Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AA+/Stable/CRISIL A1+' ratings on the bank loan facilities of Amara Raja Energy & Mobility Ltd (ARE&ML; formerly known as Amara Raja Batteries Ltd)

 

The ratings continue to reflect the strong business risk profile of ARE&ML, supported by its established market position as the second largest lead acid battery manufacturer with its Amaron brand, diverse product profile across automotive and industrial battery segments, and robust distribution network in India and abroad. The ratings also factor in ARE&ML’s strong financial risk profile with negligible debt on its balance sheet. These strengths are partially offset by exposure to intense competition in the domestic battery segment and to logistical challenges arising from geographically concentrated operations. The company also faces project-related risk associated with its proposed entry into lithium ion (Li-ion) cells and battery packs through its subsidiary, Amara Raja Advanced Cell Technology Pvt Ltd (ARACT).

 

In fiscal 2024, ARE&ML registered revenue growth of 13% driven by healthy volume growth of 14% in in automotive battery divisions and modest growth of 4% in the industrial battery division, which together account for more than 80% of ARE&ML’s overall revenue. Growth in the automotive battery demand was driven by new vehicles sales as well as aftermarkets sales. The sluggish growth in industrial batteries was due to gradual transition of telecom batteries towards Li-ion batteries due to their higher energy intensity and longer life cycle, resulting in lower demand for industrial lead acid batteries. Revenue grew ~13% on-year during the first half of fiscal 2025 and is expected to have steady growth over the medium term, supported by steady growth in the automotive segments and new energy business with increasing demand for electric vehicle (EV) chargers and battery packs.

 

Operating profitability sustained at 14.5% in fiscal 2024 (14.4% in fiscal 2023). During the first six months of fiscal 2025, ARE&ML recorded operating profitability of 13.4% as against 13.1% during the corresponding period of the previous fiscal. Over the medium term, the operating profitability will be supported by stabilisation in key raw material costs, sourcing of cheap power from captive solar plant, increase in export volume in new geographies, commencement of manufacturing of tubular batteries post reinstatement, and synergy benefits from the acquisition of the plastic components business from group company Mangal Industries Ltd (MIL; ‘CRISIL A/Positive/CRISIL A1’) leading to reduced operational costs and better procurement policies for ARE&ML. However, the profitability is expected to be constrained by relatively low margins at ARACT (battery packs segment) and will improve gradually over medium term.

 

ARE&ML’s strong financial risk profile continues to be supported by sizeable networth and low debt on its balance sheet. This, along with healthy annual cash generation, has kept debt metrics robust, as indicated by gearing of 0.01 time as on March 31, 2024. The company is likely to undertake sizeable capital expenditure (capex) of Rs 1,100-1,200 crore annually for the next 2-3 years for debottlenecking battery capacity, routine modernisation and Phase 1 of the Li-ion giga factory under ARACT. Prudent funding of capex and working capital requirement from expected annual accrual of Rs 1,100-1,200 crore, and limited reliance on debt will ensure debt metrics remain robust over the medium term.

 

CRISIL Ratings also notes the National Company Law Tribunal (NCLT) order dated January 10, 2024, pertaining to approval of acquisition of the plastic components division from group company, MIL.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of ARE&ML and its wholly owned subsidiaries, Amara Raja Power Systems Ltd (ARPSL), Amara Raja Batteries Middle East (FZE) UAE, Amara Raja Circular Solutions Pvt Ltd (ARCSPL) and ARACT, on account of their financial and operational linkages.

 

CRISIL Ratings has amortised the goodwill of Rs.428 crore on the acquisition of the plastic components business from MIL over a period of five years from fiscal 2023 till fiscal 2027. CRISIL Ratings has also amortised goodwill of Rs 7.8 crore on the acquisition of ARPSL over a period of five years from fiscal 2024 till fiscal 2028.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Healthy market presence in the domestic storage batteries segment: The business risk profile of ARE&ML is supported by its healthy presence in the domestic storage battery market. The company is the largest player in this segment after Exide Industries Ltd (Exide), and has a large distribution network comprising 100,000+ points of sales, 1,000+ Power zone retail stores, 2,000+ extensive service hubs and 23 branches across India. This, along with the strong equity of its Amaron brand, has strengthened its market position over the years. Steady capacity addition has supported revenue growth (compound annual growth of 13% over the 10 years through fiscal 2024) and market share in both, the industrial and automotive segments.

 

• Diverse revenue streams, supported by established relationship with clients: ARE&ML’s increasing market presence in the domestic battery segment is a result of its diversified presence across the automotive and industrial segments. The company has a diversified presence in four-wheelers and two-wheelers in the automotive segment, apart from home uninterruptible power supply (UPS) and other battery segments as well as in exports, with limited dependence on any single customer for revenue. The diversified presence renders its business risk profile less vulnerable to downturns in the domestic automotive and industrial sectors, and sub-segments within this sectors.

 

• Strong financial risk profile: The financial risk profile is supported by modest debt, sizeable networth of Rs 6, crore as on March 31, 2024, and healthy cash generating ability, translating into healthy return on capital employed (RoCE; 18.5% in fiscal 2024) and robust debt protection metrics. Despite high capex intensity in the past, ARE&ML has not relied much on debt, leading to limited debt and comfortable gearing of 0.01 time as on March 31, 2024.

 

The expansion at ARACT is estimated at Rs 9,500 crore, to be undertaken in phases over 10 years. ARE&ML proposes to invest Rs 100-150 crore in Phase I/II of the lead recycling facility at ARCSPL, and ~Rs 2,000 crore through ARACT over the next 2.0-2.5 years, while its routine annual capex is expected at Rs 300-350 crore. With the company likely to fund both, the Li-ion giga factory (at ARACT) and lead recycling capex, predominantly through accrual, the financial risk profile is expected to remain strong over the medium term. However, marginal addition of debt is expected from fiscal 2026 pertaining to Phase I/II of the lead recycling capex. However, debt metrics will remain robust due to ARE&ML’s strong cash generating ability.

 

Weaknesses:

• Logistical disadvantages arising from geographical concentration in operations: ARE&ML operates from two locations in Andhra Pradesh (Tirupati and Chittoor), while demand is spread across the country, thereby restricting distribution logistics. The concentration of operations in a single state exposes the company to risks relating to natural calamities in the region. However, ARE&ML’s closely linked facilities offer benefits in the form of economies of scale. The plants are completely integrated with all critical components, including plastic battery cases which are sourced in-house.

 

The Andhra Pradesh Pollution Control Board (APPCB) issued closure orders in April 2021 for ARE&ML’s lead acid battery plants at Tirupati and Chittoor, citing allegations relating to non-compliance with environmental regulations. However, the High Court of Andhra Pradesh has continued to grant interim suspensions of the APPCB closure orders. While there have been no significant production disruptions in the past three fiscals, any adverse ruling could impact ARE&ML’s production and will be monitorable. The location of both plants in the same state thus exposes ARE&ML to possible legal risks.

 

• Exposure to intense competition: The telecom segment has been going through a transition phase where telecom providers have been migrating to Li-ion batteries for newly installed towers due to higher energy density and longer life cycle. This has reduced the demand for lead acid batteries for telecom applications, and telecom operators continue to exert pressure on vendors to reduce prices. Competition is also intensifying in the automotive aftermarket battery segment with small and mid-sized organised players (hitherto operating only in the industrial segment and now increasing focus on the automotive 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 aftermarket segment. Still, ARE&ML has performed better than its peers, largely because of its diversified revenue streams and product quality.

 

• Project risk related to entry into Li-ion cell and battery pack business: The new capacity coming up in ARACT is not likely to face material demand risk, with steady offtake expected from larger original equipment manufacturers (OEMs) as part of their green energy strategy despite operational challenges such as inadequate charging infrastructure, reliance on imported components and parts, and high prices of EVs. During August 2024, ARE&ML signed a Memorandum of Understanding (MoU) with Piaggio Vehicles Pvt Ltd (PVPL; ‘CRISIL A/Positive/CRISIL A1’) and Ather Energy Pvt Ltd for development and supply of lithium ferro phosphate (LFP) and nickel manganese cobalt (NMC) cells and battery packs for their upcoming vehicle offerings. ARE&ML is also in discussion with a few other EV technology players and will collaborate with them over the medium term in line with their EV strategy.

 

Although investments in ARACT will be sizeable over Rs 9,500 crore towards setting up a Li-ion battery plant and battery storage facility, the same will be well phased out over 10 years. Also, the initial investment may not entail much of debt, backed by ARE&ML’s healthy accrual. ARACT has also commenced sale of EV chargers, energy storage system (ESS) solutions and EV battery packs, which will help absorb initial gestational losses from the Li-ion battery plant. Besides, ARE&ML has implemented various large capex programmes in the past.

 

There has also been an increase in demand for EVs, especially in the two-wheeler and passenger car segments, which will gradually impact demand for internal combustion engine (ICE)-based vehicles, and hence, demand for traditional automotive batteries. ARE&ML has invested in Log 9 Materials, a start-up, and InoBat AS, a European group, both of which are focused on battery technology for EVs. ARE&ML plans to employ high density cells which pack more energy per unit and are suitable for tropical climatic conditions.

 

ARACT recently signed a technical licensing agreement with Gotion Ino-Bat (GIB) EnergyX Slovakia s.r.o., a joint venture between Ino-bat AS and Gotion High-Tech Co Ltd, which is a leading Li-ion battery maker based in China. As part of the agreement, GIB EnergyX will license Gotion’s world class LFP technology, which will aid ARACT in manufacturing world class LFP cells in the upcoming Li-ion giga factories. Furthermore, ARACT has an agreement with Jiangsu Highstar Battery Manufacturing Co, a global leader in NMC technology, which will aid ARE&ML in implementation of the latest NMC technology in the cell manufacturing process.

 

The technical tie-ups will aid ARE&ML in getting access to cell technology IP, support in establishing gigafactory facilities conforming to the latest generation process technologies, integration with global supply chain network for critical battery materials, and customer technical support for solution deployment. ARE&ML’s ability to bring in successful products and technology, and garner customers for these batteries, where technology is still evolving, will remain monitorable.

Liquidity: Strong

ARE&ML will maintain strong liquidity, driven by expected annual cash accrual of Rs 1,300-1,400 crore over the medium term and liquid surplus of over Rs 471 crore as of March 31, 2024. Besides, the company’s working capital lines of Rs 120 crore are sparingly utilised. ARE&ML has signed a MoU with the government of Telangana for setting up the state’s first Li-ion battery making giga factory and proposes to invest Rs 9,500 crore over the next 10 years in a phased manner for the same. The plant will have ultimate capacity up to 16 GWh and a battery pack assembly unit up to 5 GWh. Initial investment of up to Rs 1,500 crore (over the next 2.0-2.5 years) is proposed to be largely funded through ARE&ML’s accrual.

 

ESG Profile of ARE&M

CRISIL Ratings believes ARE&ML’s Environment, Social and Governance (ESG) profile supports the company’s already strong credit risk profile.

 

The battery sector has a significant impact on the environment because of the high greenhouse gas (GHG) emissions of its core operations as well as products. The sector also has a significant social impact because of its large workforce across its own operations and value chain partners and focus on innovation and product development.

 

ESG highlights:

• The share of renewable energy in total energy consumption has increased to 23.5% in fiscal 2024 with commissioning of a 50 MW Solar plant in Chitoor and target for FY 25 is 25%
• The Company’s energy conservation measures have led to a 19.18% decrease in energy intensity and target for FY 25 is to reduce further by 1.5%
• The Company has used recycled lead for 83% of all lead consumed, leading to avoided abiotic depletion and plans to increase the same to 84.31% by FY 25
• ARE&M has maintained its status as a zero-fatality organization throughout the year. The Lost Time Frequency Rate (LTIFR) for FY24 was 0.93. The rate has increased, the Company has already initiated Behavior Based Safety (BBS) programme and assessment of critical risks.
• The governance structure is characterized by 57% of its board comprising independent directors. It has a committee at the Board level to address investor grievances and also put out extensive disclosures. Company has established Sustainability committee lead by Executive Director.

 

There is growing importance of ESG among investors and lenders. ARE&ML’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given its high share of shareholding by foreign investors/companies

Outlook: Stable

CRISIL Ratings believes ARE&ML will continue to benefit from its established market position in the automotive and industrial battery segments, its improving revenue and customer diversity, and adequate operating profitability. Strong annual cash generation, and prudent funding of sizeable capex, which is well phased out, will ensure sustenance of robust debt metrics over the medium term.

Rating sensitivity factors

Upward factors:

• Strong revenue growth and sustenance of operating profitability at above 15% resulting in better-than-anticipated cash generation
• Completion of Phase 1 of sizeable capex (Li-ion battery plant) without material time and cost overruns, and timely stabilisation of operations thereafter
• Sustenance of strong financial risk profile and comfortable debt metrics

 

Downward factors:

• Lower-than-expected revenue growth due to delays in ramping-up capacity utilisation at new production facilities, and operating profitability below 10%
• Larger-than-expected, debt-funded capex or acquisition or material time and cost overruns in ongoing projects adversely affecting key debt metrics on sustained basis
• Adverse legal ruling impacting operations materially

About the Company

ARE&ML, promoted by Mr Ramachandra Galla in 1985, initially manufactured standby valve-regulated lead acid (VRLA) batteries at its unit at Karakambadi in Tirupati, AP. In 1998, Johnson Controls International (JCI) acquired 26% stake in the company, and in fiscal 2000, ARE&ML diversified into the manufacture of automotive batteries and set up a second plant at Chittoor.

 

Following divestment of stake by JCI to Brookfield, RNgalla Family Pvt Ltd (RNGFPL; holding company of the Galla group) increased its stake in ARE&ML marginally to 28.06% with Brookfield holding 24%. Brookfield reduced its stake in ARE&ML to 14% in May 2021, and completely exited ARE&ML in July 2023. As per the latest shareholding data as of September 2024, the Galla family through their holding company, RNGFPL, is the single largest owner and promoter of ARE&ML with 32.86% stake, followed by foreign portfolio investors (22.33%), Life Insurance Corporation of India (6.31%), mutual funds (6.25%) and other financial institutions (4.04%), with the balance held by public and others as on September 2024.

 

ARE&ML reported net profit of Rs 484 crore on operating income of Rs 6,514 crore in the first half of fiscal 2025, compared with net profit of Rs 419 crore on operating income of Rs 5,755 crore in the corresponding period of fiscal 2024

Key Financial Indicators

Particulars	Unit	2024	2023
Operating income	Rs crore	11,717	10,402
Profit after tax (PAT)*	Rs crore	847	645
PAT margin	%	7.2	6.2
Adjusted debt/adjusted networth	Times	0.01	0.02
Interest coverage	Times	51	51.30

*Adjusted for Goodwill amortization

Any other information: Not Applicable