Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities of TATA Autocomp GY Batteries Private Limited (TGY) to ‘Positive’ from ‘Stable’ while reaffirming the long term rating at ‘CRISIL A-’; CRISIL Ratings has also reaffirmed the rating on the short term bank facilities at ‘CRISIL A2+’.

 

The outlook revision follows similar action of JV partner Tata Autocomp Systems Ltd (‘CRISIL AA-/Positive/CRISIL A1+’), wherein the outlook was revised to Positive on account of expected improvement in business profile driven by healthy operating performance, and improvement in financial risk profile.

 

The ratings continue to reflect the need-based financial support from key JV partner Tata Auto Comp Systems Ltd (TACO; rated 'CRISIL AA-/Positive/CRISIL A1+') and the growing strategic importance of TGY to TACO. Moreover, TGY will continue to be an integral part of the auto component business of TACO considering its diversified customer base and expansion plans. CRISIL Ratings has recently received the aforementioned undertaking from TACO clearly articulating its need-based financial support to TGY.

 

Further, TGY is expected to receive equity infusion from TACO and GS Yuasa International Ltd, Japan (GYIN) over the next two years to fund its capital expenditure (capex) plans, limiting the addition of debt. The support from joint venture (JV) partners was also seen in fiscal 2021, when the company received equity infusion of Rs 30 crore. This trend will continue with expected equity infusion of Rs 30-45 crore in the current fiscal.

 

TGY is expected to sustain improved operating performance over the medium term backed by increasing share of business in two-wheeler (2W) battery segment from its key customers, TVS Motors Ltd (TVS), Honda Motor and Scooter India Pvt Ltd (HMSI) and India Yamaha Motor Pvt Ltd and addition of new customers in the medium term. The addition of 1.2 million capacity over the next 2 years will support healthy annual revenue growth of 15-20% over the next three fiscals.

 

Financial risk profile is expected to remain adequate with total external debt sustaining below Rs 100 crore over the medium term. TGY is undertaking capex of Rs ~160 crore between fiscals 2022 and 2024 for capacity expansion and technology upgradation to improve product quality. The capex will be funded through equity infusion, internal accrual and marginal debt. The JV partners are expected to infuse about Rs ~135 crore of equity over fiscals 2022, 2023 and 2024. Some recovery in industry conditions will result in improvement in debt with earnings before interest, depreciation and tax (EBITDA) declining from 7.95 times in fiscal 2021 to ~3.4 times and below 2 times in fiscals 2022 and 2023, respectively. Also, with equity infusion, the total outside liabilities to tangible networth (TOL/TNW) ratio is likely to improve to 2.06 times in fiscal 2022 from 3.46 times in fiscal 2021.

 

Addition of new business from existing customers and new capacities will benefit the company to report better-than-industry growth in fiscal 2022 as the industry slowly recovers. The company’s performance has stabilised in the last few months and accordingly revenue is expected to increase by ~12% and operating margin to remain around 5.5% this fiscal. Over the medium term, CRISIL Ratings expects the company to post a healthy growth of over 15% due to benefit of new business, upcoming capacities backed by orders from existing customers and a steady growth in the aftermarket segment. Profitability is expected to remain at 5-7% due to efficient procurement and benefits of scale. Going forward, ramp-up of new capacities and sustenance of profitability will remain a key monitorable.

 

The ratings continue to reflect the improving business profile of the company driven by sustained increase in operating profitability with growing share of original equipment manufacturer (OEM) business and enhanced distribution reach. The ratings also reflect the healthy financial risk profile supported by improving cash accrual. These strengths are partially offset by the company's small scale of operations and exposure to intense competition, volatility in lead prices as well as to risks related to project implementation.

 

The ratings also take into consideration the strong support from its key JV partner, TACO. TGY is a 50:50 JV between TACO and GYIN.

Analytical Approach

CRISIL Ratings has factored in the strong operational, financial, and managerial support from TACO. The recent receipt of written articulation from TACO has led to a modification in the analytical approach, which has increased the parent notch-up for TGY.

Key Rating Drivers & Detailed Description

Strengths

* Improving business profile with increasing share of OEM business in medium term and improving distribution reach

Significant increase in offtake from key customers HMSI and TVS has led to share of sales to OEM customers to rise from 30% in fiscal 2015 to 41% in fiscal 2022. Capacity expansion by 1.2 million batteries per annum for existing and new customers will lead to 15-20% growth in revenue annually over the medium term. Also, enhancing distribution reach for its aftermarket segment and tie-up with OEM customers is likely to support growth in this segment.

 

The growing share of OEM business, which offers better ability to pass on cost increase, and improving capacity are likely to support maintenance of operating margin in the medium term. Further, management’s efforts to upgrade technology (through the expander project) and improve efficiency (through EBITDA) will support margins.

 

* Strong financial and business support from TACO

TGY’s position in the automotive industry is underpinned by its collaboration with the promoters, TACO and GYIN. Association with TACO has ensured TGY to establish its position in the aftermarket segment under the Tata Green brand.

 

Strong linkages with parent entities will further enhance TGY’s technical edge and strengthen customer relationships, translating into revenue growth over the medium term. Both JV partners have supported TGY financially since commencement of business; between fiscals 2006 and 2012, the partners infused equity of Rs 138 crore to support the initial phase of activity. Further, the JV partners infused Rs 40 crore in April 2017 and Rs 30 crore in November 2020 and are expected to support the investment plans of the company by infusion of Rs ~135 crore over the medium term.

 

TACO also helps its JVs and subsidiaries in obtaining loans at attractive rates and provides support to TGY in the form of management talent. CRISIL Ratings believes that TGY remains strategically important to TACO. TGY receives technological and operational support from GYIN and had also secured business for supply of two-wheeler batteries using the global relationship of GYIN with OEMs.

 

Moreover, CRISIL Ratings has recently received a written articulation from TACO clearly stating its need-based financial support to TGY. This indicates that TGY will continue to be an integral part of the auto component business of TACO.

 

* Healthy financial risk profile

In the past, TGY's financial risk profile deteriorated on account of losses resulting in erosion of networth and debt-funded capex. With regular equity infusion, the latest being in November 2020, networth increased to Rs 75 crore as on March 31, 2021.

 

Debt protection metrics moderated in fiscal 2021 due to the impact of Covid-19 induced challenges: interest coverage and net cash accrual to total debt ratios were 1.6 times and 5%, respectively. While the company is carrying out a large capex, debt metrics are expected to remain adequate with interest cover of 2-7 times and net cash accrual to debt of 20-80% in the medium term as capex is expected to be largely funded by equity infusion.  As a result, total debt is expected to reduce from Rs ~100 crore as on March 31, 2022 to below Rs 70 crore in fiscal 2023. With ramp up of new capacities backed by orders from existing customers, net cash accrual is expected to increase to Rs 30-35 crore in the medium term. CRISIL Ratings also takes into account the availability of need-based financial support from TACO for timely debt-servicing and other funding requirement. Any large capex will remain a key rating sensitivity factor.

 

Weaknesses

* Small albeit improving scale of operations and intense competition in the industry

TGY’s Rs 471 crore (~3-4% market share) revenue in fiscal 2021 in the automotive batteries industry of Rs 14000 crore indicates its small scale of operations and thereby low pricing power. The market leaders, Exide Industries Ltd and Amara Raja Batteries Ltd (ARBL; 'CRISIL AA+/Stable/CRISIL A1+'), have a combined market share of more than 75% in the automotive and storage batteries segment. TGY's business is limited to automotive batteries vis a vis diversified revenue profile of other large players leading to limited scope of growth. In the aftermarket segment, TGY has been susceptible to price moves of market leaders however, the company has taken initiatives to increase its OEM business, which will benefit the scale over the medium term.

 

* Susceptibility to volatility in lead prices

The margins of TGY remain susceptible to volatility in lead prices and foreign exchange rates. Margins have been at negative 0.5% and 5.5% over the last 5 years. The company, a small player in the industry, is forced to follow the market leader for its pricing policy leading to absorption of increase in input costs in the aftermarket segment. The segment contributes about 60% to revenues exposing the company to the volatility in lead prices.

 

* Exposure to risks related to project implementation

TGY is undertaking a large capex of Rs ~160 crore over the medium term, funded through equity infusion, marginal debt and internal accrual.

Around Rs 120 crore will be used for capacity expansion of two-wheeler batteries from 4.1 million units at the end of fiscal 2022 to 7-8 million units over the coming years. The in-house research lab will entail a capex of Rs 15 crore, while the remaining will be for ISS batteries for the four-wheeler segment. The funding risk is expected to be moderate with the capex being funded through equity and some marginal debt. The demand risk is moderate as the company has tied-up the expanded capacity with its existing customers. The capacity expansion is being undertaken as the present capacity for two-wheeler batteries is near full utilisation.

 

Although the capex is in the existing line of business, such large projects are susceptible to the risk of time and cost overruns. Financial closure, timely commissioning as well as ramp-up of operations as envisaged will remain key rating monitorables.

Liquidity: Adequate

The expected net cash accrual of Rs 16 crore for this fiscal will comfortably cover repayments of Rs 14 crore. The gap between net cash accrual of Rs 28 crore and repayment of Rs 32 crore for the next fiscal will be paid by the cash reserve from the equity infusion in fiscal 2021. Fund-based limit of Rs 38 crore remained utilised at an average of 30% over the 12 months ended November 2021. Cash and equivalents stood at Rs 16 crore as on March 31, 2021. Capex of Rs ~160 crore over the medium term is expected to be funded through a mix of equity infusion, internal accrual and marginal debt.

Outlook: Positive

CRISIL Ratings believes that TGY's business risk profile will continue to improve with the expected ramp-up in scale of operations and sustenance of improved profitability. Support from TACO is also likely to continue thereby enhancing the overall credit profile of the company. The ratings outlook has been changed to positive from stable on account of better-than-expected performance of Tata Autocomp Systems Limited, the JV partner which extends its operational, financial, and managerial support to the company.

Rating Sensitivity Factors

Upward Factors:

• Sustained increase in scale and healthy net cash accrual (above Rs 30 crore)
• Improvement in financial risk profile due to higher cash generation or equity infusion, such as Debt/EBIDTA remains at 2.0-2.5 times

Downward Factors:

• Weakening of financial risk profile due to weaker operating performance, with net cash accrual below Rs 10 crore
• Elongation of working capital cycle or more-than-expected debt-funded capex leading to deterioration in debt protection metrics such as Debt/EBIDTA remaining above 4.5 times.

About the Company

TGY was established in October 2005 as an equal JV between TACO and GYIN. The company marked the TACO group's entry in the automotive components retail business. TGY manufactures lead-acid storage batteries for inverters, tractors, and four- and three-wheeler automobiles under the Tata Green brand. The company mainly supplies to the replacement market (around 61% of sales in fiscal 2021). In the OEM segment, the company has a supply relationship mainly with Tata Motors Ltd (TML ; rated 'CRISIL AA-/Stable/CRISIL A1+'), HMSI, Piaggio Vehicles Pvt Ltd (rated 'CRISIL A+/Negative/CRISIL A1'), Yamaha Motor Pvt Ltd, and Kirloskar Oil Engines Ltd (rated 'CRISIL AA/Stable/CRISIL A1+'); the company also supplies batteries to Maruti Suzuki India Ltd (rated 'CRISIL AAA/Stable/CRISIL A1+').

Any other information: Not applicable