Detailed Rationale

CRISIL Ratings has upgraded its ratings on the bank loan facilities of Amara Raja Electronics Ltd (AREL) to ‘CRISIL BBB-/Stable/CRISIL A3’ from ‘CRISIL BB+/Stable/CRISIL A4+’.

 

The upgrade reflects the expected improvement in business risk profile of AREL supported by steady diversification initiatives within the Electronic Manufacutring Services (EMS) segment (41% of revenues in fiscal 2024) in line with the group’s new energy strategy, which will ensure sustained healthy revenue growth over the near to medium term. Besides, revenue growth will be augmented by new business opportunities across spectrum of industries like defense & aerospace, power utilities, consumer electronics, health care & Information technology etc. enhancing capabilities in the EMS business. The company is also expected to sustain its operating profitability at ~4-4.3% over the near to medium term, which along with better scale of revenues, will result in improved operating profits and cash generation. Besides, the company is also expected to sustain its healthy financial risk profile, and maintain debt metrics at comfortable levels. The ratings also continue to draw comfort from the support AREL receives from the promoters of the Amara Raja group and need-based financial support via loans or equity, from holding company, RNGalla Family Pvt Ltd (rated ‘CRISIL A+/Stable/CRISIL A1’).

 

Revenue is expected to grow at healthy rate of ~20-25% in fiscal 2025 and in high double digits thereafter, driven by company’s entry into electric vehicle (EV) component business where company will supply EV chargers to two wheeler/three wheeler original equipment manufacturers (OEMs) through group company, Amara Raja Power Systems Ltd (ARPSL; CRISIL A+/Stable/CRISIL A1). These products were earlier purchased from third party and traded by ARPSL. Additionally, the company has also commenced supply of Battery Management system to another group company Amara Raja Advanced Cell Technology Ltd (ARACT, subsidiary of Amara Raja Energy and Mobility Ltd, (AREML, rated ‘CRISIL AA+/Stable/CRISIL A1+’) from fiscal 2024 onwards. Further, the company has diversified into wire/cable harnessing segment and has established a plant in Bangalore and steady ramp up of the facility is also expected to aid revenue growth of AREL over the medium term.

 

Debt metrics are likely to remain at healthy levels in the near to medium term, despite some moderation due to debt being availed for enhancing wiring harness line capacity and related infrastructure. Gearing is expected at ~0.8 times at March 31, 2025, and then witness steady improvement over the medium term, supported by improving cash generation. Support from RNGFPL is also expected to be forthcoming in the event of any financial exigencies or in the event of sizeable inorganic growth opportunities.

 

Earlier, revenue growth remained flattish during fiscal 2024 majorly on account of loss of revenue/delay in materialization of orders from few customers amounting to Rs.45-50 crore coupled with decline in Home UPS (HUPS, 59% of revenues in fiscal 2024) realization due to price cuts taken by the company. AREL’s operating profitability improved marginally by 10 basis points to 4.3% in fiscal 2024 from 4.1% in fiscal 2023 despite sluggish revenue growth and moderation in realization majorly aided by stabilization of input costs along with continous cost reduction initiatives/value engineering undertaken by the company. Also better margins from new customer orders aided profitability.  AREL’s financial risk profile is comfortable with gearing of 0.46 times at March 31, 2024 (0.37 times at March 31, 2023). Other debt metrics like Interest coverage ratio and net cash accruals to total debt improved to 7.13 times and 0.52 times respectively in fiscal 2024 from 3.85 times and 0.1 times in fiscal 2023. with better operating profits and cash generation.

 

CRISIL Ratings also notes the acquisition of 49% stake by AREL in DFM Softech Solutions Pvt Ltd (DSSPL) in July 2023 at total consideration of Rs.2.7 crore which has been funded entirely through own accruals. This entity was later renamed as Amara Raja Design Alpha Pvt. Ltd. (ARDAPL) by AREL. ARDAPL, incorporated in 2017, is engaged in the business of providing product design and development services. It offers industrial design, electronics, mechanical design and analysis, firmware and prototype development etc. The acquisition of sizeable stake will provide AREL with integrated Electronics System Design & Manufacturing (ESDM) expertise in industrial design, power electronics, firmware, and mechanical design and help AREL to establish  partnerships with large multinational corporations and possibly expand its customer base.

 

The ratings continue to reflect AREL’s established position in the EMS and HUPS segments, diversification initiatives which will help augment growth, established business linkages with other Amara Raja group companies, stable operating profitability, improving financial risk profile and support available from RNGFPL. These strengths are partially offset by the exposure to risks related to stiff competition in the printed circuit board (PCB) industry and exposure to volatile raw material prices and foreign exchange (forex) rates.

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profile of AREL for arriving at the final rating.

Key Rating Drivers & Detailed Description

Strengths:

• Established capabilities in the EMS and HUPS business segments, and stable operating profitability: AREL manufactures off-line sine-wave UPS systems, battery chargers, and other EMS products which entails a complete range of services from design and engineering, assembly, manufacturing, and testing services for electronic components and printed circuit board assemblies (PCBAs). It is also engaged in end-to-end design, prototyping, sourcing, turnkey manufacturing, testing of high-reliability PCBAs, box build, products and systems integration services, operating in the market verticals of Automotive, Consumer, Energy, Healthcare, Industrial, Networking and Railways. AREL has been involved in manufacture of electronics for the Amara Raja group’s internal consumption as well as external customers. HUPS business was transferred from group company, ARPSL to AREL during fiscal 2022 as a part of internal group restructuring.

 

Though AREL has adequate capacity of 1-1.5 million units, it has undertaken an additional capex program to set up surface mount technology to cater to rising demand which has  increased manufacturing capacity by 150,000 components assembly per hour in the recent past. Furthermore, the company can ramp up capacity in minimal time to cater to incremental demand. Considering the increasing demand from existing and new clients, AREL has established an additional Surface Mount Technology line in Diguvamugham, Andhra Pradesh and is installing a separate facility for wire harness facility in Bangalore. Further, AREL has also carried out a backward integration by acquisition of 49% stake in ARDAPL which is engaged in electronics system design and development services. This will enable the company to carry out its own design activities for AREL and other group companies which was earlier outsourced. Capacity enhancement is expected to increase scale of operations and AREL is well positioned to benefit from economies of scale with higher volumes.

 

The company is also entering into the EV charger business is in line with group’s new energy strategy where company plans to supply EV chargers to two and three wheeler original equipment manufacturers through ARPSL from fiscal 2025. Besides, the company has ventured into wire/cable harnessing segment and has established a plant in Bangalore which is expected to ramp up by the second half of fiscal 2025. It also commenced supply of BMS to ARACT for EV and industrial batteries in fiscal 2024. These initiatives are expected to result in AREL registering strong double digit growth over the near to medium term.

 

The company is also expected to sustain its operating profitability at ~4-4.3% over the near to medium term, which along with better scale of revenues, will result in improved operating profits and cash generation. Earlier, AREL’s operating profitability improved marginally by 10 basis points to 4.3% in fiscal 2024 from 4.1% in fiscal 2023 despite sluggish revenue growth and moderation in realization majorly aided by stabilization of input costs along with continuous cost reduction initiatives/value engineering undertaken by the company. Also better margins from new customer orders aided profitability.

 

• Improving financial risk profile: Better cash generation and prudent capital spend has translated into a healthy financial risk profile for AREL. Debt metrics are likely to remain at healthy levels in the near to medium term, despite some moderation due to debt being availed for enhancing wiring harness line capacity and related infrastructure. Gearing is expected at ~0.8 times at March 31, 2025, and then witness steady improvement over the medium term, supported by improving cash generation.  Earlier, gearing stood at 0.46 times at March 31, 2024 (0.37 times at March 31, 2023). Other debt metrics like Interest coverage ratio and net cash accruals to total debt improved to 7.13 times and 0.52 times respectively in fiscal 2024 from 3.85 times and 0.1 times in fiscal 2023. with better operating profits and cash generation.

 

• Benefits from being part of the Amara Raja group and support from RNGFPL: AREL is a part of Amara Raja group, and gets regular operational support in the areas of treasury, strategy, control & planning from RNGFPL. AREL leverages on existing supplier network of Amara Raja group companies and also derives a significant portion of its revenues from various group companies.

 

AREL has been able to efficiently manage its working capital cycle through effective collection/customer management system. Around 65-70% of overall sales for AREL is from group companies where the payment is received on arm length’s basis as per agreed payment terms ie. within 30 days from the date of delivery, without any delay. Further some of the large orders are backed by customer paid inventory (advances), which reduces the need to stock up inventory. This ensures adequate working capital availability and lesser reliance on bank debt evident from average bank limit utilization of 27% through 12 months ended July 2024. The promoters of the group and RNGFPL have continuously provided equity and unsecured loans to AREL, apart from RNGFPL providing corporate guarantee and letter of comfort for bank loan facilities. This is expected to continue in the event of any financial exigencies or sizeable inorganic growth opportunities.

 

Weaknesses:

• Modest market position and exposure to stiff competition: The PCB industry is intensely competitive with the presence of domestic manufacturers and subsidiaries of global players. This is compounded by cheaper imports from China, Japan and Taiwan. The small market position of the company will continue to limit bargaining power against stakeholders.

 

• Vulnerability to volatility in raw material prices and forex rates: Business remains exposed to fluctuations in raw material prices, which can, however, be mitigated by price protection clauses with customers. Also, since AREL imports majority of its raw materials, any adverse movement in forex rates can further affect business risk profile.

Liquidity: Adequate

Estimated internal accruals of Rs.~11-18 crore/annum over medium term is expected to be sufficient for meeting the term loan repayment obligations of Rs.4 crore per annum along with incremental  capex and working capital requirement requirements. Promoters and RNGFPL have provided support by way of equity and unsecured loans in the past, including Rs.1 crore extended in fiscal 2025. Further support from RNGFPL is expected to be forthcoming as and when required. Besides, AREL has adequate cushion in the form of 27% utilized bank limits of Rs.36.35 crore over last 12 months ended July 2024 which will also help in case of any working capital stretch going forward.

Outlook: Stable

CRISIL Ratings believes AREL's business will benefit over the medium term from opportunities in the communication and general industry segments, leading to steady ramp-up of orders in the EMS segment and steady revenue from HUPS segment. AREL's financial risk profile will remain stable on account of improving accrual and low debt obligation. Timely support from the Amara Raja group’s holding company, RNGFPL is expected to be forthcoming in the event of any exigencies.

Rating Sensitivity Factors

Upward factors:

• Increasing diversification of customer base and better product diversity leading to healthy double digit revenue growth
• Sustenance of operating profitability above 4% levels, benefitting cash generation.
• Sustenance of healthy financial risk profile.

  

Downward factors:

• Continued decline in revenue growth and operating profitability below 2.5% impacting cash generation
• Large debt-funded capex, acquisitions or stretched working capital leading to moderation of financial risk profile and debt metrics.
• Change in stance of support from RNGFPL or promoters.

About the Company

AREL is a part of the Amara Raja group that has business interests in industrial and automotive batteries, power electronics, fasteners, sheet metal products and food processing. AREL was incorporated in 1999 and makes EMS products that include providing services from design and engineering, assembly, manufacturing, and testing for electronic components and PCB assemblies in the automotive, consumer, energy, healthcare, industrial, networking and railway industries. AREL manufactures electronics for the group as well as external customers. The company acquired the HUPS business in the second-half of fiscal 2022 from group company, ARPSL, as part of internal restructuring.

 

49% stake in AREL is held by Amara Raja group holding company RNGFPL, and balance by promoters directly.

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs.Crore)	Complexity Level	Rating assigned with outlook
NA	Bank Guarantee*	NA	NA	NA	4.2	NA	CRISIL A3
NA	Bank Guarantee	NA	NA	NA	0.3	NA	CRISIL A3
NA	Letter of Credit	NA	NA	NA	14.6	NA	CRISIL A3
NA	Proposed Letter of Credit	NA	NA	NA	2.44	NA	CRISIL A3
NA	Cash Credit	NA	NA	NA	21.35	NA	CRISIL BBB-/Stable
NA	Long Term Bank Facility	NA	NA	Sep-2024	1.35	NA	CRISIL BBB-/Stable
NA	Long Term Bank Facility	NA	NA	Sep-2024	0.62	NA	CRISIL BBB-/Stable
NA	Long Term Bank Facility	NA	NA	Mar-2029	4.7	NA	CRISIL BBB-/Stable
NA	Foreign Exchange Forward	NA	NA	NA	0.4	NA	CRISIL A3

*Bank guarantee and letter of credit are interchangeable