Amara Raja Batteries

Investors with an appetite for risk and a long-term perspective can consider an exposure to the Amara Raja Batteries stock. The company is a pioneer in VRLA (Valve Regulated Lead Acid) batteries. Buoyant automobile sales, promising long-term outlook for telecom batteries and a diversified presence in the industrial segment signify good earnings visibility.



At the current market price of Rs 208, the stock trades at a price-earnings multiple of 11 times its trailing 12 month earnings. This is at about 50 per cent discount to Exide Industries that trades at 21 times.

Riding high on auto

The company derives 55 per cent of its revenues from the sale of automobile batteries. Of this, over 65 per cent comes from the high-margin replacement sales.

While OE margins may be lower, the strong demand for automobiles bodes well for the company's volume growth. More so, because Amara Raja supplies across all segments of the auto industry. Maruti, Hyundai, Mahindra and Mahindra, Tata Motors, Ford, TAFE, Ashok Leyland and Swaraj Mazda are among its clients. Besides, robust auto sales now indicate that there will be good replacement demand for batteries three to four years down the line.

Hence, to cash in on such demand, Amara Raja has tied up with OE clients to service the replacement demand of their (OEM's) customers. The company joined hands with Maruti Suzuki for a co-branded battery called ‘Amaron MGB' to be sold through Maruti's outlets. Also, the company sells two-wheeler batteries in the aftermarkets and is expanding capacities for the same.



In July this year, it entered into an agreement with Honda to develop two-wheeler batteries.

Moreover, Amara Raja has pioneered in developing batteries for hybrid vehicles. It supplied batteries to the micro hybrid Scorpio, from the Mahindra stable and has also completed design and development of a micro hybrid programme for the Tata Ace.

Down, but not out

Under the Power Stack and Quanta brands, the company supplies batteries to the industrial segment. While the demand for automobile batteries pushed up sales and profits in the last few quarters, the industrial batteries division has been a dampener.

For the quarter ended June 2010, the company's net sales rose 45 per cent year-on-year to Rs 446 crore while profits fell by 16 per cent to Rs 36 crore. This is partly attributable to the prices and offtake of industrial batteries being impacted by theslowdown in the telecom industry due to tariff wars and postponement of capex plans of tower companies. But the long-term outlook for the telecom industry is intact.

Several companies which have been allotted 2G spectrum over the last two years are beginning to enter into infrastructure-sharing agreements with existing ones.

This, along with WiMax and 3G spectrum availability, necessitate enhancing efficiency and upgrading existing networks. This implies batteries of higher capacity would be required to power the same. Besides, replacement demand for batteries sold over the last two-three years will also kick in. The company will be able to leverage on its existing relationships with companies such as BSNL, Airtel, Idea, Tata teleto cater to this demand. Amara Raja is also expected to introduce the FAT (Front-Access Terminal) back-up batteries for telecom players which carry the advantage of convenience and cost efficiency.

Diversified presence

While telecom brings in 60 per cent of the industrial segment revenues, UPS, Railways and power utilities bring the rest.

Large-scale computerisation of banking networks and government departments, creation of high-powered data centres in IT and financial services industry, increasing penetration of PCs and the continued power shortage situation are expected to keep the market for UPS batteries ticking.

Also, Amara Raja's batteries power over 50 per cent of Tier-II and III AC coaches of the Railways and over 40 per cent of their signalling and telecom power supply. Government's priority to expand railway connectivity and modernise facilitiesand the intention to make India a manufacturing hub for coaches in South Asia lends visibility to earnings from this front.

Margin outlook

Amara Raja's operating profit margins took a hit in the first quarter, falling by almost ten percentage points Y-o-Y to about 14 per cent. While this can partly be attributed to pricing pressures and slower offtake of telecom batteries, price of lead, the key raw material has been a major reason. After peaking at $ 2370 per tonne in January 2010, lead prices currently hover around $1900-$2000 , implying margins may stabilise from now on.

While the company may be able to pass on some increase to customers, it may not score over Exide in terms of input prices.

Exide’s acquisition of smelting companies relatively shields it from lead price volatility.Amara Raja too is trying to leverage its relationship with JV partner, Johnson Controls, for lead procurement.

via BL