Angel Broking: Initiate Coverage Amara Raja Batteries BUY Target Price of Rs261

Amara Raja Batteries Limited (ARBL) is India’s second largest manufacturer of lead
batteries with a market share of ~27%. US-based Johnson Controls (JCI) is a joint venture
partner of ARBL and holds a 26% equity stake in the company. Automotive and industrial
batteries contribute 50% each to the total revenue of ARBL.
JV with JCI – Well placed to chase long-term growth opportunities: Growing concerns
about the environmental impact of CO2 emissions and significant investments by global
auto majors to develop alternative fuel base vehicles offer a huge opportunity to industry
players. We believe ARBL, through its existing relationship with JCI, is well placed to tap the
demand for new generation automotive batteries (lithium ion and hybrid).
OEM and replacement segment to drive demand: We expect the automotive battery
market to post a 16.1% CAGR in sales over FY2010–13E, led by a robust 12% CAGR in
new vehicle sales and growing vehicle population. Thus, during FY2010–13E, we expect
ARBL to post a 17.8% volume CAGR in the automotive battery segment, leading to a
26.6% automotive revenue CAGR. Also, with a strong focus on strengthening its
distribution network, we expect ARBL to increase its market share to ~29% in FY2013E.
UPS/inverter batteries to drive industrial battery demand: ARBL pioneered the use of
maintenance‐free batteries with presence in the railway signaling, telecom power and
supply solutions segments. Going forward, we expect the power back-up (UPS) and
inverter segment to drive demand for industrial batteries, leading to a 13.8% CAGR in
industrial revenue over FY2010–13E.
Capacity expansion to provide scale: Supported by strong demand for automotive
batteries, ARBL plans to increase its two-wheeler and four-wheeler battery capacity by
100% and 21%, respectively, by FY2011, incurring a capex of Rs85cr (Rs150cr overall
capex). We expect ARBL to post a 19.8% CAGR in revenue, driven by a strong 17.9%
volume CAGR over FY2010–13E.
At the CMP, ARBL is trading at 12x FY2011E and 9.4x FY2012E earnings. We feel the
stock is available at attractive valuations. We Initiate Coverage on ARBL with a BUY rating
and a Target Price of Rs261 (21% potential upside). At our target price, the stock will trade
at 11.6x FY2012E EPS of Rs22.5 (30% discount to Exide's multiple of 16.6x).