High Energy Batteries (India) Ltd

Brickwork Ratings upgardes the ratings for the Bank Loan Facilities of Rs. 72.95 Crs. of High Energy Batteries (India) Ltd

Particulars

Facilities**	Amount (Rs.Crs.)		Tenure	Rating#
Facilities**	Previous	Present	Tenure	Previous (27 Mar 2020)	Present
Fund Based	27.00	30.45	Long Term	BWR BB /Stable Upgrade	BWR BB + /Stable Upgrade
Non Fund Based	40.00	42.50	Short Term	BWR A4 + Upgrade	BWR A4 + Reaffirmation
Grand Total	67.00	72.95	(Rupees Seventy Two Crores and Ninety Five lakhs Only)

#Please refer to BWR website www.brickworkratings.com for definition of the ratings
**Details of Bank Loan facilities,consolidation or instruments are provided in Annexure

RATING ACTION / OUTLOOK

The ratings upgrade factors in the improved financial performance in FY2020 and 9MFY 2021, limited competition in the domestic defence ancillary segment in which the Company operates and medium term revenue visibility through healthy order book position with low counter party credit risk as majority orders are exclusively from the companies related to the Ministry of Defence, Government of India.

The ratings continue to draw strength from the experience of the promoters in the battery manufacturing industry, increased profitability margins, improved debt protection metrics, long standing relationships with reputed clientele and positive outlook for domestic defence manufacturing sector. However, the ratings remain constrained by working capital intensive operations with high dependence on external financing, customer and supplier concentration risk, susceptibility of margins to fluctuation in raw material prices , uncertainty associated with low entry barriers in this business and inherent limitations of tender based contract with competitive bidding.

The ‘Stable’ outlook indicates a low likelihood of rating change over the medium term. Brickwork Ratings believes that High Energy Batteries (India) Limited’s business and financial risk profile will be maintained over the medium term. The outlook may be revised to positive if there is improvement in net sales and profitability on a sustained basis, leading to strengthening of financial risk profile. The outlook may be revised to negative if there is decline in revenue and profitability and deterioration of gearing and debt coverage metrics, thereby weakening the financial risk profile of the Company.

KEY RATING DRIVERS

Credit Strengths:

Experienced management and Group support: :
The management is experienced in the battery manufacturing sector. The Company has an established track record of almost four decades in manufacturing of batteries for defence and civilian purposes. The Board of Directors comprises experienced and qualified professionals. The Company is the part of the Chennai based Seshasayee Group from which it derives managerial and financial support. The reputation and extensive experience of the management among the industry peers is expected to support the Company operations.
Company operating in niche segment :
The Company is operating in a niche segment with very few competitors in the market. The clientele include Brahmos Aerospace Ltd., Hyderabad, Bharat Dynamics Ltd., Visakhapatnam, Advanced System Lab, Hyderabad, Naval Science & Technology Lab, Visakhapatnam and some foreign government defence agencies. The Company has been able to secure repeat orders from these clientsThe company is the sole supplier of silver zinc batteries to Airforce and Navy. Hyderabad batteries limited is their only competitor selling Nickel Cadmium batteries to Navy. Further the demand for the products increases on account of tensions previling in the boarder.
Improved Financial Risk profile :
Revenue from sale of products improved from Rs. 46.62 Crs. in FY 2019 to Rs. 61.49 Crs. in FY2020. The imporvement in turnover is mainly on account of regular inflow of orders from defense sectors, uninterrupted production and completion of inspection and testing without any delay. Operating profit has improved from Rs. 7.16Crs in FY 2019 to Rs. 15.47 Crs in FY 2020. The net profit has improved from 0.44 Crs in FY 2020 to Rs. 5.60 Crs in FY 2020. The profitability margin with operating margin remains high at 25.15 % and Net profit margin remains at 9.11 % in FY 2020. Total debt declined from Rs. 39.01 Crs. as on 31Mar2019 to Rs. 32.32 Crs. as on 31Mar2020, primarily due to decline in short term borrowings. Tangible net worth (TNW) has increased from Rs. 18.62 Crs as on 31st March 2019 to Rs. 23.61 Crs as on 31st March 2020 due to accretion of retained earnings. Gearing marginally improved from 2.10 times as on 31Mar2019 to 1.37 times as on 31Mar2020. Debt Protection metrics with Interest Service Coverge Ratio remains at 2.73 times and Debt Service Coverage Ratio remains at 1.88 times as on 31st March 2020. The company has earned a revenue of Rs.54.59 Crs in 9MFY2021 despite disruption of operations on account of COVID lockdown. The profitability margins remains high at 39.23 % for 9 months ended 31st December 2020 as the company was able to cut down its manufacturing cost by selling products of high price that could be produced with lower cost.
Positive outlook for domestic defence industry :
The domestic defence manufacturing industry is expected to get boost from the government increased expenditure on defence and focus on indigenisation of defence manufacturing. Government formulated the ‘Defence Production and Export Promotion Policy 2020’ to provide impetus to self-reliance in defence manufacturing under the ‘Aatmanirbhar Bharat’ scheme. Further to increase defense manufacturing and to make the country a reliable weapon supplier to friendly countries,the government has allowed FDI up to 74% through automatic route and FDI beyond 74% would need to be permitted under the Government route.The Defence Ministry has set a target of 70% self-reliance in defense equipements by 2027, creating huge prospects for Indian industry players

Credit Risks:

Susceptibility of revenue to external factors: :
The Company gets its defence contracts through competitive bidding. The Company sells its products of Aerospace Naval and Power System Batteries to defence customers where the payment terms are definite. The payments from the defense organisations of Government of India are received as per the terms of the contracts. The risk is restricted to the Liquidated damages clause for late supplies as per the contract terms and there is no irrevocable credit loss risk. Thus, the revenue depends on winning the bid and successful and timely completion of the contracts with minimum liquidated damages. The competition in the civilian battery segment is high from both organized and unorganized players due to which the Company temporary suspension of Lead Acid Battery production in FY20.
Small scale of operations :
Despite being in the business for almost four decades, having an efficient management team and being part of a niche market segment with very few competitors, the Company’s scale of operations is small as characterized by its revenue from sale of products of Rs. 61.49 Crs. in FY2020. Small scale of operations limits the Company's operational and financial flexibility and economies of scale
Foreign exchange risk :
The Company manufactures batteries almost exclusively for domestic consumption. However, the products are exported as and when such orders are received. However, the Company imports ~10% of the raw materials for its manufacturing. The Company is exposed to commodity price fluctuations in both domestic and international markets as its main raw materials are silver, copper, lead, zinc, magnesium etc. It is exposed to foreign currency fluctuation risk as it imports Silver Bullion, Silver Foil, Magnesium Sheets, other raw materials and stores and spares for which payables are denominated in foreign currency.

RATING SENSITIVITIES

Positive:

Improvement in scale of operations and profitability on a sustained basis.
Maintaining the financial risk profile of the company.

Negative

Decline in net sales and profitability
Deterioration in gearing and debt coverage metrics due to increase in debt level

LIQUIDITY INDICATORS - Adequate

As on 31st March 2020 The company has sufficient EBITDA of Rs. 15.47 Crs to cover interest and finance expenses. Net Cash Arruals has increased from Rs. 1.83 Crs in FY 2019 to Rs 9.97 Crs in FY 2020 on account of increased profits. As on 30th September 2020, the company has reported a net cash accruals of Rs. 12. 47 Crs, current ratio of 1.52 times and cash and cash equivalents balance of Rs. 4.99 Crs. The external working capital utilization was around 70-80% over the last 11 months and the long term debt obligations from the group companies are expected to repaid over the medium term with their cash accruals. Further with continous inflows of order from defense organisation coupled with increased cash accurals and decline in borrowings. The company's liqudity position is adequate.

ABOUT THE ENTITY

High Energy Batteries (India) Limited (HEBIL) was initially established on 27Sep1961 in Chennai and commenced its commercial production in 1979. It is a ISO 9001:2015 and ISO OSHAS 14001:2004 accredited Company.

The battery manufacturing unit is located at Mathur, Trichy. The company manufactures Silver Zinc battereis & cells, Nickel and Cadimium cells and Lead Acid batteries etc.

The silver zinc batteries are manufactured for use in Indian Army, Navy, Air Force and Launch Vehicles.The company gets defence contracts from various government agencies through competitive bidding. Due to the unviability of the business, the Company has temporarily suspended the production of lead acid batteries in FY20. It is now focussing on silver zinc batteries and cells and nickel cadmium cells which are primarily supplied to government defence agencies..

The Company’s batteries are maufactured and assembled manually. Being a labour intensive business, the installed and utilized capacity shall not be considered appropriate criteria for the purpose of rating.

The company is a part of the chennai based Seshaasayee group and the Company’s shares are listed on BSE.

Mr. N Gopalaratnam is the Chairman and Dr. G A Pathanjali the Managing Director. Mr. R Swaminathan is the CFO.

KEY FINANCIAL INDICATORS (Standalone)

Key Parameters	Units	FY 19-20 (Audited)	FY 18-19 (Audited)
Operating Revenue	Rs.Crs.	61.49	46.62
EBITDA	Rs.Crs.	15.47	7.16
PAT	Rs.Crs.	5.60	0.44
Tangible Net Worth	Rs.Crs.	23.61	18.62
Total Debt/Tangible Net Worth	Times	1.37	2.10
Current Ratio	Times	1.10	0.88

KEY COVENANTS OF THE FACILITY RATED

The terms of sanction include standard covenants normally stipulated for such facilities

STATUS OF NON-COOPERATION WITH PREVIOUS CRA

Not Applicable

RATING HISTORY FOR THE PREVIOUS THREE YEARS (including withdrawal and suspended)

Facilities	Current Rating (2021)			2020		2019		2018
Type	Tenure	Amount (Rs.Crs.)	Rating	Date	Rating	Date	Rating	Date	Rating
Fund Based	LT	30.45	BWR BB+/Stable	27Mar2020	BWR BB/Stable	17Apr2019	BWR B +/Stable	17Jan2018	BWR B +/Stable
Fund Based	ST	NA	NA	27Mar2020	BWR A4 +	17Apr2019	BWR A4	17Jan2018	BWR A4
Non Fund Based	LT	NA	NA	27Mar2020	BWR BB/Stable	17Apr2019	BWR B +/Stable	17Jan2018	BWR B +/Stable
Non Fund Based	ST	42.50	BWR A4+	27Mar2020	BWR A4 +	17Apr2019	BWR A4	17Jan2018	BWR A4
Grand Total		72.95	(Rupees Seventy Two Crores and Ninety Five lakhs Only)

COMPLEXITY LEVELS OF THE INSTRUMENTS - NA

BWR complexity levels are meant for educating investors. The BWR complexity levels are available at www.brickworkratings.com / download / ComplexityLevels.pdf. Investors queries can be sent to info@brickworkratings.com.

Analytical Contacts
Kaushik Srikanth V Rating Analyst kaushik.s@brickworkratings.com	Parvathavardhini N Associate Director Ratings parvathavardhini.n@brickworkratings.com
1-860-425-2742 \| media@brickworkratings.com

High Energy Batteries (India) Ltd

ANNEXURE-I

Details of Bank Facilities rated by BWR

SL.No.	Type Of Facilities	Long Term(Rs.Crs.)	Short Term(Rs.Crs.)	Total(Rs.Crs.)
1	Cash Credit - Sanctioned	21.75	_	21.75
2	Inland Letter of Credit (ILC) - Sanctioned	_	6.00	6.00
3	Bank Guarantee - Sanctioned	_	30.50	30.50
4	Open Cash Credit / Cash Credit (Hypothecation/Pledge) - Sanctioned	6.75	_	6.75
5	Covid -19 Emergency Line Credit - Sanctioned	1.95	_	1.95
6	Letter of Credit - Sanctioned	_	6.00	6.00
Total		30.45	42.50	72.95
TOTAL (Rupees Seventy Two Crores and Ninety Five lakhs Only)

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