Buy Amara Raja Batteries – 3QFY2011 Result Update - Angel Broking

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Amara Raja Batteries – 3QFY2011 Result Update

Angel Broking maintains a Buy on Amara Raja Batteries with a Target Price of Rs. 240.

Amara Raja Batteries (ARBL) reported its 3QFY2011 results, which were ahead of

our estimates. The performance was driven by double-digit volume growth in the

auto battery segment; however, the industrial battery segment recorded moderate

growth due to subdued demand in the telecom segment. We broadly maintain

our earnings estimate for ARBL and positive outlook for the battery industry, owing

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 15.8% yoy; Higher raw-material prices affect profitability: ARBL

posted 15.8% yoy growth in net sales to `425.5cr (`367.5cr), ahead of our

expectations of `412.5cr, aided by ~15% yoy volume growth. While the volume

offtake in the auto battery segment remained buoyant, the industrial battery

segment continued to face challenges mainly due to sluggish demand from the

telecom sector. EBITDA margins contracted by 322bp yoy, largely due to a surge

in input cost and lower realisation from telecom batteries. Consequently, net profit

fell marginally by 0.6% yoy to `39.6cr (`39.9cr), above our estimates of `34.8cr.

Outlook and valuation: We estimate ARBL’s top line to witness a ~19% CAGR

over FY2010–12E, largely aided by substantial growth in auto battery volumes.

Net profit is estimated to post a ~7% CAGR, largely due to lower realisation from

telecom batteries. ARBL is trading at 7.9x FY2012E EPS, reflecting a ~50%

discount to Exide (adjusted for its insurance business). We believe ARBL is well

placed to tap the rising demand from the auto and industrial segments, with its

innovative products, increased capacity and widening reach. Consequently,

discount would reduce going forward. Hence, we maintain Buy on ARBL with a

Target Price of `240. At our target price, the stock will trade at 10.7x (35%

discount to Exide's multiple of 16.5x) FY2012E earnings.

Top-line marginally above expectation: For 3QFY2011, ARBL reported 15.8% yoy

growth in net sales to `425.5cr (`367.5cr), which was 3.1% above our expectation

of `412.5cr, aided by ~15% yoy growth in volumes. Net sales growth was aided

by healthy double-digit volume growth in the auto battery segment. In the

industrial battery segment, telecom batteries remain subdued, impacting overall

volume and realisation growth of the company. Telecom volume contribution of

the company came down to ~20% from ~40% in the last corresponding period.

However, ARBL managed to garner a higher market share in the telecom battery

segment. Further, continuous focus on the UPS segment helped ARBL to retain its

dominant position.

Management is sanguine on the telecom side of its business, as a large number of

towers in the mobile telecom network has been established in the last three-four

years; and going ahead, batteries used in these towers would be due for

replacement. Emerging opportunities in the solar segment and increasing market

share in the UPS segment would help the division to further optimise its revenue

stream.

EBITDA margins at 15.6%, down 322bp yoy: During 3QFY2011, ARBL witnessed a

322bp yoy decline in EBITDA margins, owing to the substantial 445bp yoy rise in

raw-material costs, which accounted for around 64.4% of sales (60.0% in

3QFY2010). Raw-material costs were affected, to a certain extent, by the increase

in average lead prices, which were up ~4.5% yoy and ~17% qoq. Margins also

declined due to lower realisation from the telecom battery segment. However, the

company believes that current prices of telecom batteries are unsustainable and

expects to see an upward move in the next few quarters, though the recent surge in

lead prices will negatively affect margins in the short term to a certain extent.

In the industrial segment, ARBL is not going to be witnessing much decline in

volumes, as it has actually been able to increase its market share during the year.

However, since overall demand has come down, there has been a fairly significant

pressure in 2HFY2011, especially on the pricing front, which would result in lower

profitability compared to that in 1HFY2011.

Net profit declines marginally yoy; up 25.5% qoq: ARBL reported a 0.6% yoy

decline in net profit to `39.6cr (`39.9cr) during the quarter. Net profit growth was

affected by lower realisation and subdued growth in the telecom battery segment.

However, higher other income, a decline in depreciation expense and lower tax

outgo restricted the fall in the bottom line to a certain extent during the quarter.

Investment arguments

􀂄 ARBL is India’s second-largest manufacturer of lead batteries, with a market

share of ~27%. US-based Johnson Controls 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.

􀂄 We expect the automotive battery market to post a ~16% CAGR in sales over

FY2010–12E, led by healthy growth in replacement demand, ~10.3% CAGR

in new vehicle sales and shrinking market share of unorganised players. Thus,

during FY2010–12E, we expect ARBL to post a 21.2% volume CAGR in the

automotive battery segment, leading to overall 19.2% revenue CAGR. Also,

with a strong focus on strengthening its distribution network, we expect ARBL to

increase its market share to ~29% by FY2013E.

􀂄 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 backup (UPS/inverter) segment to drive demand

for industrial batteries, leading to an 11.1% CAGR in industrial revenue over

FY2010E–12E.

􀂄 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 `85cr (`150cr overall capex).

Outlook and valuation

We estimate ARBL to post a ~19% CAGR in its top line over FY2010–12E, largely

aided by substantial growth in auto battery volumes. However, net profit for the

period is estimated to grow lower at around ~7% CAGR, largely due to lower

realisation from the telecom battery segment, impacting overall performance at the

operating front.

On the valuation front, ARBL is trading at 10.4x and 7.9x FY2011E and FY2012E

EPS, respectively. At present, ARBL is trading at a ~50% discount to Exide (adjusted

for its insurance business). Although ARBL has always traded at a discount to Exide

(due to Exide’s leadership position, scale of operations, superior margins and

return ratios), ARBL is well placed to tap the rising demand from the automobile

and industrial segments with its innovative products, increased capacity and

widening reach. Going forward, the discount commanded by ARBL compared to

Exide would reduce with a) increasing scale of operations, b) sustainable revenue

and earnings visibility and c) improving return ratios. We maintain Buy on ARBL

with a 12-month Target Price of `240, representing a ~35% potential upside. At

our target price, the stock will trade at 10.7x (35.3% discount to Exide's multiple of

16.5x) FY2012E EPS of `22.4.