Amara Raja Batteries

Investors with a long-term perspective may use attractive valuations and buy the stock of Amara Raja Batteries (ARB). At Rs 91.6, the stock trades at 8.9 times the trailing four quarter earnings, at a discount to competitor, Exide Industries, that trades at a trailing earnings price-multiple of 19.2 times. We had given a buy recommendation at Rs 101 in October 2008.

Since then, even with the automotive component sector facing a severe downturn on the back of reduced demand from automakers, ARB has made up through its industrial division and the battery replacement market. Capacity expansion plans, its entry into new segments and research efforts strengthen the potential of this stock.
Replacement market

Replacement demand makes for the bulk of ARB’s automotive revenues for ARB, constituting 62 per cent of sales with a 28 per cent market share in the automotive aftermarket sales. Ignoring the tame sales last year, vehicle sales have been robust in the years prior — year-on-year growth in passenger cars between 2006-07 and 2007-08 was 20.7 and 12.3 per cent respectively. Commercial vehicle sales grew 33.3 and 4.9 per cent in the same period. ARB supplies to both these segments, and replacement demand will, therefore, be a key factor boosting sales, since most batteries have maximum a four-year life span, and will necessarily have to be replaced.

Serving this demand is further helped by ARB’s extensive retail network — the company has over 18,000 retail outlets besides franchised distributors and Amaron Pitstops — its exclusive brand stores in urban areas. Rural markets have been tapped through PowerZone, which number more than 400 stores. The retail reach, coupled with brand building efforts will help stimulate sales.
Industrial segment

Within the industrial segment, ARB supplies batteries for telecom infrastructure, UPS systems, railways, and has started supplying to the IT and banking segments. About 60 per cent of revenues in the industrial division stem from the telecom sector, and infrastructure investment in this sector will boost demand.

The company is bringing in new technology to further its reach in this segment; it introduced Front Access Terminal batteries for the telecom sector, and is designing solar powered batteries for its UPS segment. Efforts are also on to design solutions for line interactive inverters, which have voltage regulators, and then move on to online inverters.
Automotive demand

ARB addresses the OEM requirements of a vast number of automakers such as Honda, Ford, Fiat, Ashok Leyland, General Motors and others, catering to the passenger and commercial vehicles. This sector constitutes 26 per cent of revenues, and the company has attempted to combat the slowdown by reaching a wider section of automakers, entering the two-wheeler segment with its Amaron Pro-Bike, and launching batteries with extended warranties and new ranges of batteries.

In a new initiative, the company tied up with Maruti Suzuki to launch a co-branded car battery — Amaron MGB — which will be available across all Maruti dealerships, besides being the battery endorsed by Maruti. With alternative fuels in the limelight now, ARB is designing batteries for hybrid cars. Its partnership with Johnson Controls will help its research and development efforts.

Exports account for 10 per cent of the automotive segment and the company, therefore is sheltered to an extent from the global auto slowdown though foreign exchange losses are still a concern.

An investment of Rs 95 crore will be made in manufacturing capacity expansion, ramping up production capacity from 1.2 million units to 1.8 for its VRLA battery and from 1.8 million units to 2.4 million units for its motorcycle batteries.
Financials

Sales have grown at a CAGR of 54 per cent, while profits posted a 50 per cent CAGR for the years between 2006 and 2009. Global lead prices were on the downswing between September and March 2009 hitting a low of $844 per tonne in December. Per tonne price of lead averaged $1,859 in September, dropping to $1,245 by end-March. The effect of this showed up in margins, with an improvement of 50 basis points to 17.3 per cent at the operating level in the March 2009 quarter over the March 08 quarter.

However, higher depreciation brought net margins down to 8.5 per cent, a slight drop from 8.6 per cent in the same quarter in 2008. Leverage is on the low side at 0.8 times equity, and interest payouts have remained steady at 1 per cent of sales turnover.

Foreign exchange exposure remains a concern, and the company operates on a negative operating cash flow. Lead prices have risen for the past two months, and such fluctuations may dampen margins.

via BL