| Amara Raja Electronics Limited | ||||||
| Long-term rating upgraded to 'CRISIL BB/Stable'; short-term rating reaffirmed; rated amount enhanced | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has upgraded its rating on the long-term bank facilities of Amara Raja Electronics Ltd (AREL) to ‘CRISIL BB/Stable’ from ‘CRISIL BB-/Stable’ and reaffirmed the short-term rating at ‘CRISIL A4+’.
The upgrade reflects the improved business risk profile, driven by transfer of the Home Uninterrupted Power Supply (HUPS) business (revenue potential of Rs 50-60 crore per annum) to AREL as a part of business restructuring of the Amara Raja group. Additionally, the company has diversified its order book and accordingly reduced the share of tender-based government orders, leading to improved business stability and higher margin in the electronic products business.
Though business was affected by Covid-19 and the company was operational for only 9-10 months in fiscal 2021, revenue registered strong growth of 96% YoY basis to Rs 93.27 crore with ramp-up of the electronic products business following steady orders from both existing and new clients. Operating profitability improved to 1.65% against losses in fiscal 2020. This improvement has sustained in the 9 months of fiscal 2022 as well, when revenue grew 109% year-on-year supported by recovery in industrial and consumer demand and transfer of the HUPS business in September 2021. With scale-up of operations and rationalisation of expenses, operating margin also improved significantly to 3.65% (December 2021). Business risk profile will sustain over the medium term on the back of opportunities in the communication and consumer electronics segments and steady revenue from HUPS.
The rating action also factors in the equity infusion of Rs 16.5 crore by holding company, RN Galla Family Pvt Ltd (CRISIL A+/Stable/CRISIL A1) in November 2021, which improved the liquidity of AREL. Financial risk profile also improved, with continued comfortable debt protection metrics: interest coverage ratio was over 3.82 times for the nine months ended December 31, 2021, against 0.98 time as on March 2021; gearing is expected to improve to 0.82 time by March 2022 from 1.75 as on March 2021.These ratios are expected to remain healthy over the medium term with improved profitability and absence of significant capital expenditure (capex) plans.
The ratings continue to draw comfort from the operational support AREL receives from the promoters of the Amara Raja group, and their need-based financial support via loans or equity. Corporate guarantee of the promoter (RN Galla Family Pvt Ltd) for cash credit limit continues to support credit risk profile. These strengths are partially offset by the exposure to risks related to stiff competition in the printed circuit board (PCB) industry, global shortage of semiconductor chips, and exposure to volatile raw material prices and foreign exchange (forex) rates. |
Analytical Approach CRISIL Ratings has taken a standalone view of AREL and has not consolidated its financials with other group concerns as the businesses are different with few linkages among the entities. |
Key Rating Drivers & Detailed Description Strengths: Established capabilities in the electronics manufacturing services (EMS) business and overall revenue growth: Though AREL has adequate capacity of 1-1.5 million units, it has undertaken an additional capex programme to set up surface mount technology to cater to rising demand. This will increase manufacturing capacity by 100,000 components assembly per hour at a total cost of Rs 6.72 crore. Furthermore, the company can ramp up capacity in minimal time to cater to incremental demand. Capacity enhancement is expected to increase scale of operations and AREL is well positioned to benefit from economies of scale with higher volumes.
Transfer of HUPS to AREL: As part of a business restructuring in September 2021, HUPS was transferred to AREL from one of the group entities. Henceforth, the company will manufacture HUPS for Amara Raja Batteries Ltd ('CRISIL AA+/Stable/CRISIL A1'), which is expected to generate incremental revenue of Rs 50-60 crore annually and aid growth in fiscal 2022. The HUPS segment will also help diversify overall business risk profile.
Improved financial risk profile through fresh equity infusion: Equity infusion of Rs 16.50 crore by RN Galla Family Pvt Ltd in November 2021 will help meet working capital requirement. The promoter has also extended unsecured loans of Rs 2.0 crore to meet capex. Networth, gearing and debt protection metrics are expected to improve in fiscal 2022 with the above infusion.
Benefits from being part of the Amara Raja group: The promoters of the group have continuously provided equity and unsecured loans to AREL, apart from the corporate guarantee for cash credit facilities. The company also benefits from the industry links, experience, and client relationship of the Amara Raja group, besides established supplier network and infrastructure.
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.
Global shortage of semiconductor chips: On account of the pandemic, there was global shortage of semiconductor chips. Since these are the key inputs for AREL, disruption in their supply can affect smooth production and will be a key monitorable. |
Liquidity: Adequate Liquid funds were about Rs 2.14 crore as on March 31, 2021, against term loan obligation of Rs 1.9 crore for the next two fiscals. Equity infusion of Rs 16.50 crore from RN Galla Family Pvt Ltd also supports liquidity. |
Outlook: Stable The business risk profile of AREL will continue to benefit over the medium term from opportunities in the communication and general industry segments, leading to ramp-up in orders in the electronics products division and steady revenue from the recently transferred HUPS segment. Financial risk profile will remain stable on account of improving accrual and small debt, and timely funding support from the promoters. |
Rating Sensitivity Factors Upward Factors
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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 got the HUPS business in the second-half of fiscal 2022 from group company, Amara Raja Power Systems Ltd. The restructuring was carried out to increase the scale of operations of AREL and strengthen its balance sheet. In the HUPS business, the company usually obtains components from group company, Mangal Industries Ltd (CRISIL A/Positive/CRISIL A1) and assembles and sells to Amara Raja Batteries Ltd. AREL has decided to focus on its core manufacturing segment and has already invested in acquiring the required management team and engineering talent. Its medium-term strategy will be to cover the fixed overheads and benefit from economies of scale.
RN Galla Family Pvt Ltd(RFPL) was set up in February 2017 as a partnership firm and reconstituted as a holding company on July 11, 2017. It is the holding company of the Amara Raja group and has 28% stake in Amara Raja Batteries Ltd and 100% in other group entities. RFPL is involved in managing investments in group companies and food division which produces tropical fruit pulps and concentrates to both corporate and export customers. |
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)
*Bank guarantee and letter of credit are interchangeable |
| 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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