Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Amara Raja - The Challenger- BUY
Amara Raja Batteries Ltd (ARBL) is the second-largest
manufacturer of lead-acid batteries in India, with ~23%
share by volume of the organised battery market. We
estimate an earnings CAGR of ~30% over the next two years,
driven by capacity expansion in the automotive and twowheeler
segments. In our view, concerns over its high
exposure to the telecom sector are overdone, and ignore the
company’s strong performance in the automotive and UPS
segments. On the telecom side too, there are initial signs of
bottoming; we expect substantial improvement in this
segment’s revenues and margins in FY12. Valuations, at 9x
FY12ii EPS, are attractive for a branded consumer company.
Capacity expansion will drive growth in the auto segment: Low
penetration and rising incomes would drive healthy double-digit
growth across segments in the auto industry. Meanwhile, the highmargin
replacement segment is set for a surge, as the last few years’
strong growth in vehicle sales translates to replacement demand for
batteries. ARBL, which plans to increase its annual battery capacity for
4-wheelers from 4.2m batteries to 6m, and for 2-wheelers from 1.8m
to 5m by October 2011, should be a key beneficiary.
Telecom segment on its way up: The telecom segment, which
forms >20% of revenues for ARBL, after a sharp decline in the
previous few quarters, is now improving on increased demand from
replacement of telecom batteries. ARBL is running at full capacity on
improved demand, and pricing too has bottomed out; the segment
should witness a healthy 15% growth in FY12. ARBL is also planning
to develop new markets outside India, especially in Africa.
Battery business holds great promise: The Indian battery market
is set for strong volume growth and margins for the next 5-6 years.
Margin expansion in the medium term would be driven mainly by a
shift in market share in the replacement segment from unorganised
battery manufacturers to organised ones. This shift will help expand
battery manufacturers’ margins for two reasons: 1) margins in the
replacement segment are intrinsically higher than in the OEM
segment; and 2) raw-material costs will fall as prices of scrap
batteries come down.
Capacity expansion to drive growth in auto
batteries
ARBL, which started making automotive batteries in 2000, has
garnered a share of ~25% by volume in both aftermarket and OEM
batteries for passenger cars. The automotive segment’s share of
ARBL’s revenues increased from zero in FY2000 to 30% in FY05 to
50% in FY10, and rose further to ~58% as at end-1HFY11.
ARBL has positioned itself directly against market leader Exide, by
offering batteries with higher power and higher warranty life at the
same prices as Exide’s batteries. Apart from its Amaron brand, ARBL
sells aftermarket batteries to private-label manufacturers such as
Bosch, Lucas and AC Delco.
The company’s annual production capacity is 4.2m four-wheeler
batteries and 1.8m two-wheeler batteries. In March 2011, its annual
production capacity for four-wheeler batteries will increase from
4.2m units to 5.1m units and for two-wheeler batteries from 1.8m
units to 3.6m units. By September 2011, annual production capacity
will increase further to 6m four-wheeler batteries and 5m twowheeler
batteries. The company’s capacity utilisation for both classes
of batteries is currently running at over 90%.
ARBL sells only VRLA batteries for two-wheelers. As OEMs are often
reluctant to adopt new technology, which is often relatively
expensive, ARBL sells its entire output of 1.8m units in the
replacement market. The two-wheeler battery replacement market
has seen a strong surge in demand in the last 2-3 years, thanks to
the advent of self-start vehicles. Earlier, two-wheeler batteries were
used to power only the lights and horn, so batteries were often not
replaced even after they had died down.
ARBL’s 3.6m-unit capacity will also be used solely to cater to the
replacement market. In addition, the company is developing a twowheeler
VRLA battery for Honda, to be used for its vehicles in India
as well as abroad; capacity beyond 3.6m units will be used to make
batteries for Honda. ARBL will start supplying batteries to Honda in
2012. It will also start supplying batteries for Bajaj Auto’s high-end
bikes (KTM brand) by end-2011.
Duopoly structure results in pricing power for both players
Exide and Amara Raja together account for ~95% of the organised
automotive battery market. As the large presence of the unorganised
segment indicates, automotive batteries are not very technologically
demanding to make. The barrier to entry in this business is brand
franchise, and ARBL has worked hard to build the Amaron brand in
the last ten years.
Whilst Exide is clearly the market leader, ARBL, through its
positioning as a “technology leader” has established a strong brand
franchise. ARBL has emerged as the second-largest player in the
segment, and has garnered 30% share in both the auto OEM and
replacement market. Both players have by and large refrained from
aggressive price competition, because the market is virtually a
duopoly.
This duopoly was temporarily disrupted in January 2011, when Exide
cut prices of its batteries by 4%, in spite of an increase in lead
prices. Exide’s price cut was prompted by a need to stem the
previous few quarters’ market share losses in the replacement
segment caused by capacity constraints. Normalcy has since been
restored, with Exide increasing prices by 5% from mid-February
2011. Exide’s dominant position in the market makes it not only the
price-setter, but also makes it the most susceptible to any
excessively aggressive pricing by competitors.
Low penetration and rising income levels augur well for
growth in auto sector
With India emerging as a small-car production hub, passenger-car
production in India is set to increase at over 15% annually in the
next five years. Robust growth in the rural economy will drive a
>12% CAGR in two-wheeler sales as well. As such, we expect
volume growth in the OEM segment to remain healthy. Whilst Exide
is the dominant player with OEMs, most of them want to diversify
their vendor bases. Hero Honda’s production was adversely affected
recently when Exide, which is currently the company’s sole supplier
of batteries, had a strike. Hero Honda is therefore likely to appoint
ARBL as a second supplier.
Based on last few years’ record, we expect low double-digit growth
in replacement demand in the coming years. Growth would be
further boosted by a shift in volumes from the unorganised segment
to the organised segment. Unorganised players’ market share in the
replacement segment is ~90% in commercial vehicles (CVs), 50% in
two-wheelers and ~10% in passenger cars.
Improved distribution to drive further growth
Whilst Exide follows a direct distribution strategy—it has around
3,000 direct dealers and 3,500 indirect dealers—ARBL uses a
franchisee model. ARBL has 200 franchisees who service 18,000
retail outlets. This was a good model to follow in the initial phase, as
it enabled ARBL to expand quickly while extending credit to only
about 200 franchisees and not to over 5,000 dealers (this made the
task of collecting money easy). Going forward, ARBL plans to use the
direct dealer model in some cases where the franchisee model has
not been effective.
Also, the eastern part of the country, which is a stronghold for Exide
(since it is based in Kolkata), is weak in terms of distribution and is a
focus area for ARBL. It also plans to tie-up with new franchisees in
the north, west and south, as some of its current franchisees are
now constrained by credit and hence are unable to scale up the
business as well as ARBL would like them to. The new franchisees
would help ARBL penetrate deeper into the existing territories.
Johnson Controls gives ARBL the technology edge
Johnson Controls, which owns 26% in ARBL (in which it also holds
board seats), is the global leader in lead acid batteries for passenger
cars, light trucks and utility vehicles, in addition to being the leading
independent supplier of hybrid systems. ARBL has been a technology
leader in the Indian market, having introduced VRLA batteries for the
first time for industrial applications and two-wheelers. In the
automotive segment too, ARBL was the first to introduce batteries
with 5-year warranties. The tie-up with Johnson Controls gives ARBL
access to the latest battery technology. Furthermore, Johnson’s
eminence in the hybrid space would be an asset for ARBL as and
when this technology picks up in India. The presence of Johnson
Controls also gives comfort on the various related-party transactions
that ARBL has with its sister companies, as Johnson Controls carries
out a quarterly internal audit.
Risks
Prices of lead, a key raw material, are volatile
Lead accounts for ~75% of ARBL’s total cost of production and
~65% of its net sales. The company sources 15–20% of its lead
from third-party smelters, 30% from domestic lead suppliers and
imports 55% of its lead requirement, largely from Australia and
Korea. Its imports are dollar-denominated and the company hedges
50% of its currency risk.
The company has built-in clauses in its contracts to pass through any
lead-price fluctuations to its OEM customers and large corporate
industrial customers. For auto OEM customers, increases in cost of
lead are passed on with a one-quarter lag. In sales to industrial retail
customers and replacement sales, on the other hand, the company
bears the raw-material risk. Lead prices have been very volatile in
the past few years, reaching a peak of US$3,890/tonne in October
2007 and then falling to below US$1,000/tonne in January 2009.
Attractive valuations — BUY
ARBL is currently trading at a one-year forward PE of 9x. For
comparison, Exide is trading at a one-year forward PE of 16x, a
>50% premium to ARBL. In the last five years (FY05-10), ARBL’s
revenues have grown at 44% annually, driving an 81% CAGR in
profit. During the same period, Exide’s revenues have grown at 26%
annually, driving a 48% CAGR in profit.
Our target price on Amara Raja is set at 12x one-year-forward PE
(FY13 EPS of Rs23), which translates into a PE of 14.8x on FY12ii
EPS of Rs19.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Amara Raja - The Challenger- BUY
Amara Raja Batteries Ltd (ARBL) is the second-largest
manufacturer of lead-acid batteries in India, with ~23%
share by volume of the organised battery market. We
estimate an earnings CAGR of ~30% over the next two years,
driven by capacity expansion in the automotive and twowheeler
segments. In our view, concerns over its high
exposure to the telecom sector are overdone, and ignore the
company’s strong performance in the automotive and UPS
segments. On the telecom side too, there are initial signs of
bottoming; we expect substantial improvement in this
segment’s revenues and margins in FY12. Valuations, at 9x
FY12ii EPS, are attractive for a branded consumer company.
Capacity expansion will drive growth in the auto segment: Low
penetration and rising incomes would drive healthy double-digit
growth across segments in the auto industry. Meanwhile, the highmargin
replacement segment is set for a surge, as the last few years’
strong growth in vehicle sales translates to replacement demand for
batteries. ARBL, which plans to increase its annual battery capacity for
4-wheelers from 4.2m batteries to 6m, and for 2-wheelers from 1.8m
to 5m by October 2011, should be a key beneficiary.
Telecom segment on its way up: The telecom segment, which
forms >20% of revenues for ARBL, after a sharp decline in the
previous few quarters, is now improving on increased demand from
replacement of telecom batteries. ARBL is running at full capacity on
improved demand, and pricing too has bottomed out; the segment
should witness a healthy 15% growth in FY12. ARBL is also planning
to develop new markets outside India, especially in Africa.
Battery business holds great promise: The Indian battery market
is set for strong volume growth and margins for the next 5-6 years.
Margin expansion in the medium term would be driven mainly by a
shift in market share in the replacement segment from unorganised
battery manufacturers to organised ones. This shift will help expand
battery manufacturers’ margins for two reasons: 1) margins in the
replacement segment are intrinsically higher than in the OEM
segment; and 2) raw-material costs will fall as prices of scrap
batteries come down.
Capacity expansion to drive growth in auto
batteries
ARBL, which started making automotive batteries in 2000, has
garnered a share of ~25% by volume in both aftermarket and OEM
batteries for passenger cars. The automotive segment’s share of
ARBL’s revenues increased from zero in FY2000 to 30% in FY05 to
50% in FY10, and rose further to ~58% as at end-1HFY11.
ARBL has positioned itself directly against market leader Exide, by
offering batteries with higher power and higher warranty life at the
same prices as Exide’s batteries. Apart from its Amaron brand, ARBL
sells aftermarket batteries to private-label manufacturers such as
Bosch, Lucas and AC Delco.
The company’s annual production capacity is 4.2m four-wheeler
batteries and 1.8m two-wheeler batteries. In March 2011, its annual
production capacity for four-wheeler batteries will increase from
4.2m units to 5.1m units and for two-wheeler batteries from 1.8m
units to 3.6m units. By September 2011, annual production capacity
will increase further to 6m four-wheeler batteries and 5m twowheeler
batteries. The company’s capacity utilisation for both classes
of batteries is currently running at over 90%.
ARBL sells only VRLA batteries for two-wheelers. As OEMs are often
reluctant to adopt new technology, which is often relatively
expensive, ARBL sells its entire output of 1.8m units in the
replacement market. The two-wheeler battery replacement market
has seen a strong surge in demand in the last 2-3 years, thanks to
the advent of self-start vehicles. Earlier, two-wheeler batteries were
used to power only the lights and horn, so batteries were often not
replaced even after they had died down.
ARBL’s 3.6m-unit capacity will also be used solely to cater to the
replacement market. In addition, the company is developing a twowheeler
VRLA battery for Honda, to be used for its vehicles in India
as well as abroad; capacity beyond 3.6m units will be used to make
batteries for Honda. ARBL will start supplying batteries to Honda in
2012. It will also start supplying batteries for Bajaj Auto’s high-end
bikes (KTM brand) by end-2011.
Duopoly structure results in pricing power for both players
Exide and Amara Raja together account for ~95% of the organised
automotive battery market. As the large presence of the unorganised
segment indicates, automotive batteries are not very technologically
demanding to make. The barrier to entry in this business is brand
franchise, and ARBL has worked hard to build the Amaron brand in
the last ten years.
Whilst Exide is clearly the market leader, ARBL, through its
positioning as a “technology leader” has established a strong brand
franchise. ARBL has emerged as the second-largest player in the
segment, and has garnered 30% share in both the auto OEM and
replacement market. Both players have by and large refrained from
aggressive price competition, because the market is virtually a
duopoly.
This duopoly was temporarily disrupted in January 2011, when Exide
cut prices of its batteries by 4%, in spite of an increase in lead
prices. Exide’s price cut was prompted by a need to stem the
previous few quarters’ market share losses in the replacement
segment caused by capacity constraints. Normalcy has since been
restored, with Exide increasing prices by 5% from mid-February
2011. Exide’s dominant position in the market makes it not only the
price-setter, but also makes it the most susceptible to any
excessively aggressive pricing by competitors.
Low penetration and rising income levels augur well for
growth in auto sector
With India emerging as a small-car production hub, passenger-car
production in India is set to increase at over 15% annually in the
next five years. Robust growth in the rural economy will drive a
>12% CAGR in two-wheeler sales as well. As such, we expect
volume growth in the OEM segment to remain healthy. Whilst Exide
is the dominant player with OEMs, most of them want to diversify
their vendor bases. Hero Honda’s production was adversely affected
recently when Exide, which is currently the company’s sole supplier
of batteries, had a strike. Hero Honda is therefore likely to appoint
ARBL as a second supplier.
Based on last few years’ record, we expect low double-digit growth
in replacement demand in the coming years. Growth would be
further boosted by a shift in volumes from the unorganised segment
to the organised segment. Unorganised players’ market share in the
replacement segment is ~90% in commercial vehicles (CVs), 50% in
two-wheelers and ~10% in passenger cars.
Improved distribution to drive further growth
Whilst Exide follows a direct distribution strategy—it has around
3,000 direct dealers and 3,500 indirect dealers—ARBL uses a
franchisee model. ARBL has 200 franchisees who service 18,000
retail outlets. This was a good model to follow in the initial phase, as
it enabled ARBL to expand quickly while extending credit to only
about 200 franchisees and not to over 5,000 dealers (this made the
task of collecting money easy). Going forward, ARBL plans to use the
direct dealer model in some cases where the franchisee model has
not been effective.
Also, the eastern part of the country, which is a stronghold for Exide
(since it is based in Kolkata), is weak in terms of distribution and is a
focus area for ARBL. It also plans to tie-up with new franchisees in
the north, west and south, as some of its current franchisees are
now constrained by credit and hence are unable to scale up the
business as well as ARBL would like them to. The new franchisees
would help ARBL penetrate deeper into the existing territories.
Johnson Controls gives ARBL the technology edge
Johnson Controls, which owns 26% in ARBL (in which it also holds
board seats), is the global leader in lead acid batteries for passenger
cars, light trucks and utility vehicles, in addition to being the leading
independent supplier of hybrid systems. ARBL has been a technology
leader in the Indian market, having introduced VRLA batteries for the
first time for industrial applications and two-wheelers. In the
automotive segment too, ARBL was the first to introduce batteries
with 5-year warranties. The tie-up with Johnson Controls gives ARBL
access to the latest battery technology. Furthermore, Johnson’s
eminence in the hybrid space would be an asset for ARBL as and
when this technology picks up in India. The presence of Johnson
Controls also gives comfort on the various related-party transactions
that ARBL has with its sister companies, as Johnson Controls carries
out a quarterly internal audit.
Risks
Prices of lead, a key raw material, are volatile
Lead accounts for ~75% of ARBL’s total cost of production and
~65% of its net sales. The company sources 15–20% of its lead
from third-party smelters, 30% from domestic lead suppliers and
imports 55% of its lead requirement, largely from Australia and
Korea. Its imports are dollar-denominated and the company hedges
50% of its currency risk.
The company has built-in clauses in its contracts to pass through any
lead-price fluctuations to its OEM customers and large corporate
industrial customers. For auto OEM customers, increases in cost of
lead are passed on with a one-quarter lag. In sales to industrial retail
customers and replacement sales, on the other hand, the company
bears the raw-material risk. Lead prices have been very volatile in
the past few years, reaching a peak of US$3,890/tonne in October
2007 and then falling to below US$1,000/tonne in January 2009.
ARBL is currently trading at a one-year forward PE of 9x. For
comparison, Exide is trading at a one-year forward PE of 16x, a
>50% premium to ARBL. In the last five years (FY05-10), ARBL’s
revenues have grown at 44% annually, driving an 81% CAGR in
profit. During the same period, Exide’s revenues have grown at 26%
annually, driving a 48% CAGR in profit.
Our target price on Amara Raja is set at 12x one-year-forward PE
(FY13 EPS of Rs23), which translates into a PE of 14.8x on FY12ii
EPS of Rs19.
No comments:
Post a Comment