Buy Amara Raja Batteries Short-term concerns, positive potential;:: Anand Rathi

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Amara Raja Batteries
Short-term concerns, positive potential; maintain Buy
We expect the structural soundness of Amara Raja Batteries’
business to play out over the long term and, hence, help it outperform
its peers. Even though short-term concerns persist
regarding the rise in commodity prices and lower industrial
demand, we yet maintain our Buy recommendation.

 Branding is key. Amara Raja is India’s second-largest battery
maker in the regulated sector and has made its mark via branding,
strong retail network and entry into the two-wheeler segment.
 Healthy automotive demand. ARB operates in the auto
replacement market and caters to some OEMs as well. With the
strong automotive demand expected, a 13.7% CAGR over FY11-
13e, we expect good growth in ARB’s automotive battery sales.
 Industrials, a key segment. Notwithstanding the present
industrial slowdown, we expect the segment to recover from the
current lows in the medium to long term and drive demand in the
long term. Being a significant revenue contributor for ARB,
industrial demand recovery in FY12 would be a major positive.
 Valuation and risks. We value ARB at 10x FY12e EPS (a 40%
discount to the target multiple for market leader Exide Industries).
At the ruling market price, the stock trades at 9.5x FY11e and 7.8x
FY12e earnings. Risks: Delayed industrial demand recovery,
further increase in the price of lead.