Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A+/Stable/CRISIL A1’ ratings on the bank facilities of Amara Raja Power Systems Limited (ARPSL).

 

The ratings continue to reflect ARPSL’s established customer relationships in power supply systems, increasing customer base and healthy financial risk profile. The ratings also benefit from the strong parentage of Amara Raja Energy & Mobility (AREML; ‘CRISIL AA+/Stable/CRISIL A1+’). These strengths are partly offset by high customer concentration in revenue and high competitive intensity in the company’s product line.

 

Revenue growth has remained flat during fiscal 2024 on account of decline in revenue from the electric vehicle (EV) charger division and lower-than-anticipated offtake of EV chargers due to migration to the latest technology. ARPSL’s revenue is expected to grow ~20% in fiscal 2025 majorly aided by growth in EV charger and integrated power systems (IPS for railways) segment, backed by steady flow of orders from existing and new clients. Under the EV charger segment, ARPSL supplies chargers to various original equipment manufacturers (OEMs). This business, coupled with increased orders from the railways, is expected to be the growth driver for ARPSL due to increased preference towards cleaner mobility solutions.

 

Profitability has declined 140 basis points (bps) mainly due to sluggish revenue growth resulting in lesser fixed cost absorption and provisioning for receivables amounting to Rs 3.5 crore. Out of this amount, Rs 1.18 crore pertains to various small companies which are under litigation and the remaining major amount pertains to  the annual maintenance contract (AMC) work for the Indian Railways. There is delay in clearance of bills by the railways, post the Covid-19 pandemic, which is expected to be realised shortly and no further provisioning will be required going forward. The profitability is expected to sustain at 9-10% over the medium term, aided by expected revenue growth and various cost initiatives undertaken by the company. ARPSL has recently moved to the management representative-based model wherein sales, marketing and receivables collection are outsourced to various franchises with adequate technical expertise, which will reduce selling and promotional expenses going forward. Furthermore, it has started the product servicing business from the previous fiscal, which does not have any major cost associated with it, apart from fixed labour costs, resulting in gradual improvement in operating profitability.

 

The financial risk profile remains comfortable with nil debt on its balance sheet as on March 31, 2024. The debt protection metrics are expected to remain healthy, with minimal capital expenditure (capex) due to availability of sufficient capacity that will be funded by internal cash accrual, limiting overall debt.

Analytical Approach

Due to the criticality of ARPSL to AREML’s new energy business, CRISIL Ratings has factored in the business, managerial and financial support from AREML (parent of ARPSL) for arriving at the ratings of ARPSL.

Key Rating Drivers & Detailed Description

Strengths:

Established relationships with customers for the supply of IPS systems: ARPSL has established relationships with various zonal divisions of Indian Railways and other industrial players. The designs of power back-up products are approved by the Railway Research Designs & Standards Organization (RDSO), which has resulted in ARPSL garnering a healthy share of the market for IPS systems. Revenue from the power control segment is also driven by established relationships with customers.

 

Healthy financial risk profile: The financial risk profile continues to benefit from nil debt obligation, absence of major capex and adequate debt protection metrics. Gearing remained nil as on March 31, 2024. The debt protection metrics are expected to remain comfortable, supported by modest accrual and low capital spending.

 

Benefits of having a strong parent: At present, ARPSL receives both managerial and operational support from AREML. The parent enjoys a robust credit profile and is expected to provide timely financial support during exigencies and fund any sizeable investment plans at ARPSL. Besides a strong presence in the automotive and industrial batteries segment, AREML’s credit profile benefits from its strong annual cash generating ability and almost debt-free balance sheet.

 

Weaknesses:

Customer concentration in revenue: The revenue profile may remain restricted as a large proportion of sales is generated from the railways. Any change in policies of customers or preferences for vendors would impact the business. However, longstanding relationships with customers and the company’s focus on diversifying its revenue profile should partially offset this risk.

 

Exposure to intense competition: Manufacturing of power backup systems for industrial application is a highly fragmented business segment, with many players in the organised and unorganised segments leading to pricing pressure. As technology intensity is not high, the major entry barriers for domestic players are proven implementation skills, design capability and after-sales service. Scalability of the business will remain a key monitorable in the near term.

Liquidity: Adequate

ARPSL had adequate liquidity with bank lines of Rs 20 crore with average utilisation of 0% over the six months ended June 30, 2024. Liquidity will be supported by adequate cash accrual of Rs 15-20 crore, over the medium term, against nil debt obligation and nominal capex. Also, timely financial support from AREML is expected in the event of any exigencies.

Outlook: Stable

CRISIL Ratings believes ARPSL will benefit from steady performance of the products segment over the medium term, which will lead to improvement in cash accrual. The financial risk profile is expected to remain stable with steady accrual and moderate fund requirements. Timely support from AREML is also expected in the event of any financial exigncies or for large investments.

Rating Sensitivity Factors

Upward factors

• Upward revision in the credit risk profile of AREML
• Sustained growth in ARPSL’s revenue and operating margin of 11-12%, leading to better-than-anticipated cash generation
• Sustenance of healthy financial risk profile

 

Downward factors

• Deterioration in the credit risk profile of AREML or change in stance of support from the parent
• Material decline in ARPSL’s revenue and dip in operating margin to 7-8%, impacting cash generation
• Large, debt-funded capex or stretched working capital cycle, leading to material moderation in the debt protection metrics

About the Company

ARPSL, a part of the Amara Raja group, was established in 1984. It manufactures power backup systems for railway signals, telephone stations, electricity substations and industry control systems.

 

Its facility is in Karakambadi, near Tirupati in Andhra Pradesh. It entered the project execution and low-tension panel manufacturing business in 2011. Revenue contribution of these segments grew at a healthy pace in the recent past. As part of internal restructuring, the home UPS business was transferred to the group company, AREML in fiscal 2022, while the engineering, procurement and construction (EPC) business was transferred to Amara Raja Infra Pvt Ltd(ARIPL; ‘CRISIL A+/Stable/ CRISIL A1’) in fiscal 2023. ARPSL has commenced the servicing of power control products and EV chargers from fiscal 2023.

About AREML

AREML, promoted by Mr Ramachandra Galla in 1985, manufactures standby valve-regulated lead acid (VRLA) batteries at its unit in Karakambadi, Andhra Pradesh. In 1998, Johnson Controls International (JCI) acquired 26% stake in the company, and in fiscal 2000, AREML diversified into the manufacture of automotive batteries, and set up a second unit at Chittoor, Andhra Pradesh. Following divestment of the stake by JCI to Brookfield Business Partners (Brookfield), RNGalla Family Private Limited (holding company for the group) increased its stake to 28.06% with Brookfield holding 24%. In May 2021, Brookfield divested 10% stake and now holds 14%. Other shareholders include Life Insurance Corporation of India (7.23%), Nalanda India Equity Fund (9.88%), corporate bodies (1.44%), public, non-resident Indians, financial institutions, foreign institutional investors and others (39.39%).

 

In fiscal 2024, AREML reported profit after tax (PAT) of Rs 906 crore and revenue from operations of Rs 11,361 crore compared with PAT of Rs 694 crore and revenue from operations of Rs 10,480 crore during fiscal 2023

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity level	Rating assigned with outlook
NA	Cash Credit	NA	NA	NA	20	NA	CRISIL A+/Stable
NA	Letter of credit & Bank Guarantee^	NA	NA	NA	40	NA	CRISIL A1
NA	Term Loan	NA	NA	Jun-2026	2.73	NA	CRISIL A+/Stable

^Bank guarantee and letter of credit limits are 100% interchangeable.