Visit http://indiaer.blogspot.com/ for complete details For 2QFY2011, Amara Raja (ARBL) reported a decent top-line performance,
though it was below our expectations. The company’s operating margins declined
significantly due to increased lead prices and lower realisation from the telecom
battery segment. Thus, the company reported negative growth at the bottom line.
We maintain our positive outlook on the battery industry due to changing
demographics, which in turn will support secular consumption growth in Indian
markets. We maintain our Buy rating on the stock.
Net sales up 8.7% yoy; net profit down 33.8% yoy: For 2QFY2011, ARBL reported
below-expectation top-line growth of 8.7% to `393cr. Growth was aided by
healthy double-digit growth in auto battery volumes. EBITDA margins declined by
909bp yoy, which was largely due to surge in input cost and lower growth and
realisation from the telecom battery segment. However, higher other income and
lower interest cost restricted the fall in net profit to a certain extent. Net profit
reported a 33.8% yoy decline to `31.6cr (`47.7cr).
Outlook and valuation: We estimate ARBL’s top line to witness a ~19.3% CAGR
over FY2010–12E, largely aided by substantial growth in auto battery volumes,
while net profit is estimated to post a ~7% CAGR, largely due to lower realisation
from the telecom battery segment. On the valuation front, ARBL is trading at 8.9x
FY2012E EPS, reflecting a ~45% discount to Exide (adjusted for insurance
business). We believe ARBL is well placed to tap the rising demand from the
automobile and industrial segments, with its innovative products, increased
capacity and widening reach. Consequently, discount commanded by ARBL
compared to Exide would reduce going forward. Hence, we maintain Buy on
ARBL with a 12-month Target Price of `251. At our target price, the stock will
trade at 11.3x (35% discount to Exide's multiple of 17.3x) FY2012E earnings.
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