRISIL's ratings on ARBL continue to reflect the diverse revenue streams and product portfolio and well established distribution network. The ratings also factor in healthy financial risk profile, marked by strong capital structure and debt protection metrics. These strengths are partially offset by exposure to intense competition in the domestic storage batteries segment; especially in the automotive and telecom battery sub-segments and threat from increasing preference for electric vehicles (EV), albeit in the long term and further due to logistical disadvantages as entire operations are consolidated in Andhra Pradesh whiles the consumers are spread across India. |
Analytical Approach For arriving at the rating, CRISIL Ratings has considered Amara Raja Batteries Limited (ARBL)'s standalone business and financial risk profiles. |
Key Rating Drivers & Detailed Description Strengths Healthy market presence in the domestic storage batteries segment: Business risk profile is supported by its healthy presence in the domestic storage battery market; ARBL is the largest player in this segment after Exide Industries Ltd (Exide). The company has a large distribution network comprising of 30000+ Amaron and PowerZone retailers across India. This, along with the strong equity of its Amaron brand has strengthened its market position over the years. The steady capacity additions supported the company’s revenue growth and increase in market share in both industrial and automotive markets; ARBL’s revenues registered a compounded annual growth rate (CAGR) of 11% over the last 10 years to fiscal 2022.
Diverse revenue streams, supported by established relationship with clients: ARBL’s increasing market presence in the domestic battery segment is also a result of its diversified presence across the automotive segments and industrial segments. Within automotive segment, it has well diversified presence in four wheeler segment, two wheeler segment, HUPS & other battery segment and into exports. Further dependence on single customer for revenue within these segments is limited. The company’s diversified presence thus renders its business risk profile less vulnerable to downturns in the domestic auto OEM and industrial sectors.
Strong financial risk profile: ARBL’s financial risk profile is healthy with negligible debt and healthy profitability resulting in favorable debt protection indicators, healthy return on capital employed (RoCE), and comfortable net worth and gearing. Despite high capex intensity with annual capex of over Rs.500 crore per annum, ARBL continues to fund the same entirely through accruals and cash surplus, resulting in gearing of about 0.01 times as on March 2022. Debt metrics continued to remain strong in fiscal 2022 as well, in the absence of significant debt. Similar trends are likely to continue over the medium term.
Weaknesses: Logistical disadvantages arising from geographical concentration in operations: ARBL currently operates from 2 locations within Andhra Pradesh (Tirupati and Chittoor), while demand is spread across the country, thereby restricting distribution logistics. The single-state-location facilities expose the company to risks relating to geographical concentration of operations, like natural calamities and others. However, ARBL’s closely linked facilities does offer benefits in the form of economies of scale because of its large size. The plants are completely integrated with all critical components, including plastics battery cases which are sourced in-house.
Exposure to intense competition especially in telecom segment and threat from EVs: The telecom segment has been going through a tough consolidation phase, wherein the telecom operators/ infrastructure players continue to exert pressure on vendors to reduce prices. Competition is also intensifying in the auto aftermarket battery segment and small-to-mid sized organized players (hitherto operating only in the industrial segment and now increasing focus on the auto segment) offering products at competitive prices. During periods of subdued end market demand, the increase in lead prices cannot be fully transferred to end customers especially in the after-market segment. Nevertheless, ARBL has performed better than its peers, largely because of its diversified revenue streams and product quality.
There has also been an increase in demand for electric vehicles especially in the two wheeler and passenger car segments, which gradually impact demand for existing integrated circuit engine (ICE) based vehicles and therefore the demand for traditional batteries. ARBL has invested in Log 9 Materials, a start up, and InoBat Auto an European group both of whom are focused on battery technology for electrical vehicles. The company is also establishing a Factory for Manufacturing Li-Ion batteries in FY23 which will be used in EVs. While ARBL will continue to look for partners to gain foothold in EV batteries, its ability to bring in successful products and garner customers for its EV batteries, whose technology is itself still evolving, will remain key monitorables. |
Liquidity: Strong ARBL enjoys superior liquidity driven by expected annual cash accruals of more than Rs. 1000 Crs in the medium term and liquid surplus of Rs. 339 crore. ARBL will continue to undertake capex of over Rs.750 Crs in fiscal 2023 and ~Rs. 500 in medium term crore towards the ongoing capacity expansion in two wheeler and four wheeler batteries as well as establishment of lead smelting plant and a factory to manufacture lithium ion batteries. CRISIL Ratings believes that ARBL’s surplus funds will also increase gradually with the expected increase in accruals. |
Outlook: Stable CRISIL Ratings believes that ARBL will continue to benefit from the pick up in demand from both industrial and automotive sectors, supported by its established market position and capacity expansions. This, coupled with prudent funding of its capital expenditure (capex) and working capital requirement, will aid sustenance of strong credit metrics over the medium term. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company ARBL, promoted by Mr. Ramachandra Galla in 1985, initially manufactured standby valve-regulated lead acid (VRLA) batteries at its unit in Karakambadi (Andhra Pradesh). In 1998, Johnson Controls International (JCI) acquired 26 per cent in the company and, in 1999-2000. ARBL diversified into the manufacture of automotive batteries. Following divestment of stake by JC to Brookefield, RNGalla Family Private Limited (holding company for the group) increased its stake to 28.06 per cent stake. Brookfield held 24% and in May 2021 it divested 10% stake; it presently holds 14%. Other shareholders include financial institutions (32 per cent), corporate bodies, the public, non-resident Indians and others (16 per cent). ARBL has achieved a revenue of Rs.8775 crore and PAT of Rs.512 crore in FY 22. |
Key Financial Indicators
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
*Interchangeability from Fund based to Non fund based limits. ^100% Interchangeability between BG and LC limits $100% interchangeability between Cash credit/WCDL/Sight or Usance Letter of Credit/Bill Discounting/ Buyers Credit, Guarantee (Rs 0.01 Cr) facilities |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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