India Ratings & Research (Ind-Ra) has revised HBL Power Systems (HBL) outlook to negative from stable while affirming its long-term issuer rating at 'A-'.

The negative outlook reflects HBL's weaker-than-expected credit metrics thus far in FY14 (year-end March), despite a substantial reduction in debt, on account of a delay in the improvement in EBITDA margins.

EBITDA margin deteriorated in FY13 to 9.3% (FY12: 12.5%) on account of losses in the retail battery segment which contributes around 26% to the top-line. EBITDA margin improved marginally to 9.5% in 9MFY14, contrary to Ind-Ra’s expectation of around 14%. This was due to forex losses on imported lead. Starting October 2013, HBL has resorted to local sourcing of lead to reduce currency risk.

Furthermore, there was a delay in debt prepayment using proceeds of the sale of Agile Holdings which was completed only in July 2013 as against the company's expectation of March 2013. This resulted in net adjusted debt/EBITDA of 6.9x at FYE13.

The affirmation reflects the reduction of HBL's term debt to Rs 1.5 billion as of end-January 2014. The debt was refinanced partly using the Rs 1.2 billion non-interest-bearing advances extended as cash by the holding company Beaver Holdings (56.61% ownership) under an investment agreement with private equity investors. In July 2013, HBL sold its ownership of Agile which had around 60% stake in Igarashi Motors, a BSE and NSE-listed company, for Rs 1.7 billion. The sales proceeds were also used to reduce debt. HBL's net external debt/EBITDA is likely to improve to below 3.0x by FYE15.

The ratings also factor in HBL's market leadership position in the field of specialised batteries in India, over 35 years of track record in battery manufacturing and strong R&D culture. The company's vertically integrated manufacturing involving electro-plating, plastic moulding, precision fabrication, lead smelting and production of protection circuit modules also support the ratings. Moreover, it has a strong order-book of around Rs 8.2 billion, besides the retail segment.

Shares of the company declined Rs 0.1, or 1.05%, to settle at Rs 9.45. The total volume of shares traded was 46,928 at the BSE (Friday).