A Mar a Raja Batteries

8/7/2019 A Mar a Raja Batteries

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C O M P A N Y R E P O R T

Amara Raja Batteries Ltd

AnalystBharat Gianani

[email protected]

Tel: (022) 2858 3404

Key Data (INR)CMP 175

Target Price 192

Key Data

Bloomberg Code AMRJ IN

Reuters Code AMAR.BO

BSE Code 500008

NSE Code AMARAJABAT

Face Value (INR) 2

Market Cap. (INR Bn.) 14.9

52 Week High (INR) 185

52 Week Low (INR) 73

Avg. Daily Volume (6m) 256540

Beta (Sensex) 0.99

Shareholding %

Promoters 52.1

Mutual Funds /UTI / Banks 13.9

Foreign Institutional Investors 4.2

Bodies Corporate 5.7

Individuals 17.4

Other 6.8

Total 100

INR (Mn) FY10E FY11E FY12E

Net sales 14,652.1 16,395.0 18,526.2

Operating Profit 2,873.3 2,734.7 3,142.0

OPM (%) 19.6 16.7 17.0

PAT 1,670.3 1,444.3 1,642.6

PAT (%) 11.4 8.8 8.8

Earnings Per Share 19.6 16.9 19.2

29 Jun, 2010

We initiate coverage on Amara Raja Batteries Ltd (ARBL) with “Buy at Declines”

recommendation and price target of INR 192 (P/E of 10x its FY12E EPS of INR 19.2).

ARBL is a leading manufacturer of Standby Valve Regulated Lead Acid (VRLA)

batteries having presence in both industrial and automotive segments. ARBL has

planned capacity expansion on back of strong growth seen in the automotive segment.

Further, the company is also in negotiations with two wheeler OEM’s for supply of

its batteries, which would improve its market share going forward. Given the strong

growth in the automotive segment and steady growth in the industrial segment, the

company is likely to see good volume growth going forward. At CMP of INR 175,

ARBL trades at a P/E of 10.3x FY11E EPS of INR 16.9 and 9.1x FY12E EPS of

INR 19.2Investment Positives

Strong growth in the Automotive segment

The Automotive segment has shown strong recovery since beginning of FY10.

There has been strong growth across segments (particularly passenger cars and two

wheelers). The company is likely to benet from the strong automotive sales owing to

its focus on the automotive segment (it introduced two wheeler batteries in 2008).

Automobile Production trends

After slowdown in FY09, automobile production has recovered in FY10 due to

strong underlying demand. Passenger vehicle production grew at CAGR of 15.5 %

during FY04-FY10. Commercial vehicle production grew at CAGR of 12.8% during

FY04-FY10. Similarly, two wheeler production grew at CAGR of 11% during FY04-

FY10. Automobile sales will continue to remain robust due to increase in disposable

incomes, lower vehicle penetration levels. A strong automotive sale in the domestic

market augurs well for the company.

Category (no of units)

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Passenger

Vehicles

989,560 1,209,876 1,309,300 1,545,223 1,777,583 1,838,593 2,351,240

Commercial

Vehicles

275,040 353,703 391,083 519,982 549,006 416,870 566,608

Three

Wheelers

356,223 374,445 434,423 556,126 500,660 497,020 619,093

Two Wheelers 5,622,741 6,529,829 7,608,697 8,466,666 8,026,681 8,419,792 10,512,889

Grand Total 7,243,564 8,467,853 9,743,503 11,087,997 10,853,930 11,172,275 14,049,830

Source: SIAM, ACMIIL Research

B U Y a t D e c l i n e s


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Growing sales in the Auto Replacement segment

The company has been expanding its distribution network to focus on the high

margin auto replacement market (margins in Auto replacement market are 20-22% as

compared to 3-4% in the Auto OE space). The company has expanded its distributionnetwork to 200 franchisees and 19,000 retailers. The company has launched “Pistop”

outlets in urban areas and “Power Zone” in semi urban and rural areas to enhance

visibility and reach in the automotive replacement market. ARBL has also tied up

with Maruti for retailing of its batteries through Maruti authorized service centers.

Further its tie up with Tata International Ltd will boost exports of automotive batteries.

The strong growth witnessed by the automotive industry in past augurs well for the

replacement segment.

Industrial segment to grow steadily

The Industrial segment is expected to maintain steady growth going forward. The UPS

(uninterrupted power supply) segment is expected to register strong growth on the backdrop of continued power cuts in the interiors of the country resulting in higher

demand. India currently faces peak demand decit of 13.3%. Further, the Railways

and power segment are also expected to register good growth on backdrop of good

demand and huge power capacity additions. The telecom sector is also expected to

see steady growth due to huge spending by the telecom players. Under penetration

in the rural areas presents immense opportunities for the telecom players.

Strong Technological tie up

Amara Raja has access to advanced technology due to its tie up with Johnson Controls

Inc. Johnson Controls Inc (JCI) is the global leader in lead-acid, hybrid, and electric

batteries for automobiles and has 26% stake in ARBL. After success in the industrial

segment, the VRLA batteries introduced by ARBL in the motorcycle segment has

gained acceptance in the market. Also, with the growing development of hybrid

technology, ARBL due to strong technological support from JCI is well poised to

introduce Lithium ion batteries, which would improve its competitive positioning

going forward.

Capacity Expansion to drive growth

In order to cater to the demand from the high growth in the automotive segment, ARBL

is planning to increase its capacity at its plant in Tirupati. It has planned a capex of INR 900 million for this purpose. It plans to increase the capacity of four wheeler

batteries from the current 4.2 million units to 5.1 million units. Further, it plans to

double its two wheeler battery capacity from current 1.8 million units to 3.6 million

Source: CEA, ACMIIL Research Source: Industry, ACMIIL Research

Peak Demand (GW) Peak Met (GW) Peak Shortage (%)

FY07 FY08 FY09 FY100

20

40

60

80

100

120

140

0%

2%

4%

6%

8%

10%

12%14%

16%

18%

Power Shortage

Total Urban Rural

2009 (Dec)

(%)

0

20

40

60

80

100

120

2004 2005 2006 2007 2008 2009

Teledensity




units. The company has guided an overall capex of INR 1,350 Million in FY11. The

capex is expected to be funded through internal accruals. Capacity expansion would

boost ARBL’s revenue going forward.

Investment Concerns Volatile Lead Prices

Lead forms major portion of the overall costs (about 70-75%). Lead Prices have been

volatile in the past. Lead prices crashed to $960 per tonne in December 2008 from a

peak of $3000 per tonne in March 2008. Lead prices have softened recently and are

currently quoting at about $1880 per tonne.

However, since the company passes on increases in the lead prices to both industrial

and automotive customers, it is not likely to have signicant impact on the company.

ARBL takes into account changes in the lead price on monthly basis for Auto

replacement and industrial customers, whereas for the automotive OE customers it

does on quarterly basis.

Increasing Competition

Battery demand is expected to remain buoyant in the medium term. This has led to

signicant scaling up of capacity by the players. Exide Industries Ltd has planned to

raise capacity by ~20%. Tata Autocomp-GS Yuasa JV for manufacturing “Tata Green”

batteries for passenger cars and utility vehicles has plans to scale up capacity from 0.5

million to 2 million batteries by FY11. Thus competition is expected to intensify.

Cheaper Imports

Cheaper imports from China and Thailand have been surging which constitute

threat to the company. According to the company, the price differential for imported

batteries is ~20%.

0

500

1000

1500

2000

2500

S e p

- 0 8

D e c -

0 8

M a r - 0

9

J u n

- 0 9

S e p

- 0 9

D e c -

0 9

M a r - 1

0

Source: LME, ACMIIL Research




Company Background

Amara Raja Batteries Ltd (ARBL) is the largest manufacturer of Standby Valve

Regulated Lead Acid (VRLA) batteries in the Indian Ocean Rim comprising the area

ranging from Africa and the Middle East to South East Asia. ARBL was incorporatedin 1985 and is one of the leading manufacturers of storage batteries. It is the largest

supplier of standby power systems to Indian Utilities such as Indian Railways,

Department of Telecommunication, Power Generation stations, MTNL,VSNL, ITI

and HTL. Further, ARBL has ramped up its presence in the Automotive space lead

by its premium brand “Amaron”. It signed an agreement with Johnson Controls Inc

in 1998 for Automotive batteries.

In 1992,the company set up plant for manufacturing sealed maintenance free lead acid

batteries for industrial applications. Later, it entered the automotive battery segment

with the launch of its brand “Amaron” in 2000.Further, in 2008, the company entered

the high growth two wheeler segment with the launch of VRLA batteries. ARBL has

manufacturing facility at Karakambadi, Tirupati in Andhra Pradesh. The Company is

growing aggressively and expanding capacities to enhance its presence.

Company Analysis

The company derives equal sales (50:50) from the industrial and the automotive

segment.

Revenue break up segment wise

ARBL revenue mix has recently skewed towards the automotive segment (especially

after the launch of two wheeler batteries in 2008 and recent slowdown in the telecom

segment). In 2005, ARBL revenue mix was 70% from industrial segment and 30%

from automotive segment.

Industrial

50%

Automotive

50%

Source: Company, ACMIIL Research




Automotive Segment

ARBL is the second largest battery manufacturer and has market share of ~24%

in the Auto OE space (excluding the two wheeler segment) and 18% in the Auto

replacement market. Its brand “Amaron” is well recognized in the market. In theautomotive segment, ARBL derives signicant revenues from the replacement space

(~65%). The OEM space contributes 25%, whilst exports contribute 10%.

Automotive segment revenue break up

ARBL was late entrant in the automotive space. It entered the automotive space in

2000. ARBL is still a small player in the Auto OE segment (having ~12% share of the

overall market). It does not have presence in the growing two wheeler OE space.

ARBL has however ramped up its presence, particularly in the high margin auto

replacement market (it has a market share of ~18% in the replacement market).

Apart from tapping the passenger vehicle segment, the company has also increased

its presence in the two wheeler segment with launch of new VRLA battery in 2008.

ARBL has also tied up with Maruti Suzuki for availability of its batteries through

network of Maruti authorized service stations. Besides, ARBL has signicantly

increased its presence by expanding its distribution network.

ARBL also exports batteries to Singapore, Malaysia, Indonesia, Vietnam, China,

Sri Lanka.

The Key Customers for ARBL in the automotive segment include Maruti Suzuki,Hyundai, Mahindra & Mahindra, Ford, Tata Motors, Ashok Leyland, General Motors

and Daimler Chrysler. The company has exclusive supply agreements with Ford,

Swaraj Mazda and Daimler Chrysler.

Brand Segment

Pro, Flo, Go, Black Passenger Cars

Fresh Passenger Cars/Multi Utility Vehicles

Hi-Way Commercial Vehicles

Harvest Tractors

Replacement65%

OEM

25%

Exports10%





Industrial Segment

ARBL has market share of ~21% in the Industrial battery market. In the industrial

segment, ARBL derives signicant revenues from the telecom space (~60%). The

UPS space contributes 28%, whilst power and railways contribute 12%.Industrial segment revenue break up

Amara Raja Batteries started business with supply of batteries to the industrial

segment. ARBL is a leading player in Industrial VRLA batteries. The Company

pioneered VRLA technology in India in the early nineties and is supplier to telecom

companies including BSNL, VSNL, MTNL, Bharti, Idea & Hutch. Amara Raja also

supplies to switch manufacturers such as Alcatel, Ericsson, Lucent, Nokia & Motorola.

Amara Raja has also provided VRLA batteries to Indian Railways for train lightingand air conditioning applications.

Brand Segment

Power Stack Telecom, Power Stations, Railways

Quanta Railways, IT and Ites companies, BFSI

Shield Inverters

Peer Comparison

Exide Industries Ltd (EIL) is the market leader in the storage batteries market. ARBL

is the second largest player.

EIL is the market leader in the automotive battery segment. EIL has market share

of 77% in the Auto OE segment as compared to 12% for ARBL. Similarly, in the

Auto replacement segment, EIL commands market share of 58% as compared to

18% for ARBL.

Particulars (FY10) Exide Industries Amara Raja Batteries

Net Sales (INR Mn) 39,832.6 14,652.1

Raw Material/Sales 54.8 60.2

Employee/ Sales 6.6 4.3

Other Exp/Sales 13.9 15.9

OPM% 24.6 19.6

NPM% 14.1 11.4

ROCE% 41.9 39.8

RONW% 30.0 30.7


Telecom

60%UPS

28%

Power &

Railways 12%





EIL has better operating margins due to better pricing power and captive lead smelting,

leading to lower Raw material/ sales ratios. In FY10, RM/Sales ratio for EIL was

54.8% as compared to 60.2% for ARBL. Similarly, due to better brand image and

pan India presence Other Exp/Sales ratio for Exide is lower, resulting into higher

operating margins. EIL reported operating margin of 24.6% in FY10 as compared to

19.6% for ARBL. EIL also has higher return ratios due to efcient capacity utilization

and better pricing power. ROCE for EIL was 41.9% in FY10 as compared to 39.8%

for ARBL.

Industry Analysis

The Indian storage battery market is estimated at INR 110 billion. Storage batteries

can be broadly divided into automotive batteries and industrial batteries.

Automotive Segment

The automotive segment forms the major chunk of demand with ~60% of the overall

battery market. The industry is virtually duopoly with two major players ExideIndustries and ARBL having market share of ~90%. Automotive demand can be

further classied into OE and replacement demand.

The replacement market is almost equally divided between organized and unorganized

players. Unorganised players have substantial market share of about 45% in the

replacement segment (especially commercial vehicle and tractor space). CV players

are driven more by protability parameters, thereby use of cheaper unbranded

batteries is more prevalent in this space. Unorganised players evade taxes resulting

in substantial price advantage leading to supply of cheaper batteries. Increasing

brand awareness, however, has helped organized players improve their market share

particularly in the Car replacement market.

The existence of the unorganized players can be threatened by stricter enforcement

of regulations. According to the Batteries Management and Handling Rules, 2001,

old batteries must be collected against new batteries sold. Further, the old batteries

collected must be handed over to the registered smelters, who will then recycle and

dispose them safely. Unorganized players major source of raw material (lead) is from

exhausted batteries. By curbing its availability, the existence of unorganized players

can be threatened.

Margins in the Auto OE market are low (3-5%) due to stronger bargaining power of

the customers. The supply contracts have pass thru clause where changes in the price

of the major raw material, viz lead, is passed on to the customers. The competition

in this space is expected to intensify due to entry of relatively smaller players. The

growth in the Auto OE space looks good due to strong demand.

The Auto replacement segment commands higher margins (20-24%), due to fragmented

customers. On average, battery needs replacement every 3 years. Considering, high

automotive growth in past few years, the demand in the automotive replacement

segment is expected to remain good.




Industrial segment

Basically, batteries in industrial application are stand-by source of power. The

industrial battery segment can be broadly divided into motive power batteries and

stationary batteries. Motive power batteries nd applications in railways, forkliftsand other electric vehicles.

The bulk of the demand for industrial batteries is, however, accounted for by the

stationary batteries that typically nd application in telecom networks, power plants

and UPS systems. The presence of unorganized players is minimal ~7% and they are

present mostly in the inverter and standby segment. Valve-regulated lead acid (VRLA)

batteries came as a major breakthrough in the industrial battery segment. Usually,

the chemical reaction inside a battery results in a gas discharge. If the gas pressure

inside the battery increases and reaches a certain level, the valve will vent. Venting

is an anti-explosion mechanism. Hence, VRLA batteries have found acceptance in

remote-power and unmanned applications such as telecom installations and UPS.

Roughly, the VRLA segment accounts for about 60 per cent of the industrial battery

segment.

The Industrial battery segment has a margin of ~16-18%. Standby batteries have

slightly higher margin at ~20%. The sales in the Industrial segment are mainly to the

OE customers (Telecom infrastructure companies, Indian Railways, Power companies)

except the standby segment which has both OE and replacement customers.

Huge power capacity additions planned by Government of India is likely to boost

demand from the power segment. Further power cuts in the interiors and increasing

use of IT/ITES is likely to boost demand for inverter and standby batteries. Further

upgrading of railway infrastructure (addition of new passenger coaches) would boost

demand from railway segment.

Telecom players have planned capex for adding towers particularly in the smaller cities

(termed as “B” and “C” circles). The industry is expected to add 1,00,000 towers in

next two years from current 3,20,000. This augurs well for the company.

SWOT Analysis

Strengths Extensive distribution network helps enhance presence·

Strong Technological tie up (with Johnson Controls Inc).

Strong Industrial and Automotive Client base (supplies to BSNL, MTNL,

BHEL, Indian Railways, Maruti, Hyundai, Ford, Mahindra & Mahindra,

Ashok Leyland)

●

●

●

Weakness Not present in all automotive OE sub segments (not

present in high growing two wheeler OE segment)·

Has Manufacturing presence in only one location·

No captive smelting for key raw material Lead

●

●

●

Opportunities Buoyant automobile market with strong underlying demand coupled with

MNC’s targeting India as manufacturing base

Continued Power deficits and strong telecom demand underlies huge

potential demand

●

●

Threats Intense competition with players (Exide Industries,

Tata GS-Yuasa) expanding capacities·

Cheaper imports from low cost countries (China,

Thailand)

●

●

Risk to our estimates

ARBL is negotiating with two-wheeler OEM’s for supply of its batteries. In the event

of ARBL securing orders from the two wheeler OEM’s it would provide signicant

upside in the volumes for ARBL. This would result in signicant improvement in

revenues, earnings and market share for the company.




Valuation & Recommendation

The growth in the automotive market looks encouraging. Further, the demand in

the industrial segment is also expected to show steady growth. This should result

in steady growth in revenues and protability for the company. However, given thesmaller size of ARBL (as compared to the industry) and consequently less pricing

power, we assign a multiple of 10x (a discount of 33% to industry leader Exide’s

P/E multiple of 15x) to its FY12E earnings of INR 19.2 per share to arrive at a price

target of INR 192 per share. We thus initiate coverage with “Buy at Declines” rating

for the stock.




Financials

Profit & Loss Account (INR Mn)

FY08 FY09 FY10 FY11E FY12E

Net Sales 10,833.3 13,177.2 14,652.1 16,395.0 18,526.2Add : Other Income 56.4 80.6 49.5 82.0 92.6

Total Income 10,889.6 13,257.8 14,701.6 16,476.9 18,618.8

less: Expenditure 9,056.5 11,503.3 11,658.1 13,611.1 15,402.7

Operating Profit 1,776.8 1,996.2 2,873.3 2,734.7 3,142.0

less: Depreciation 244.5 345.6 429.5 510.6 571.9

PBIT 1,588.7 1,409.0 2,614.1 2,355.2 2,644.3

less:Interest 129.3 182.4 67.7 140.0 125.0

PBT 1,459.4 1,226.6 2,546.3 2,215.2 2,519.3

less:Tax 515.8 421.8 876.0 770.9 876.7

Net Profit 943.6 804.8 1,670.3 1,444.3 1,642.6

Sales Growth (%) 81.8 21.6 11.2 11.9 13.0

Operating Profit Growth (%) 116.8 12.3 43.9 -4.8 14.9

Net Profit Growth (%) 100.6 -14.7 107.5 -13.5 13.7

Operating Margin (%) 16.4 15.1 19.6 16.7 17.0

NP Margin (%) 8.7 6.1 11.4 8.8 8.8


Balance Sheet (INR Mn)

FY08 FY09 FY10P FY11E FY12E

Share Capital 113.9 170.8 170.8 170.8 170.8

Reserves & Surplus 3,217.1 3,885.1 5,265.6 6,420.2 7,772.9

Total Shareholders Fund 3,331.0 4,055.9 5,436.4 6,591.0 7,943.8

Total Loans 3,162.6 2,858.7 911.9 930.1 697.6

Deferred Tax Liability 169.5 182.5 216.4 216.4 216.4

Total Sources of Fund 6,663.1 7,097.1 6,564.7 7,737.5 8,857.7

Application of Fund

Gross Block 3,105.8 4,270.9 4,941.2 6,151.8 6,890.1

less:Depreciation 1,217.3 1,457.7 1,887.1 2,397.7 2,969.6

Net Block 1,888.5 2,813.2 3,054.1 3,754.1 3,920.4

Investments 162.0 471.0 160.8 112.5 96.8

Total Curent Assets 5,749.3 5,259.9 6,310.6 6,453.0 7,712.7Total Current Liabilities 1,794.1 1,843.1 3,068.9 2,922.1 3,282.3

Net Current Assets 3,955.2 3,416.8 3,241.7 3,530.8 4,430.5

Total Application Of Fund 6,663.1 7,097.1 6,564.7 7,737.5 8,857.7





Cash Flow Statement (INR Mn)


Profit Before Tax 1,459.4 1,226.6 2,546.3 2,215.2 2,519.3

Depreciation 244.5 345.6 429.5 510.6 571.9Interest Paid 129.3 182.4 67.7 140.0 125.0

Net Operating Profit Before working capital change 1,949.3 1,956.0 3,077.3 2,865.8 3,216.1

Net Cash Flow from Operating activities -170.8 2,239.4 2,420.1 1,252.4 1,794.8

Net Cash used in Investment Activities -1,157.0 -1,321.5 -194.0 -1,272.4 -792.5

Net Cash from Financing activities 1,583.3 -726.5 -2,304.3 -411.5 -647.3

Net Increase/decrease in cash & cash equivalent 255.5 191.4 -78.2 -431.5 355.0

Cash at Beginning 256.0 511.5 702.9 624.7 193.2

Cash at End of Period 511.5 702.9 624.7 193.2 548.2


Valuation Ratios


Profitability Ratios

Operating Margins (%) 16.4 15.1 19.6 16.7 17.0

PAT After Minority Interest (%) 8.7 6.1 11.4 8.8 8.8

ROCE (%) 23.8 19.9 39.8 30.4 29.9

RONW (%) 28.3 19.8 30.7 21.9 20.7

Capital Structure Ratios

Debt-Equity 0.9 0.7 0.2 0.1 0.1

Turnover Ratios

Fixed Assets 3.5 3.1 3.0 2.7 2.7

Inventory 5.6 8.2 6.7 6.9 6.9

Debtors 4.8 6.3 6.0 6.1 5.9

Creditors 11.2 12.3 8.7 10.6 10.9

Solvency Ratios

Current Ratio 3.2 2.9 2.0 2.2 2.3

Interest Coverage Ratio 12.3 7.7 38.6 16.8 21.2

Valuation Ratios

EPS 16.6 9.4 19.6 16.9 19.2

BV/Share 58.5 47.5 63.7 77.2 93.0P/E (X) 8.9 10.3 9.1

EV/EBIDTA(X) 5.0 5.4 4.7



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Disclaimer:

This report is based on information that we consider reliable, but we do not represent that it is accurate or complete and it should not be relied upon such. ACMIIL or

any of its afliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information

contained in the report. ACMIIL and/or its afliates and/or employees may have interests/positions, nancial or otherwise in the securities mentioned in this report.

To enhance transparency we have incorporated a Disclosure of Interest Statement in this document. This should however not be treated as endorsement of the views

expressed in the report

Disclosure of Interest Amara Raja Batteries Ltd

1. Analyst ownership of the stock NO

2. Broking Relationship with the company covered NO

3. Investment Banking relationship with the company covered NO

4. Discretionary Portfolio Management Services NO

This document has been prepared by the Research Desk of Asit C Mehta Investment Interrmediates Ltd. and is meant for use of the recipient only and is not for

circulation. This document is not to be reported or copied or made available to others. It should not be considered as an offer to sell or a solicitation to buy any security.

The information contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be relied upon as such. We

may from time to time have positions in and buy and sell securities referred to herein.

Notes:

Institutional Sales:

Ravindra Nath, Tel: +91 22 2858 3400

Kirti Bagri, Tel: +91 22 2858 3731

Himanshu Varia, Tel: +91 22 2858 3732

Email: [email protected]

Institutional Dealing:

Email: [email protected]

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