Credit profiles to remain stable despite higher capex, including for diversification into lithium-ion
Revenue of domestic lead-acid battery manufacturers will grow 10-11% in fiscal 2025, closely mirroring ~12% last fiscal. The growth will be driven by steady demand in the mainstay automotive segment and tailwind from rising 5G penetration, expansion of 4G network, increasing data centres and demand from railways.
While demand for lead-acid batteries remains steady - from new vehicles as well as for replacement - battery makers are taking up capital expenditure (capex) to enhance capacities, integrate backward into lead recycling and diversify into lithium-ion batteries.
Resultant, the capex, envisaged at Rs 11,000-12,000 crore between fiscals 2024 and 2026, will lead to an increase in debt for part-funding it. Despite this, debt protection metrics will be robust and credit profiles stable, backed by healthy cash accruals because of steady operating margin of 12-13%.
A CRISIL Ratings analysis of five lead-acid battery makers, which account for over 80% of the sector's revenue, indicates as much. Currently, ~55% of the sector's revenue comes from the automotive sector and the remaining from industries such as telecommunication, home inverters, healthcare, and railways (see chart).
Says Anuj Sethi, Senior Director, CRISIL Ratings, "Demand from the automotive segment is projected to increase 9-10% in fiscal 2025, driven by two-wheeler and passenger vehicle sales as well as replacement demand. This, along with a demand growth of 11-12% from the industrial segment due to expansion in the telecom, data centres and railway sectors, will ensure healthy revenue growth for lead-acid battery makers this fiscal as well."
To reduce dependence on the automotive segment, which tends to be cyclical, leading battery manufacturers are focusing on setting up lithium-ion battery capacities, which have diverse applications. Besides electric vehicles (EVs), lithium-ion batteries are in demand in sunrise sectors1 such as renewable energy storage and data centres, as well as the consumer electronics and industrial segments, given their high energy density, longer life cycle and superior efficiency.
India currently relies on imports for its lithium-ion battery requirement. These imports are estimated to have risen ~45% over the past three fiscals to ~Rs 26,000 crore in fiscal 2024. China, South Korea and Japan are the primary suppliers to India, with China alone meeting over 75% of the requirement.
Notwithstanding the high demand, battery makers will see only 15-20 gigawatt hours of Li-ion battery capacity come on stream in phases between fiscals 2025 and 2028, catering to 25-30% of the total requirement at that time. These manufacturers will be keen to ensure tie-ups/offtake arrangements are in place for a significant portion of this capacity.
Says Naren Kartic.K, Associate Director, CRISIL Ratings, "We expect annual capex of battery makers to double to Rs 3,800-4,000 crore between fiscals 2024 and 2026 (from ~Rs 2,000 crore previously) towards enhancing leadacid battery capacity (current utilisation of 75-80%) given the stable demand, as well as to set up lead acid battery recycling capacities2 and lithium-ion battery capacities. Amid this sizeable capex, strong balance sheets will help absorb initial losses from lithium-ion battery plants and the impact of debt for part-funding capex, keeping debt protection metrics healthy and credit profiles stable."
The debt-to-Ebitda3 and interest coverage ratios are likely to moderate to ~0.6 time and ~15 times, respectively, by fiscal 2026 from ~0.3 time and over 35 times, respectively, estimated in fiscal 2024.
Timely execution and commencement of lithium-ion capacities, developments around supply tie-ups/offtake agreements with customers, pace of EV adoption, and movement in prices of key raw materials will bear watching. |
