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COMPANY RESEARCH REPORT
INITIATING COVERAGE
AMARA RAJA BATTERIES LIMITED
RECOMMENDATION: HOLD
CMP: Rs. 164.65
1st TARGET: Rs. 197
HOLDING PERIOD: 1 Year
BUSINESS SUMMARY
Amara Raja Batteries Limited (ARBL) is a joint venture between the Amara Raja Group and Johnson Controls Inc. (JCI). The company is one of the leading lead acid battery manufacturers, whose batteries are used in a wide array of industries, ranging from the automobile industry, the telecom industry, the power industry, the railways industry, the oil industry and the defense industry.
INVESTMENT RATIONALE/RISKS
After a disappointing show in the current fiscal, ARBL looks set to come back strongly in FY12, aided by strong expansion plans in its automobile battery segment. We also like the fact that around 65% of ARBL’s automobile battery sales come from the replacement market where the margins are much higher and where effects of a tightening interest rate regime are quite marginal, as car batteries are required to be replaced every three to four years.
ARBL has a strong pan-India distribution network of 18000 retailers and 200 franchisees across 2300 towns and is now looking to further increase its geographical diversification by setting up a manufacturing plant in North India. The company currently manufactures all its products in Tirupati (South India).
The stock is currently trading at relatively cheap pe valuations to the industry leader Exide (19), the average industry pe (14) and ARBL’s 5 year PE average (11.1) as well. This is mainly due to the disappointing performance in the current fiscal. We believe that with time, one will see a convergence in the pe valuation of ARBL with the average industry level and Exide.
Intermittently high lead prices have damaged the bottom line performance coupled with the weak demand and pricing pressures seen in the telecom segment which accounts for 20% of ARBL’s sales volumes (Q3FY11). All this will, most likely see the FY11 annual EPS fall below last year’s annual eps as well as the current trailing EPS. Lead prices look set to stay at elevated levels until the end of the current fiscal atleast and the telecom sector could take another 1-2 quarters to revive.
BRIEF PROFILE
Amara Raja Batteries Ltd (ARBL) is one of the leading lead acid battery manufacturers in India and was founded in 1985 by Mr. Ramachandra Galla, the current chairman of the company. In 1998 the company entered into a joint venture agreement with the USD 35 billion valued conglomerate-Johnson Controls Inc (JCI) making it the world’s largest battery manufacturing alliance. The company’s batteries are used in a wide array of industries, ranging from the automobile industry, the telecom industry, the power industry, the railways industry, the oil industry and the defense industry. The company possesses an impressive list of clients, most of whom are bigwigs in their respective industries. Companies such as Daimler Chrysler, Ford, Maruti, BSNL, Bharti Airtel, Nokia, BHEL, NTPC, Power Grid Corporation, Crompton Greaves, Doordashan and the Indian Railways are some of the companies that make up ARBL’s impressive client list. What is also noteworthy is that the Lakshwadeep islands are powered by Amara Raja Power Systems. ARBL is responsible for pioneering VRLA (Valve Regulated Lead Acid) batteries in India. The company manufactures the extremely popular ‘Amaron’ brand of automotive batteries. ARBL has received a slew of awards since its inception, some of which include the “Quality Excellence” award by Indus Towers Limited, “Best Telecom Equipment Manufacturer” award by BSNL and the “Best Employer Award in the Electronics Industry Category” by the Employer Branding Institute of India.
BUSINESS ARBL’s business is divided into the Automotive Battery SBU and the Industrial Battery SBU with more SBUs having made equal contributions to the revenue in FY10. ARBL’s automotive battery sales takes place both at the OEM (Original Equipment Manufacturer) level and the replacement market. The replacement market has better margins and is relatively insulated from tightening interest rates that tend to affect auto and auto ancillary sales. 65% of ARBL’s automobile revenue comes from its replacement sales. ARBL enjoys a 26% market share in the organized segment of the auto replacement market and a 22-27% share in the OEM market. FY10 figures. In the industrial battery sales segment, ARBL services the telecom industry, the power industry, the railway industry, oil and gas industry, the IT industry and the UPS industry. Telecom battery sales account for 45-50% of the industrial battery sales, while UPS batteried account for 35-40% and the other industries account for the rest of the share. ARBL enjoys a 28% market share in the industrial battery segment (FY10).
SECTOR
The Indian battery market is estimated to be worth Rs.90 billion with the organized sector accounting for 72% of that figure and the unorganized sector accounting for 28%.
Of the Rs.65 billion valued organized battery sector, automobile batteries account for Rs.33 billion while industrial batteries account for Rs.32 billion.
AUTOMOBILE SECTOR
The unorganized automobile battery sector is much bigger valued at Rs.20-25 billion relative to the unorganized industrial battery sector valued at Rs.5 billion.
The unorganized segment is dominated by small players and cheap imports from neighbouring Asian countries. These players are mostly found in tier-II and tier-III cities and lack strong brand equity but are able to offer new or rebranded batteries at attractive rates.
In FY10, the automobile OEM market and the replacement market grew by 30% and 10% respectively. In FY11, growth rates for those two segments are expected to be 18% and 11% respectively.
Rs.80000 crore is expected to be invested in fresh capacity over th next four years.
Car manufacturing capacity is expected to grow at a 10-15% CAGR until 2015.
The Indian government is looking to ensure that automobiles contribute 10% of the GDP over the next 10 years.
INDUSTRIAL BATTERY SECTOR
The unorganized segment in industrial batteries is less intense than that of the automobile battery segment as it is a very capital intensive segment and where there per unit realization of batteries is higher and the frequency of purchase is limited.
The main growth drivers in the industrial battery business are infrastructure and technology-related industries such as telecommunications, UPS, power and renewable energy.
While the telecom sector is undergoing some pressure, the outlook looks fairly encouraging with tariff stability, potential M&As, revenue from 3G/BWA services, rural network expansion and improving tele-density.
UPS battery demand has grown at a 15% CAGR in the last five years and are expected to continue growing at that rate.
Under the 11th plan the government in planning to spend Rs.2000 billion to modernize and expand the railways.
Under the 11th plan, the government has revised the incremental power capacity target from 78577 mw to 92700 mw with the objective of raising per capita consumption to 1000kwh by 2012.
OUTLOOK AND SCOPE
ARBL has the potential to grow and scale up, in a market that is extremely fragmented with a noteworthy unorganized segment that can be tapped into and where brand loyalty can still be strengthened by the big players.
After already having increased its large industry battery capacity in previous years the capex focus in the near future is on the four wheeler and two wheeler battery capacity.
In the current calendar year, ARBL will complete two phases of expansion. In the first phase it will increase its four wheeler capacity by 23% from 4.1 million units to 5.05 million units and increase its two wheeler capacity by 100% from 1.8 million units to 3.6 million units. In the second phase the four wheeler battery capacity and two wheeler battery capacity will be further increased to 6 million units and 5 million units respectively.
The company is also on the lookout for setting up a new manufacturing capacity in North India.
Some of the other initiatives that ARBL intends to undertake include investment in low-cost automation, aggressive cost management strategies, improve reuse and recycling methods, consolidate market share in Indian railways battery segment, improve reach and brand visibility and strengthen presence in foreign territory particularly the Indian Ocean rim geography.
Some of the potential products in the anvil include LM tubular batteries for motive power application, AGM motor cycle batteries, and automotive batteries for stop-start vehicle application.
AMARON VOLT Amaron Volt is the new industrial battery product introduced by ARBL in the current fiscal designed particularly for the telecom industry. This product is a result of over 3 years of Research and Development work by ARBL. This 2V high integrity telecom battery is most conducive in the era of a 3G&BWA enabled data driven market and is suitable for functioning even in the most remotest regions in India. The advantages of this battery include robustness, enhanced life performance even during partial state of charge conditions, high life in remote locations, leak proof joints and zero maintenance operation, best in class back up power and higher savings from operational expenses.
HISTORICAL FINANCIALS From FY07- FY10, ARBL’s sales have grown from Rs.596 crores to Rs.1467 crores at a CAGR of 35%. Most of the growth was seen in the initial period with the FY08 (yoy) sales growth rate coming in at a whopping 82%. Until the current fiscal ARBL has always been impressive at the operating profit level. Operating profit (yoy) growth rates for FY08,FY09 and FY10 have been 107%, 15% and 40.5% respectively. In the last fiscal EBITDA margins shot up by 410 basis points from 15.6% to 19.7% while NET PROFIT margins shot up by 520 basis points from 6.1% to 11.3%. ARBL is very efficient with its inventory and has a much better inventory turnover ratio than industry leader- Exide. ARBL’s average 4 year inventory turnover ratio stands at 9.2 relative to Exide’s 7.2. Net profits from FY07-FY10 have grown from Rs.47 crores to Rs.167 crores at a CAGR of 52%. ARBL’s debt equity ratio has never exceeded 0.81 In the last 5 years ARBL’s dividend payout ratio has never exceeded 15%. Last year’s dividend payout ratio was 14.83%.
FINANCIAL OUTLOOK Disappointing FY11 results in the first 3 quarters coupled with yet another likely disappointing quarter (Q4) will dampen the overall two year outlook. Downbeat sentiment in the telecom sector, tightening interest rate cycle (affecting OEM automobile battery sales) and high cost of lead prices will see a disappointing Q4. Lead prices are a serious concern. In FY10 it averaged around $1600-1700 per MT, but in the current year it has been well above the $2100 per MT mark and the Q4 realization will in all probability average $2600-2700 per MT. Raw material as a % of net sales which was 62.3% in FY10 is expected to go up to 66.7% in FY11E but drop to 65.5% in FY12E. Depreciation is expected to grow by 40% yoy in FY12. PAT is expected to drop from Rs. 167 crores in FY10 to Rs.137 crores in FY11E but increase once again in FY12E by 25% to reach Rs. 172 crores. PAT margins are expected to be 7.8% in FY11E and 8% in FY12E.
RISKS Lead prices which account for 75% of the raw material cost are a huge worry for ARBL. In the current year so far it has averaged more than $2100 per MT mark. In Q4 it is expected to average $2600-2700. Unlike the market leader- Exide, ARBL does not have any captive sources of lead recycling. Margins are consequently likely to be under pressure. The telecom sector which contributes around 20% of ARBL’s sales volumes (FY11Q3) is undergoing a lot of pressure and this has consequently resulted in pricing and volume pressures for ARBL. The OEM automobile sales of ARBL could come under strain as automobile sales are expected to grow at a lower rate in the current fiscal due to hardening of interest rates. FY11E EPS is all but certain to be lower than both the trailing EPS and last year’s annual EPS.
INVESTMENT RATIONALE
FY11 hasn’t been a great year for ARBL with a drop in net profits. However we believe most of the negatives have already been priced into the stock and investors can look forward to a better year in FY12 where sales and PAT are expected to grow by 22% and 25% respectively.
Massive capacity additions particularly in the automobile segment are likely to boost sales volumes in the next fiscal.
ARBL also has a very strong pan-India distribution network of 18000 retailers and 200 franchisees across 2300 and is now looking for further geographical diversification by setting up a new plant in North India.
We like the fact that 65% of ARBL’s automobile sales come from the secondary market which is relatively insulated from a high interest rate regime.
ARBL can leverage on the strength of its global JV partner- Johnson Controls Inc. particularly in the field of technology. The pioneering VRLA technology that was introduced by ARBL in India fructified due to this association.
Valuations are currently ideal as the stock is trading at a rate lower than the industry average and its own 5 year average. We also believe that the wide spread in the valuation gap between Exide (industry leader) and ARBL will decline.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
COMPANY RESEARCH REPORT
INITIATING COVERAGE
AMARA RAJA BATTERIES LIMITED
RECOMMENDATION: HOLD
CMP: Rs. 164.65
1st TARGET: Rs. 197
HOLDING PERIOD: 1 Year
BUSINESS SUMMARY
Amara Raja Batteries Limited (ARBL) is a joint venture between the Amara Raja Group and Johnson Controls Inc. (JCI). The company is one of the leading lead acid battery manufacturers, whose batteries are used in a wide array of industries, ranging from the automobile industry, the telecom industry, the power industry, the railways industry, the oil industry and the defense industry.
INVESTMENT RATIONALE/RISKS
After a disappointing show in the current fiscal, ARBL looks set to come back strongly in FY12, aided by strong expansion plans in its automobile battery segment. We also like the fact that around 65% of ARBL’s automobile battery sales come from the replacement market where the margins are much higher and where effects of a tightening interest rate regime are quite marginal, as car batteries are required to be replaced every three to four years.
ARBL has a strong pan-India distribution network of 18000 retailers and 200 franchisees across 2300 towns and is now looking to further increase its geographical diversification by setting up a manufacturing plant in North India. The company currently manufactures all its products in Tirupati (South India).
The stock is currently trading at relatively cheap pe valuations to the industry leader Exide (19), the average industry pe (14) and ARBL’s 5 year PE average (11.1) as well. This is mainly due to the disappointing performance in the current fiscal. We believe that with time, one will see a convergence in the pe valuation of ARBL with the average industry level and Exide.
Intermittently high lead prices have damaged the bottom line performance coupled with the weak demand and pricing pressures seen in the telecom segment which accounts for 20% of ARBL’s sales volumes (Q3FY11). All this will, most likely see the FY11 annual EPS fall below last year’s annual eps as well as the current trailing EPS. Lead prices look set to stay at elevated levels until the end of the current fiscal atleast and the telecom sector could take another 1-2 quarters to revive.
BRIEF PROFILE
Amara Raja Batteries Ltd (ARBL) is one of the leading lead acid battery manufacturers in India and was founded in 1985 by Mr. Ramachandra Galla, the current chairman of the company. In 1998 the company entered into a joint venture agreement with the USD 35 billion valued conglomerate-Johnson Controls Inc (JCI) making it the world’s largest battery manufacturing alliance. The company’s batteries are used in a wide array of industries, ranging from the automobile industry, the telecom industry, the power industry, the railways industry, the oil industry and the defense industry. The company possesses an impressive list of clients, most of whom are bigwigs in their respective industries. Companies such as Daimler Chrysler, Ford, Maruti, BSNL, Bharti Airtel, Nokia, BHEL, NTPC, Power Grid Corporation, Crompton Greaves, Doordashan and the Indian Railways are some of the companies that make up ARBL’s impressive client list. What is also noteworthy is that the Lakshwadeep islands are powered by Amara Raja Power Systems. ARBL is responsible for pioneering VRLA (Valve Regulated Lead Acid) batteries in India. The company manufactures the extremely popular ‘Amaron’ brand of automotive batteries. ARBL has received a slew of awards since its inception, some of which include the “Quality Excellence” award by Indus Towers Limited, “Best Telecom Equipment Manufacturer” award by BSNL and the “Best Employer Award in the Electronics Industry Category” by the Employer Branding Institute of India.
BUSINESS ARBL’s business is divided into the Automotive Battery SBU and the Industrial Battery SBU with more SBUs having made equal contributions to the revenue in FY10. ARBL’s automotive battery sales takes place both at the OEM (Original Equipment Manufacturer) level and the replacement market. The replacement market has better margins and is relatively insulated from tightening interest rates that tend to affect auto and auto ancillary sales. 65% of ARBL’s automobile revenue comes from its replacement sales. ARBL enjoys a 26% market share in the organized segment of the auto replacement market and a 22-27% share in the OEM market. FY10 figures. In the industrial battery sales segment, ARBL services the telecom industry, the power industry, the railway industry, oil and gas industry, the IT industry and the UPS industry. Telecom battery sales account for 45-50% of the industrial battery sales, while UPS batteried account for 35-40% and the other industries account for the rest of the share. ARBL enjoys a 28% market share in the industrial battery segment (FY10).
SECTOR
The Indian battery market is estimated to be worth Rs.90 billion with the organized sector accounting for 72% of that figure and the unorganized sector accounting for 28%.
Of the Rs.65 billion valued organized battery sector, automobile batteries account for Rs.33 billion while industrial batteries account for Rs.32 billion.
AUTOMOBILE SECTOR
The unorganized automobile battery sector is much bigger valued at Rs.20-25 billion relative to the unorganized industrial battery sector valued at Rs.5 billion.
The unorganized segment is dominated by small players and cheap imports from neighbouring Asian countries. These players are mostly found in tier-II and tier-III cities and lack strong brand equity but are able to offer new or rebranded batteries at attractive rates.
In FY10, the automobile OEM market and the replacement market grew by 30% and 10% respectively. In FY11, growth rates for those two segments are expected to be 18% and 11% respectively.
Rs.80000 crore is expected to be invested in fresh capacity over th next four years.
Car manufacturing capacity is expected to grow at a 10-15% CAGR until 2015.
The Indian government is looking to ensure that automobiles contribute 10% of the GDP over the next 10 years.
INDUSTRIAL BATTERY SECTOR
The unorganized segment in industrial batteries is less intense than that of the automobile battery segment as it is a very capital intensive segment and where there per unit realization of batteries is higher and the frequency of purchase is limited.
The main growth drivers in the industrial battery business are infrastructure and technology-related industries such as telecommunications, UPS, power and renewable energy.
While the telecom sector is undergoing some pressure, the outlook looks fairly encouraging with tariff stability, potential M&As, revenue from 3G/BWA services, rural network expansion and improving tele-density.
UPS battery demand has grown at a 15% CAGR in the last five years and are expected to continue growing at that rate.
Under the 11th plan the government in planning to spend Rs.2000 billion to modernize and expand the railways.
Under the 11th plan, the government has revised the incremental power capacity target from 78577 mw to 92700 mw with the objective of raising per capita consumption to 1000kwh by 2012.
OUTLOOK AND SCOPE
ARBL has the potential to grow and scale up, in a market that is extremely fragmented with a noteworthy unorganized segment that can be tapped into and where brand loyalty can still be strengthened by the big players.
After already having increased its large industry battery capacity in previous years the capex focus in the near future is on the four wheeler and two wheeler battery capacity.
In the current calendar year, ARBL will complete two phases of expansion. In the first phase it will increase its four wheeler capacity by 23% from 4.1 million units to 5.05 million units and increase its two wheeler capacity by 100% from 1.8 million units to 3.6 million units. In the second phase the four wheeler battery capacity and two wheeler battery capacity will be further increased to 6 million units and 5 million units respectively.
The company is also on the lookout for setting up a new manufacturing capacity in North India.
Some of the other initiatives that ARBL intends to undertake include investment in low-cost automation, aggressive cost management strategies, improve reuse and recycling methods, consolidate market share in Indian railways battery segment, improve reach and brand visibility and strengthen presence in foreign territory particularly the Indian Ocean rim geography.
Some of the potential products in the anvil include LM tubular batteries for motive power application, AGM motor cycle batteries, and automotive batteries for stop-start vehicle application.
AMARON VOLT Amaron Volt is the new industrial battery product introduced by ARBL in the current fiscal designed particularly for the telecom industry. This product is a result of over 3 years of Research and Development work by ARBL. This 2V high integrity telecom battery is most conducive in the era of a 3G&BWA enabled data driven market and is suitable for functioning even in the most remotest regions in India. The advantages of this battery include robustness, enhanced life performance even during partial state of charge conditions, high life in remote locations, leak proof joints and zero maintenance operation, best in class back up power and higher savings from operational expenses.
HISTORICAL FINANCIALS From FY07- FY10, ARBL’s sales have grown from Rs.596 crores to Rs.1467 crores at a CAGR of 35%. Most of the growth was seen in the initial period with the FY08 (yoy) sales growth rate coming in at a whopping 82%. Until the current fiscal ARBL has always been impressive at the operating profit level. Operating profit (yoy) growth rates for FY08,FY09 and FY10 have been 107%, 15% and 40.5% respectively. In the last fiscal EBITDA margins shot up by 410 basis points from 15.6% to 19.7% while NET PROFIT margins shot up by 520 basis points from 6.1% to 11.3%. ARBL is very efficient with its inventory and has a much better inventory turnover ratio than industry leader- Exide. ARBL’s average 4 year inventory turnover ratio stands at 9.2 relative to Exide’s 7.2. Net profits from FY07-FY10 have grown from Rs.47 crores to Rs.167 crores at a CAGR of 52%. ARBL’s debt equity ratio has never exceeded 0.81 In the last 5 years ARBL’s dividend payout ratio has never exceeded 15%. Last year’s dividend payout ratio was 14.83%.
FINANCIAL OUTLOOK Disappointing FY11 results in the first 3 quarters coupled with yet another likely disappointing quarter (Q4) will dampen the overall two year outlook. Downbeat sentiment in the telecom sector, tightening interest rate cycle (affecting OEM automobile battery sales) and high cost of lead prices will see a disappointing Q4. Lead prices are a serious concern. In FY10 it averaged around $1600-1700 per MT, but in the current year it has been well above the $2100 per MT mark and the Q4 realization will in all probability average $2600-2700 per MT. Raw material as a % of net sales which was 62.3% in FY10 is expected to go up to 66.7% in FY11E but drop to 65.5% in FY12E. Depreciation is expected to grow by 40% yoy in FY12. PAT is expected to drop from Rs. 167 crores in FY10 to Rs.137 crores in FY11E but increase once again in FY12E by 25% to reach Rs. 172 crores. PAT margins are expected to be 7.8% in FY11E and 8% in FY12E.
RISKS Lead prices which account for 75% of the raw material cost are a huge worry for ARBL. In the current year so far it has averaged more than $2100 per MT mark. In Q4 it is expected to average $2600-2700. Unlike the market leader- Exide, ARBL does not have any captive sources of lead recycling. Margins are consequently likely to be under pressure. The telecom sector which contributes around 20% of ARBL’s sales volumes (FY11Q3) is undergoing a lot of pressure and this has consequently resulted in pricing and volume pressures for ARBL. The OEM automobile sales of ARBL could come under strain as automobile sales are expected to grow at a lower rate in the current fiscal due to hardening of interest rates. FY11E EPS is all but certain to be lower than both the trailing EPS and last year’s annual EPS.
INVESTMENT RATIONALE
FY11 hasn’t been a great year for ARBL with a drop in net profits. However we believe most of the negatives have already been priced into the stock and investors can look forward to a better year in FY12 where sales and PAT are expected to grow by 22% and 25% respectively.
Massive capacity additions particularly in the automobile segment are likely to boost sales volumes in the next fiscal.
ARBL also has a very strong pan-India distribution network of 18000 retailers and 200 franchisees across 2300 and is now looking for further geographical diversification by setting up a new plant in North India.
We like the fact that 65% of ARBL’s automobile sales come from the secondary market which is relatively insulated from a high interest rate regime.
ARBL can leverage on the strength of its global JV partner- Johnson Controls Inc. particularly in the field of technology. The pioneering VRLA technology that was introduced by ARBL in India fructified due to this association.
Valuations are currently ideal as the stock is trading at a rate lower than the industry average and its own 5 year average. We also believe that the wide spread in the valuation gap between Exide (industry leader) and ARBL will decline.
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