High Energy Batteries (India) Ltd Management Discussions

<dhhead>MANAGEMENT DISCUSSION AND ANALYSIS</dhhead>

REPORT

i. INDUSTRY STRUCTURE AND

DEVELOPMENTS

High Energy Batteries (India) Limited was established in the year 1979 for manufacture of Silver Oxide Zinc batteries for MIG Aircraft starting and emergency application with the technical collaboration of M/s. Yardney Electric Corporation, USA.

HEB Aircraft battery was type tested and approved for bulk manufacture in the year 1981. Over the years, design features and product range for all the three services have been constantly upgraded to suit Indian conditions and improvements in life achieved through in-house R&D.

Silver Zinc Batteries, Nickel Cadmium Batteries and Silver Chloride Magnesium batteries designed, developed and manufactured by HEB are power sources intended for high-rate critical applications. These batteries are very strategic in nature and custom-designed for use in aviation, torpedo propulsion, Satellite Launch vehicles and Army Battle Tanks. The demand for our batteries is not regular in nature, as the ordering schedule is cyclic and also not in large quantities (volume based) since the application is for strategic Defence use, more as a deterrent.

The principal customers of the Company are the Department of Defence Supplies and VSSC / ISRO and therefore the Company is subject to certain provisions of the Official Secrets Act, 1923. The Company also requires prior permission from Ministry of Defence for export to other countries.

The Defence applications require high reliability products including mid-life upgradation of technology to meet the global challenges and any eventual system obsolescence.

DRDOs and Defence establishments have technology driven applications and provide us opportunities for even ab initio Engineering development which acts as a catalyst for the growth of our Company. The procurement policy currently pursued by the Government with thrust on Indigenization and "Atmanirbhar" in Defence procurement, encourages the domestic manufacturing sector and it augurs well for our Company with Design, Development, manufacturing cum testing capability to perform better.

HEB is a manufacturer of hi-tech batteries for use in Defence and other applications. The Company has a strong base of in-house R&D to design, develop and establish the manufacture of alkaline electrolyte-based silver zinc, nickel cadmium and seawater- based silver chloride magnesium batteries for power intense demanding applications such as under water propulsion, control guidance, communication, emergency starting, rail-road, industrial and aerospace applications. The Company regularly undertakes development activity and establishes the technology for the manufacture of electrochemical system, for use in many mission-critical applications.

The back - up power requirement is rapidly growing in Defence with the induction of advanced machinery/ weaponry. The Company received a number of awards for establishment of technology and Indigenization.

 

ENERGY STORAGE SYSTEM (ESS) GROWTH STORY

Supplementing the existing potential, the Energy sector at large, needs Energy Storage systems (ESS) like Flow Battery (FB) commensurate with Power Generation units like Fuel Cells (FC) and in turn, the resultant thrust on Green Energy cum Hydrogen Economy (Indian mission towards e-mobility). Currently, the company is working on such

thrust - areas of global significance which provides the needed impetus to a great extent, for the growth and further prospects of our Company.

Union Ministry of New & Renewable Energy (MNRE) continued its remarkable journey toward transforming Indias energy landscape in 2024. This progress is in line with Indias commitment to achieving its 500 GW of nonfossil fuel energy, to meet the Panchamrit goals set by Prime Minister Shri Narendra Modi.

India-Middle East-Europe Economic Corridor (IMEC) is an ambitious plan which connects India, Saudi Arabia with European Union (EU) which includes an energy corridor, for the transport of green hydrogen.

The EU plans to import 10 million tons of green hydrogen by 2030, representing half of its projected future consumption. This would necessitate the development of green hydrogen sector at national level, particularly through the creation of production and export hubs.

Thus, the Company with its timely involvement in generation of Hydrogen as a funded project has the potential to engage gradually and progressively in our National Green Hydrogen programs.

 

ii. OPPORTUNITIES AND THREATS Opportunities

• A major player in silver zinc battery for Defence.

• In - house capability for technology development.

• Part of established business group.

• Dedicated talented pool of human resource with scientific and engineering background.

• Availability of dedicated Production cum Testing facility for the Manufacture of High-Power Batteries for Strategic Defence Applications.

• Huge capital expenditure planned by the Government of India for Batteries and ESS, in the Energy sector.

• High growth potential projected for E-mobility, Green Hydrogen and clean energy.

 

Threats

• Price rise in input materials.

• Import restriction and/or delays in receipt of critical materials/ components.

• Change in Government policy of procurement, especially by Defence Departments.

• Adverse change in the global scenario, with introduction of advanced and/or disruptive systems cum technological break-through.

• Necessity to get trained in the upcoming technologies and upgradation of production methods and equipment, mandated to take on / tackle these challenges.

 

iii. SEGMENT WISE OR PRODUCT WISE PERFORMANCE

HEBs revenue grew at a CAGR of 14% over the last ten years from FY 2015-16 to FY 2024-25, backed by the Governments thrust on the Defence sector as well as its focus on awarding orders to indigenous players. In FY 2024-25, the revenue had increased by 4.6% Year on Year basis of Rs 80.75 crores. The Company has a confirmed order book of around Rs 62.68 crores with a possible order value of Rs 101 Crores to be realized within

the next 6 months, to be executed over the next 12-18 months period, compared to the previous year (FY 2023 - 24) opening order book of Rs 35.73 crores, providing adequate revenue visibility cum turnover possibility for FY 2025 - 26.

The Company supplies silver- zinc batteries to several Defence establishments including Navy, Army, Airforce and space research organizations. In the Aerospace and Naval segment, HEB derives around 60% revenues from Navy & Naval Research Labs. Typical break - up of orders from different customer base indicates:

Customer	%
Navy & Naval Research Labs	65
DRDO Labs	7
Defence Public Sector	10
Aerospace & Others (NICAD, TDF and NuPro)	18
Total	100

 

HEBs EBITDA margins have improved substantially over the last five years, as a result of change in the product mix, better absorption of fixed costs and improved Banking operations. With due consideration of the possible uncertainties arising out of the flow of development orders, exposure to raw material price fluctuations and inconsistent import delivery commitments by approved sources abroad and silver price volatility all the possible fluctuations and cost factors are monitored and addressed well in all our contracts. The Company strives its best to maintain a sustainable EBITDA margin of around 25%.

 

iv. OUTLOOK

The procurement cycle of Indian Defence was linked to a particular cycle. Earlier, the cycle was of the order of four to five years and in recent years, it got shifted to six or seven years cycle or even more, in view of the mid-life technical improvements on both dry and wet storage life of batteries in service. While some flexibilities were available in product pricing during the earlier years, competitive pricing requirement has an impact on the operating margins as well. The Export potential for the products is being explored on a continuous basis.

The company is currently working on to expand its product range to include Fuel cells and Flow Battery mainly Vanadium Redox Flow Battery (VRFB), which will be used respectively in Power Generation using Hydrogen and Bulk energy storage applications. The Company will be focusing more on value added products including Battery/ Power Pack System Integration which would help the Company occupy a strong position in both Defence related and other non-Defence based markets in India.

Some of the key features in FY 2025 - 26 as included in the Defence Manufacturing Industry Report dated February, 2025 are as follows:

> In 2025-26, the Ministry of Defence (MoD) was allocated a total Budget of Rs 6.81 lakh crore (US$ 78.7 billion), which is 9.5% YoY increase from 2024-25 budget.

> Of this, Rs 1.80 lakh crore (US$ 20.8 billion) was allocated towards capital expenditure, including the purchase of new weapons, aircraft, warships, and other military equipment.

> An outlay of Rs 7,146 crore (US$ 825.7 million) was announced towards the capital expenditures of the Border Roads Organization (BRO).

> Defence exports crossed Rs 21,000 crore (US$ 2.43 billion) in CY24 with a target of Rs 50,000 crore (US$ 5.8 billion) by 2029.

 

v. RISK AND CONCERNS

HEB has a long working capital cycle, primarily due to the higher levels of inventory that need to be maintained. The Companys Major revenue is from Defence sector and is dependent on Defence priorities and budget allocation. Continued thrust for indigenization and Atmanirbhar, especially of Ministry of Defence (MOD), provides a positive outlook.

The export market though limited, the Company keeps exploring possible markets like Poland, Vietnam and effects supplies to countries like Philippines, Malaysia, Algeria, Italy and Kyrgyzstan. The procurement procedure is more or less similar to that of our Government Defence agencies and here again the risk of budget allocation for Defence and the consequent review of ordering cycle exists. The Company has also appointed Authorized Agents on selective basis to cater to export markets.

HEBs major raw materials include Silver, Zinc and Copper, the prices of which are highly volatile due to external market factors. Only any abrupt increase in the raw material prices could lead to a compression of margins. Price volatility in silver price gets covered by the customers on a timely basis mostly built into the contract under a price variation clause, thus exposing the Company only to minimal impact.

Price fluctuations that are gradual and regular, arising out of non-silver materials like Copper

and Zinc, get judiciously addressed in cost estimates and pricing, to mitigate any abnormal escalation. Less than 10% of the total raw materials consumed are imported, liable to certain Forex variation, and/ or Government restrictions, which again is factored adequately in cost workings, to ensure overall exposure level to be "Nil" to "as minimum as possible" on annual basis.

 

ENERGY STORAGE GROWTH (ESS) BOTTLENECK AND CHALLENGES

In the decade from 2014, utility-scale renewable energy tenders were a key driver of market growth in India. Initially focused on simple solar projects, the government has expanded its tender portfolio over the years to include a variety of renewable energy technologies, such as wind, wind-solar hybrid (WSH) and energy storage systems (ESS).

In 2024, Indias tendering agencies issued a record-breaking cumulative capacity of about 73GW utility-scale renewable energy tenders. The average capacity of renewable energy tenders has been steadily increasing, growing by 25% in 2024 compared with 2023 to reach nearly 1GW per tender. With energy off-takers focusing more on power output quality, the share of renewable energy tenders (including WSH and ESS) surpassed 49% in 2024.

All standalone ESS tenders mandate charging the ESS with a renewable energy source, indirectly contributing to Indias renewable energy market development. Standalone ESS tenders issued by tendering authorities are based on battery + ESS (BESS) or pumped hydro storage (PHS). The developers scope is only to supply and maintain the ESS in exchange for a fixed monthly or annual fee. Charging and discharging ESS are generally handled by the tendering authority.

 

vi. MATERIAL DEVELOPMENTS IN HUMAN RESOURCES

The Company as of 31^st March, 2025 has 106 employees on its rolls out of which 63 are Managerial, and others being supervisory and production staff. Further it employs around 170 labourers/ workers on contract basis, depending upon time-to-time job requirements.

The relationship between Management and Employees was cordial and a harmonious work environment prevailed throughout the year under review.

 

vii. KEY FINANCIAL RATIOS

	Financial Year		Change - Increase or (Decrease)
Description	2024-25	2023-24		Explanation
Operating Profit Margin (PBIDT/Total Income)	0.27	0.32	(15.63%)	Marginal decline
Net Profit Margin (PBT/Total Income)	0.24	0.28	(14.29%)	Marginal decline
Interest Coverage Ratio (EBIT/Interest Expense)	14.95	12.77	17.07%	Marginal rise
Earnings per share	17.10	19.14	(10.66%)	Marginal decline
Debt Equity Ratio	0.11	0.06	83.33%	(*)
Current Ratio	3.77	4.01	(5.99%)	Marginal decline
Debtors Turnover	3.43	3.15	8.89%	Marginal rise
Inventory Turnover	1.58	1.46	8.22%	Marginal rise
Return on Capital Employed (ROCE)	0.20	0.27	(25.93%)	(#)
Return on Net worth	0.22	0.29	24.14%	Reduced profit

 

(*) Increase in working capital requirements because of the highest sales in 04^th Quarter. (#) Earnings reduced mainly due to increase in the expenditure on Scientific Research.

	(For Board of Directors)
Chennai	N GOPALARATNAM
10th May, 2025	Chairman
	(DIN: 00001945)