Amara Raja Batteries Ltd - SKP Moneywise Securities Ltd Page 2 of 13 Amara Raja Batteries Ltd....

March 7, 2014

Amara Raja Batteries Ltd

Innovation in technology makes the difference

CMP: Rs.375 Target: 495 Initiating Coverage - Buy

SKP Securities Ltd www.skpmoneywise.com of 13

Company Profile

Amara Raja Batteries Ltd. (ARBL) is one of the largest manufacturers of Lead Acid batteries for both Automotive and Industrial applications in India’s storage battery industry. ARBL is the market leader in Industrial batteries and second largest player in Automotive batteries after EXIDE in India.

Investment Rationale

Capacity expansion to drive growth In FY13, ARBL ran its capacity utilization at 90% in the industrial as well as 4-

wheeler automotive and 76% in the 2-wheeler automotive segments. Foreseeing future need for more output, the company has initiated the capex plan of Rs.745cr over the period FY14-FY16E which is expected to bring in additional revenue of ~Rs.1,700cr at full capacity.

ARBL is expanding both its 4-wheeler battery plant from 56 lac units in FY13 to 82.5 lac units p.a. by Q2 FY15E and the 2-wheeler battery plant from 48 lac units in FY13 to 84 lac units p.a. by the end of FY14E in order to boost its growth prospects.

Auto replacement segment to see robust growth The average life of 2-wheelers and 4-wheelers has come down considerably

over the last few years. New 2-wheeler having self start mechanism feature transforming batteries into a critical component. Hence, timely battery replacement has become mandatory.

During FY10 & FY11 OEMs witnessed ~26% growth in demand along with higher dieselization from 36% in FY11 to 58% in FY13. With this we expect strong replacement demand over FY14-16.

Market share gains from unorganized segment particularly in CVs and tractors could support replacement demand as well.

High demand in the banking and telecom sector DoT has mandated all tower companies to reduce their dependence on

diesel and cut carbon emissions by operating at least 50% rural towers and 20% urban towers on hybrid power by 2015.

In UPS segment, ARBL has leadership position with 32% market share (up from 27% in FY10), to remain strong. With increasing computerization across industries (mainly BFSI, IT & ITeS, Retail, ATMs, e-governance projects), UPS segment has a bright future ahead.

Strong Financials with higher return ratios

ARBL’s revenues have grown at a CAGR of 31% from Rs.560 Cr. in FY07 to Rs.3394 Cr in FY13. Going ahead, we expect that ARBL’s top-line to grow 18% CAGR during FY13-16E.

Over the last three years, ARBL has maintained its EBITDA margin higher than 14.5% and PAT margin higher than 8.6%. We expect ARBL to deliver an EBITDA margin ~16% and PAT margin in the range of 9-10% during FY14E-16E respectively.

ARBL has good return ratios with ROAE in the range of 23-27.5% & ROACE in the range of 17-23% over the last three years. We expect ARBL’s ROAE and ROACE to inch lower at ~25% and 36% in FY15-16E respectively primarily due to capitalized capex during FY15.

Outlook & Recommendation

At CMP, the stock trades at a P/E of 17.6x FY14E, 16.9x FY15E and 13.6x FY16E. We initiate coverage on the stock with ‘BUY’ recommendation and a target price of Rs.495 (18x FY16E EPS), at 32% upside over the period of 18 month.

Key Share Data

Face Value (Rs.) 1

Equity Capital (Rs. in Cr.) 17.1

M.Cap (Rs. in Cr.) 6,406

52-wk High/Low 407/207

One Year Avg. Daily Vol (In Qty) 46,725

BSE Code 500008

NSE Code AMARAJABAT

Reuters Code AMAR.NS

Bloomberg Code AMRJ:IN

Shareholding Pattern (as on 31st

Dec, 2013)

Source: BSE

Key Financials (Rs. In Cr.)

Particulars FY13 FY14E FY15E FY16E

Net Sales 2975.7 3462.8 4034.2 4921.7

growth (%) 25.6% 16.4% 16.5% 22.0%

EBITDA 465.8 574.4 654.3 799.8

PAT 286.7 365.0 378.7 469.9

growth (%) 33.3% 27.3% 3.8% 24.1%

EPS (Rs.) 16.8 21.4 22.2 27.5

BVPS (Rs.) 62.0 79.6 97.7 119.9

Key Financials Ratio

Particulars FY13 FY14E FY15E FY16E

P/E (x) 22.3 17.6 16.9 13.6

P/BVPS (x) 6.0 4.7 3.8 3.1

Mcap/Sales (x) 2.2 1.8 1.6 1.3

EV/EBITDA (x) 13.1 10.9 9.3 7.2

ROACE (%) 41.9% 41.3% 35.7% 36.4%

ROAE (%) 30.4% 30.2% 25.0% 25.3%

EBITDA Mar(%) 15.7% 16.6% 16.2% 16.3%

PAT Mar (%) 9.6% 10.5% 9.4% 9.5%

D/E (x) 0.1 0.1 0.0 0.0 Source: Company, SKP Research

Price Performance ARBL vs. BSE 200

Analyst: Chirag K. Gothi

Tel No.: +91 22 4922 6006; Mobile: +91 9870895720

Email: [email protected]

FII13.35

DII12.75

Public 21.84

-40%

-20%

0%

20%

40%

60%

Mar

-13

Ap

r-1

3

May

-13

Jun

-13

Jul-

13

Au

g-1

3

Sep

-13

Oct

-13

No

v-1

3

Dec

-13

Jan

-14

Feb

-14

BSE 200 ARBL

Promoter 52.06%

mailto:[email protected]


Amara Raja Batteries Ltd.

Industry Overview

The domestic Lead Acid storage battery market is estimated to be worth ~ Rs.13,000cr. The automotive battery segment constitutes 63% whereas the industrial segment occupies 37% of the total market. The branded battery contribute 58% to Rs.4,750cr out of which Exide and ARBL are dominant players.

Automotive batteries break-up Automotive batteries mix

Source: Industry, SKP Research Source: Industry, SKP Research

Industrial batteries break-up

Source: Industry, SKP Research

Domestic Lead Acid storage battery market (Rs. 13,000 cr)

Automotive battery business (~63 % at Rs. 8,190 cr)

Industrial battery business (~37% at Rs. 4,810 cr)

Branded battery (~58% at Rs. 4,750 cr)

Unbranded battery (~42 % at Rs. 3,440 cr)

OEM 34%

Replacement Market 66%

34%

Tractors 11%

CVs 29%

Cars & UV 38%

2 Wheelers 22%

Telecom 35%

UPS 47%

Others 18%



Amara Raja Batteries ‐ Innovation in technology makes the difference

Amara Raja Batteries Ltd. (ARBL) is one of the largest manufacturers of Lead Acid batteries for both Automotive and Industrial applications in India’s storage battery industry.

Promoted by the Galla family, Dr. Ramachandra Galla is the Chairman and his son Mr. Jayadev Galla is the Vice Chairman and Managing Director of the company.

ARBL was set-up in 1985. The company began commercial production in 1992 and got its first bulk order of 200 sets of batteries from the Department of Telecom (DoT) in 1993, followed by a commercial order in 1995.

In Dec’98 the company entered into a JV with US based Johnson Controls Inc (JCI) to manufacture automotive batteries in India. Thus, in 2000 ARBL entered the segment of Automotive batteries with the launch of AMARON batteries based on Zero maintenance technology for the first time in India.

In May’08, ARBL entered the 2Wheeler battery segment with the launch of Amaron Pro Bike Rider 2-wheeler batteries powered by VRLA technology with 60 months warranty.

ARBL sells Automotive batteries under the brands Amaron (largely urban markets) and Powerzone (rural and semi urban markets), with distribution network span across through 287 franchisee distributors, 21,000 plus Amaron retail outlets and 1,100 plus Powerzone outlets.

ARBL has a manufacturing facility in Andhra Pradesh. The two-tiered distribution model has been a resounding success for ARBL. The company has been able to grow its brand equity and market penetration in line with market leader Exide Industries (EXID).

The below diagram depicts the segments to which the company caters:

Segment Automotive (60% of sales) Industrial (40% of sales)

Overview Begin operations in 2000 with technology from Johnson Controls Inc. USA

Commenced operations in the year 1991 to manufacture batteries for telecom, UPS, railways and power utility sectors

Capacity 4W batteries: 56 lac per annum

2W batteries: 48 lac per annum Large VRLA batteries – 76 cr Ah pa Medium VRLA batteries: 18 lac units

Products

Passenger cars: Amaron Pro, Amaron Flo, Amaron Go, Amaron Black and Amaron Fresh

Commercial vehicles: Amaron Hiway Tractors: Amaron Harvest

Two-wheelers: Amaron Pro Bike Rider

Product portfolio offers capacities ranging from 4.5 Ah to 5,000 Ah under multiple brands

Amaron Volt (Telecom networks, data center, power station, oil and gas)

Power Stack® (Telecom networks, data center, power stations, oil and gas, Indian Railways)

Quanta® (UPS applications) Power SleekTM (Wireless telecom network, UPS

applications)

Sectoral position

Second-largest player in the automotive battery business in India

Largest supplier of batteries to the telecom and UPS sectors and to Indian Railways for rolling stock application

Market share 4W (OEM): 28% 4W replacement (organised): 34%

2W replacement (organised): 24%

Telecom: 46% UPS: 32%

Source: Company, SKP Research



Investment Rationale

Capacity expansion to drive growth

In FY13, ARBL ran its capacity utilization at 90% in the industrial as well as 4 wheeler automotive and 76% in the 2-wheeler automotive segments. Foreseeing future need for more output, the company has initiated the capex plan of Rs.745cr over the period FY14-FY16E which is expected to bring in additional revenue of ~Rs.1,700cr at full capacity.

Over the years, ARBL’s focus has been shifting from the industrial segment to the automotive segment. As a result, the company has laid a very aggressive capacity expansion plan to further enhance its market share.

ARBL is expanding both its 4-wheeler battery plant (from 56 lac units in FY13 to 82.5 lac units p.a. by Q2 FY15E) and the 2-wheeler battery plant (from 48 lac units in FY13 to 84 lac units p.a. by the end of FY14E) in order to boost its growth prospects.

ARBL expanding its auto battery capacities for which it has earmarked Rs160cr –doubling 2-wheeler battery capacity to 36 lac in FY11 and to 48 lac by FY12; raising 4wheeler capacity by 20% to 56 lac by FY12.

ARBL has never supplied batteries to 2-wheeler OEMs but in the beginning of FY14 the company has received approvals from Hero MotoCorp Limited, Honda Motorcycle and scooter India Pvt. Ltd, Bajaj Auto Ltd and Mahindra & Mahindra Ltd to supply OEM batteries.

The capex is likely to be funded by internal accruals (see details below).

Automotive batteries Industrial batteries

4- wheeler batteries 2- wheeler batteries MVRLA LVRLA

Capacity expansion

Brownfield: from 56 lac units p.a. to 60 lac;

Greenfield: from 60 lac to 82.5 lac

From 48 lac to 84 lac From 18 lac to 36lac

units p.a. From 76 cr amph to

100 cr amph

Product range 12V - 28Ah to 180Ah 12V - 2.5Ah to 18Ah 12V - 26Ah to

200Ah 2V - 100Ah to

5000Ah

Brands Amaron and Powerzone Amaron and Powerzone Quanta and Power

Sleek Power Stack and

Amaron Volt

Applications Starting, lighting and

ignition for all vehicles Starting, lighting and ignition for

all vehicles

UPS, wireless telecom network, solar and rolling stock (railways)

Telecom network, rolling stock, solar and power utilities

Capex Rs400-450 cr Rs100-120 cr Rs200-220 cr Rs50-70 cr

Commissioning Q2FY15 Q4FY14 Q4FY14 Q4FY14

Fungibility Can be used to make MVRLA and flat plat

inverter batteries

Can be seamlessly used to produce Quanta range of SVRLA batteries for application in small UPS, emergency lamps among

others

Can be used to make 4-w batteries

Can be used to make 2V motive

powerbatteries

Revenue estimated at full capacity

Rs.750 cr Rs.180 cr Rs.500 cr Rs.250 cr

Source: SIAM, SKP Research



Auto replacement segment to see robust growth

The average life of 2-wheelers and 4-wheelers has come down considerably over the last few years. New 2-wheeler having self start mechanism feature transforming batteries into a critical component. Hence, timely battery replacement has become mandatory.

Average Life of Batteries

4-Wheelers 3-4 Years

2-Wheelers 2-3 Years

Telecom 4-5 Years Source: Company, SKP Research

In 2-wheeler replacement, the volume traction is likely to continue on strong OEM sales over FY09-12 (as mentioned below), plus higher % of new bikes having self start mechanism (estimated at 40-45% vs. close to NIL 5-6 years back), which reduces the battery life and hence boosts replacement demand.

During FY10 & FY11 OEMs witnessed higher demand along with higher dieselization in FY12-13. With this we expect strong replacement demand over FY14-16.

Market share gains from unorganized segment particularly in CVs and tractors could support replacement demand as well.

Passenger Vehicles

Commercial Vehicles

Three Wheelers

Two Wheelers

Grand Total

FY 07 21% 33% 12% 12% 14% FY 08 12% 5% -10% -8% -5% FY 09 0% -22% -4% 3% 1% FY 10 26% 39% 26% 26% 26% FY 11 28% 29% 19% 26% 26% FY 12 5% 18% -2% 14% 12% FY 13 3% -2% 5% 3% 3%

Source: SIAM, SKP Research

Expecting higher realization in diesel vehicle batteries because batteries used in diesel cars require higher power (Amp Hrs), they tend to be at least 50% more expensive than batteries that are used in petrol cars. 2-wheeler replacement battery demand is expected to grow on the back of increase in electric start option in most models released over the past four years.

Rising dieselization leads to better realisation ARBL’s Mumbai retail price

Source: http://www.batterywale.com and SKP Research

29%34% 35% 36%

47%

58%

0%

10%

20%

30%

40%

50%

60%

70%

FY08 FY09 FY10 FY11 FY12 FY13

3800 3800

6000 60005800 5800

3800 3800

0

1000

2000

3000

4000

5000

6000

7000

Maruti Swift Maruti Ertiga Toyota Etios Liva

Toyota Innova

Petrol DieselAmt in Rs.



Continue gaining market share from the organized and unorganized markets

Making a presence in automotive batteries in 2000, ARBL has garnered a share of ~28% by volume in 4-wheeler OEM batteries and 22% in replacement market for 4-wheeler. The company has increased its market share steadily over the last 5 years through aggressive branding, advertising and product innovations.

The attractive pricing policy has helped ARBL to grow at a rate of 22% CAGR for the past five years. The company provides at least 6 months more warranty period than its competitors. Better quality product combined with cheaper price and longer warranty terms made ARBL become a major player in the storage battery space in India.

Further, in the 2 wheeler organized replacement segment, the company has garnered a very strong market share of ~25% within a period of 5 years of entering into the market (ARBL entered in two-wheelers replacement market in May’08).

ARBL remains a dominant player in the Telecom batteries segment with a robust market share of ~46%. Company’s increasing dominance in the segment is reflected by the fact that company has almost doubled its market share within 5 years.

In the 4-wheeler replacement market, it expects market share to improve to 30% from 22%, while in the 2-wheeler replacement market, ARBL will gain a market share of 35% from 25% currently.

In the 4-wheeler OEM market share expansion will entirely depend on recovery in the automotive space. Still company is targeting a market share of 47% in the four-wheeler OEM segment in the next three to four years from current 28%.

Four-wheelers market share (%) Two wheelers replacement market share (%)

Market share in Telecom (%) Market share in UPS (%)

23 24 24 2526

28

12 13 1416

1922

5

10

15

20

25

30

Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13

4-wheelers OEM 4-wheelers Replacement (Overall)

21

23

24

25

18

20

22

24

26

Mar-10 Mar-11 Mar-12 Mar-13

2-wheelers Replacement (Organised)

2324

27

32 32 32

20

22

24

26

28

30

32

34


UPS

28 29

32

42

46 46

20

25

30

35

40

45

50


Telecom




High demand in the banking and telecom sector

Telecom tower companies consume about 1.7% of the total diesel consumption in India; ~60% of the towers in India depend solely on diesel therefore soaring diesel prices have led to an increase in capex and operational costs for these towers.

The Department of Telecommunications (DOT) has mandated all tower companies to reduce their dependence on diesel and cut carbon emissions by operating at least 50% rural towers and 20% urban towers on hybrid power by 2015.

Moreover, telecom tower operators themselves are rapidly switching to use of batteries as alternative to diesel generators, led by rising cost of diesel, which in turn will boost battery demand going forward.

Company has also started strategic partnership with leading telecom tower companies and operators, which provides long term revenue visibility.

UPS sector: The key sub-sectors in this UPS sector comprise BFSI (including ATMs), IT & ITeS, e-governance projects and e-commerce institutions.

BFSI: The recent RBI directive on inclusive banking which requires public sector banks to reach out to the unbanked population will see significant action building in rural India, expected to translate into a sizeable demand for UPS batteries.

The Government’s intent to issue banking licenses to NBFCs is expected to widen the banking network to semi-urban and rural locations. Increasing penetration by banks (public and private), insurance companies and NBFCs from the urban cities to the vast number of Tier-II and III towns will only increase standby power demand as these areas face significant power shortage.

ATMs: Since the ATM concentration in India is primarily in metros and Tier-I cities, the population of 74 ATMs per mn people is significantly lower than the global average. This underpenetration is expected to change following the recent Government directive (Union Budget, 2013-14) that every Indian public sector bank branch should have an ATM by March 2014; a large part of this addition is expected to come up in Tier-II and III locations with batteries as a critical power source.

The recent RBI permission to non-banking financial institutions to set up their own White Label ATMs (WLAs) in semi-urban and rural areas is expected to create a sizeable battery opportunity as well. Independent research suggests that by 2017, the installed Indian base of ATM machines will grow to 400,000 from about 100,000 in the third quarter of 2012.

IT and ITeS: India is one of the fastestgrowing IT services markets in the world; three-fourths of large Indian enterprises plan to increase IT spending in 2013.

Strong client base

Automotive Segment:

OEM customers: Ford,Maruti Suzuki, Hyundai, Honda,M&M, Tata, Volvo Eicher, Daimler Benz, Tafe Tractors, Isuzu Motors among others

Major private label customers: Bosch, Lucas, Cummins and AC Delco

Industrial Segment: Indus Towers, Viom Networks, ATC, Bharti Infratel, Bharti Airtel, Vodafone, Aircel, BSNL, Idea Cellular, Indian Railways, APC, Emerson, Numeric, Delta, DB Power and Schneider



Strong brand recall & wide distribution network key strengths

Over the past three years, ARBL has been focusing on branding. The company has steadily expanded its retail distribution network, as a strong distribution network is essential to serve the replacement market effectively.

ARBL has created a dominant distribution network (274 franchised distributors, about 18,000 retailers in Amaron format, 900 exclusive retail partners in Power Zone format spread across semi-urban and rural locations & around 2,000 service hubs) in the automobile battery segment in India.

ARBL has also been deliberately making inroads into rural India, starting in 2007 with the launch of Powerzone stores. These are small retail establishments that act as a one-stop shop for all types of batteries. “There are 1,100 such outlets spread across India and 20% of our volumes come from rural India. The advantage here is that we can tackle the unorganised sector in smaller towns.

Going forward, ARBL plans to continue using the two-tier model in the case of Amaron and a direct dealer model, in case of power zone since direct reach will be more effective here.

ARBL’s market share in the replacement market now stands at ~26%. The company plans to widen its retail network to further increase its penetration in the replacement market where unorganized players are predominant- semi urban & rural areas..

Pricing discipline to protect operating margins

The Indian batteries market is primarily a duopoly with EXIDE and ARBL occupying over 90% of the organised automotive battery space. There are pass-through clauses with OEMs enabling pricing power and margin sustenance. In case of auto OEM and replacement cost increases are passed on with a quarterly lag while in case of industrials segment, they are passed with a 1-2 month lag.

We believe continued pricing discipline will help this duopolistic industry to tide over cost increases. Also in the interim, while most benefit of lower lead prices have been offset by rupee depreciation, risks to margins are reduced due to stabilizing lead prices.

ARBL has more or less followed EXIDE with measured price hikes (as depicted in figure below). We see the return of pricing discipline as key positive at the industry level towards margin sustainability. Even in telecom segment, pricing discipline has returned as per AMRJ mgmt, which bodes well for profitability.

Pricing actions taken by EXIDE and ARBL over past 2 years

Nov-12 Dec-12 Feb-13 Mar-13 Jul-13 Sep-13 Oct-13 Nov-13 Dec-13 Feb-14

ARBL

2-3%

3-4% 4-5%

3%

-3%

EXIDE 5-6%

5-6%

5-6% 6-7%

-6%

3-4%




Strong Financial Performance

ARBL’s top-line to grow at 31% CAGR during FY13-16E:

ARBL’s revenues have strongly grown at a CAGR of 31% from Rs.560Cr. in FY07 to Rs.2976Cr in FY13. This stellar performance is primarily attributed to strong demand for batteries coupled with timely increase in capacity.

Going ahead, we believe ARBL’s top-line to grow at 18% CAGR during FY13-16E due to upcoming huge capacity additions and enable it to maintain a higher growth rate as compared to Exide.

Revenue break up segment wise % Revenue in value and Growth %

Source: Company, SKP Research Source: Company, SKP Research

Looking at EBITDA margins ~ 16%:

Over the last three years, ARBL maintained EBITDA margin higher than 14.5% and PAT margin higher than 8.6%.

The duopoly nature of the industry lends a substantial degree of pricing power to ARBL. Going ahead, we expect company to deliver an EBITDA margin ~ 16% and PAT margin in the range of 9-10% during FY14E-16E respectively through an enriched product mix and higher replacement market sales.

Sales Volume and Realisation trend Sales in value and Growth %


50 4855 55 60

50 5245 45 40

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Mar-09 Mar-10 Mar-11 Mar-12 Mar-13

Automotive Industrial

1769

2369

2976

3463

4034

4922

20.8%

34.0%

25.6%

16.4% 16.5%

22.0%

0%

5%

10%

15%

20%

25%

30%

35%

40%

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

5500

Mar-11 Mar-12 Mar-13 Mar-14E Mar-15E Mar-16E

Revenue Growth

26

2 34

4 46

6 57

4 65

4 80

0

14.8%14.5%

15.7%

16.6%

16.2%16.3%

14%

14%

15%

15%

16%

16%

17%

17%

0

100

200

300

400

500

600

700

800

900


EBITDA EBITDA Margin

15

2

21

5

28

7 36

5 37

9

47

0

8.6%

9.1%

9.6% 10.5%

9.4%9.5%

6%

7%

8%

9%

10%

11%

0

80

160

240

320

400

480

560


Net Profit Net Profit MarginRs. in Cr.

Rs. in Cr.



Healthy Return Ratios: ARBL has good return ratios with ROAE in the range of 23-27.5% & ROACE in the range

of 17-23% over the last three years on strong business performance.

We expect ARBL ROAE and ROACE to inch lower at ~25% and 36% in FY15-16E respectively primarily due to capitalized capex during FY15. However we believe that ROCE and ROE should start improving at the end of FY16E as new plant starts operating at full capacity utilization.

ARBL reported strong operating cash flow from Rs.86Cr. in FY11 to Rs.342Cr in FY13. We expect it will continue reporting during FY14-16E.


Concerns

High Raw material cost: A Raw material cost, can be a cause of concern. The major element used in the manufacturing of the battery is lead. Lead accounts for ~85% of the cost of manufacturing. Any volatility in lead prices is likely to affect the company’s profitability. However, ARBL may lose market share in the replacement market if the company is unable to pass on the increase in lead prices to consumers due to competitive pressures and with the intent of protecting or increasing its market share.

Delay in capacity expansion plans to hurt growth: Any delay in expansion plans of the company would have an adverse impact on the turnover of the business as the same has been factored in our estimates.

Slowdown in economy to impact OEM demand: The slowdown in auto sales can have effect on auto ancillary companies as inventories can pile up due to fall in demand. Passenger car segment saw sales figure in FY13 and FY14. While we expect OEM demand recovery during FY15.

25.5

29.3 30.4 30.2

25.0 25.3

32.7

38.7

41.9 41.3

35.7 36.4

20

25

30

35

40

45


ROAE ROACE

86

295342

382438 421

0

100

200

300

400

500


Operating Cash Flow Rs. in Cr. %



Peer comparison: (Amt in Cr. & TTM basis)

CMP Sales EBITDA EBITDAM PAT PATM EPS P/E ROE M-Cap

Exide 118 5902 808 13.7% 501 8.5% 5.9 19.5 13.3% 9775

ARBL 375 3368 550 16.3% 347 10.3% 20.3 19.2 25.8% 6406 Source: Both Companies and SKP Research

Valuation:

ARBL, the second largest battery player is structurally well poised with a strong revenue mix that acts as a hedge during a cyclical downturn. A diversified portfolio, strong distribution reach, service network and strong global partner provide significant competitive advantage.

ARBL is continuously increase its manufacturing capacity in all segment and improved distribution channel. Maintenance free batteries provided by ARBL have been a revolution for the industry overall.

The market seems to have grown up to the prospect of strong business growth coupled with earnings closer to the market leader. Even on the return ratios front, ARBL has improved its profile leading to further support towards higher valuation multiples.

At CMP, the stock trades at a P/E of 17.6x FY14E, 16.9x FY15E and 13.6x FY16E. We expect ARBL’s revenue grow at a CAGR of 31% and to deliver an EBITDA margin ~16% over FY13-16E. Hence, we initiate coverage on the stock with ‘BUY’ recommendation and a target price of Rs.495 (18x FY16E EPS), at 32% upside over the period of 18 month.

1 year forward P/E Band

Source: SKP Research

0

50

100

150

200

250

300

350

400

450

Ap

r-0

9

Jul-

09

Oct

-09

Jan

-10

Ap

r-1

0

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1

Jul-

11

Oct

-11

Jan

-12

Ap

r-1

2

Jul-

12

Oct

-12

Jan

-13

Ap

r-1

3

Jul-

13

Oct

-13

Price 9X 12X 15X 18X 20X


Amara Raja Batteries Ltd. Financial Performance:

Income Statement Figures: Rs. in Cr.

Particulars Mar-12 Mar-13 Mar-14E Mar-15E Mar-16E

Net Sales 2369.2 2975.7 3462.8 4034.2 4921.7

growth (%) 34.0 25.6 16.4 16.5 22.0

Expenditure 2024.9 2509.9 2888.4 3379.8 4121.9

(Inc)/Dec in Stocks 9.8 -32.1 -38.6 -40.3 -49.2

Raw materials 1597.2 2027.1 2326.4 2723.1 3334.4

Employees Exp 100.3 126.6 158.1 181.5 221.5

Other Expenses 317.6 388.2 442.5 515.6 633.9

EBIDTA 344.3 465.8 574.4 654.3 799.8

EBIDTA Margin (%) 14.5 15.7 16.6 16.2 16.3

Depreciation 46.5 66.1 71.6 115.1 123.4

EBIT 297.9 399.7 502.7 539.3 676.4

Other Income 23.2 32.2 31.6 30.0 30.0

Interest Expenses 2.4 1.0 1.0 1.2 1.5

Profit Before Tax 318.6 421.8 533.3 568.1 704.9

Tax 103.6 135.1 168.4 189.3 234.9

Profit After Tax 215.1 286.7 365.0 378.7 469.9

growth (%) 41.6 33.3 27.3 3.8 24.1

PAT Margin (%) 9.1 9.6 10.5 9.4 9.5

O/S of Shares 17.1 17.1 17.1 17.1 17.1

EPS 12.6 16.8 21.4 22.2 27.5

DPS 1.9 2.5 3.3 3.5 4.5 Div payout ratio (%) 15.0 15.0 15.2 15.8 16.4

17.1 17.1 17.1 17.1 17.1

Balance Sheet Figures: Rs. in Cr. Particulars Mar-12 Mar-13 Mar-14E Mar-15E Mar-16E

Share Capital 17.1 17.1 17.1 17.1 17.1

Reserves 806.4 1042.7 1342.7 1651.5 2031.5

Net Worth 823.5 1059.8 1359.8 1668.6 2048.6

Total Debt 84.1 87.2 77.3 77.3 77.3

Def Tax Liab (Net) 22.0 19.5 18.3 18.3 18.3

Total Liabilities 929.5 1166.5 1455.4 1764.1 2144.1

Gross Block 621.4 680.3 1087.8 1527.8 1602.8

Less: Depreciation 266.7 321.4 393.0 508.1 631.5

Net Block 354.7 358.9 694.8 1019.7 971.3

Capital WIP 31.1 102.5 200.0 0.0 0.0

Total Fixed Assets 385.8 461.4 894.8 1019.7 971.3

Investments 16.1 16.1 16.1 16.1 16.1

Inventories 266.6 292.9 340.3 416.7 496.9

Sundry Debtors 319.7 380.7 436.4 519.5 620.3

Cash and Bank Bal 229.2 410.8 243.5 400.3 685.1

Loans & Advances 133.7 207.9 234.2 171.4 305.3

Current Assets 949.2 1292.2 1254.4 1507.8 2107.6

Current Liabs & Prov 422.0 604.0 709.8 779.4 950.8

Net Current Assets 527.2 688.2 544.5 728.4 1156.8

Total Assets 929.5 1165.5 1455.4 1764.1 2144.1

Source: Company Data, SKP Research

Ratio Analysis Particulars Mar-12 Mar-13 Mar-14E Mar-15E Mar-16E

Earnings Ratios (%)

EBDITA Margin 14.5 15.7 16.6 16.2 16.3

Net Profit Margin 9.1 9.6 10.5 9.4 9.5

ROACE 38.7 41.9 41.3 35.7 36.4

ROANW 29.3 30.4 30.2 25.0 25.3

ROAA 25.4 27.4 27.8 23.5 24.0

Valuation Ratio

P/E (x) 29.8 22.3 17.6 16.9 13.6

Price/BVPS (x) 7.8 6.0 4.7 3.8 3.1

EV / EBITDA (x) 18.2 13.1 10.9 9.3 7.2

EV / Net Sales (x) 2.6 2.0 1.8 1.5 0.0

Balance Sheet Ratio

D/E Ratio 0.1 0.1 0.1 0.0 0.0

Current Ratio 2.2 2.1 1.8 1.9 2.2

FA Turnover Ratio 6.7 8.3 5.0 4.0 5.1

Inventory Days 48 43 43 45 44

Debtors Days 49 47 46 47 46

Creditors Days 22 20 21 21 21

DuPont Analysis

PAT / PBT 0.7 0.7 0.7 0.7 0.7

PBT / EBIT 1.0 1.0 1.0 1.0 1.0

EBIT / Net Sales 0.1 0.1 0.2 0.1 0.1

Sales / T.Assets 2.5 2.6 2.4 2.3 2.3

T. Assets / Equity 1.1 1.1 1.1 1.1 1.0

ROE 26.1% 27.1% 26.8% 22.7% 22.9%

Cash Flow Statement Figures: Rs. in Cr. Particulars Mar-12 Mar-13 Mar-14E Mar-15E Mar-16E

PBT 318.6 421.8 533.3 568.1 704.9

Depreciation 46.5 66.1 71.6 115.1 123.4

Interest expense 2.4 1.0 1.0 1.2 1.5

Other (inc)/Loss (23.2) (32.2) (31.6) (30.0) (30.0)

(Inc)/Dec in WC 54.5 20.6 (23.6) (27.1) (143.5)

Taxes paid (103.6) (135.1) (168.4) (189.3) (234.9)

Operating CFlows 295.3 342.1 382.4 437.9 421.3

Capital exp (79.7) (141.7) (505.0) (240.0) (75.0)

(Inc)/Dec in Invest (0.0) 0.0 0.0 0.0 0.0

Other income 23.2 32.2 31.6 30.0 30.0

Investing CFlows (56.4) (109.4) (473.4) (210.0) (45.0)

Inc/(Dec) in debt (11.0) 3.1 (9.9) 0.0 0.0

Div Paid Incl. Tax (37.5) (50.4) (65.0) (69.9) (89.9)

Inc/(Dec) in Cap 0.0 0.0 0.0 0.0 0.0

Interest paid (2.4) (1.0) (1.0) (1.2) (1.5)

Other Adj 1.5 (2.5) (1.3) 0.0 0.0

Financing CFlows (49.5) (50.7) (77.1) (71.1) (91.4)

Chg. in Cash & Equ 189.4 182.0 (168.1) 156.8 284.9

Opening Cash Bal 39.9 229.3 411.3 243.2 399.9

Closing Cash Bal 229.3 411.3 243.5 400.3 685.1


Amara Raja Batteries Ltd. Notes:

The above analysis and data are based on last available prices and not official closing rates. SKP Research is also available on Bloomberg, Thomson First Call & Investext Myiris, Moneycontrol, Ticker plant and ISI Securities

DISCLAIMER: This document has been issued by SKP Securities Ltd (SKP), a stock broker registered with and regulated by Securities & Exchange Board of India, for the information of its clients/potential clients and business associates/affiliates only and is for private circulation only, disseminated and available electronically and in printed form. Additional information on recommended securities may be made available on request. This document is supplied to you solely for your information and no matter contained herein may be reproduced, reprinted, sold, copied in whole or in part, redistributed or passed on, directly or indirectly, to any other person for any purpose, in India or into any other country without prior written consent of SKP. The distribution of this document in other jurisdictions may be strictly restricted and/ or prohibited by law, and persons into whose possession this document comes should inform themselves about such restriction and/ or prohibition, and observe any such restrictions and/ or prohibition. If you are dissatisfied with the contents of this complimentary document or with the terms of this Disclaimer, your sole and exclusive remedy is to stop using the document and SKP shall not be responsible and/ or liable in any manner. Neither this document nor the information or any opinion expressed therein should be construed as an investment advice or offer to anybody to acquire, subscribe, purchase, sell, dispose of, retain any securities or derivatives related to such securities or an offer to sell or the solicitation of an offer to purchase or subscribe for any investment or as an official endorsement of any investment. Any recommendation or view or opinion expressed on investments in this document is not intended to constitute investment advice and should not be intended or treated as a substitute for necessary review or validation or any professional advice. The views expressed in this document are those of the analyst which are subject to change and do not represent to be an authority on the subject. SKP may or may not subscribe to any and/ or all the views expressed herein. It is the endeavor of SKP to ensure that the analyst(s) use current, reliable, comprehensive information and obtain such information from sources, which the analyst(s) believes to be reliable. However, such information may not have been independently verified by SKP or the analyst(s). The information, opinions and views contained within this document are based upon publicly available information, considered reliable at the time of publication, which are subject to change from time to time without any prior notice. The Document may be updated anytime without any prior notice to anybody. SKP makes no guarantee, representation or warranty, express or implied; and accepts no responsibility or liability as to the accuracy or completeness or correctness of the information in this Report. SKP, its Directors, affiliates and employees do not accept any liability whatsoever, direct or indirect, that may arise from the use of the information or recommendations herein. Please note that past performance is not necessarily a guide to evaluate future performance. SKP or its affiliates, may, from time to time render advisory and other services to companies being referred to in this document and receive compensation for the same. SKP and/or its affiliates, directors and employees may trade for their own account or may also perform or seek to perform investment banking or underwriting services for or relating to those companies and may also be represented in the supervisory board or on any other committee of those companies or may sell or buy any securities or make any investment, which may be contrary to or inconsistent with this document. This document should be read and relied upon at the sole discretion and risk of the reader. The value of any investment made at your discretion based on this document or income there from may be affected by changes in economic, financial and/ or political factors and may go down as well as up and you may not get back the full or the expected amount invested. Some securities and/ or investments involve substantial risk and are not suitable for all investors. Neither SKP nor its affiliates or their directors, employees, agents or representatives/associates, shall be responsible or liable in any manner, directly or indirectly, for information, views or opinions expressed in this document or the contents or any errors or discrepancies herein or for any decisions or actions taken in reliance on the document or inability to use or access our service or this document or for any loss or damages whether direct or indirect, incidental, special or consequential including without limitation loss of revenue or profits or any loss or damage that may arise from or in connection with the use of or reliance on this document or inability to use or access our service or this document.

SKP Securities Ltd Contacts Research Sales

Mumbai Kolkata Mumbai Kolkata

Phone 022 4922 6006 033 4007 7000 022 4922 6000 033 4007 7400

Fax 022 4922 6066 033 4007 7007 022 4922 6066 033 4007 7007

E-mail [email protected] [email protected] [email protected]

Member: NSE BSE NSDL CDSL NCDEX* MCX* MCX-SX FPSB *Group Entities INB/INF:

230707532, BSE INB: 010707538, CDSL IN-DP-CDSL-132-2000, DPID: 021800, NSDL IN-DP-NSDL: 222-2001, DP ID: IN302646, ARN: 0006, NCDEX: 00715, MCX: 31705, MCX-SX: INE 260707532




Amara Raja Batteries Ltd - SKP Moneywise Securities Ltd Page 2 of 13 Amara Raja Batteries Ltd....

Documents

Transcript of Amara Raja Batteries Ltd - SKP Moneywise Securities Ltd Page 2 of 13 Amara Raja Batteries Ltd....