28 June 2011

Amara Raja Batteries: Buy:: Business Line

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The company has a sizeable market share and enjoys good pricing power.
Amara Raja Batteries (ARBL) has had a challenging FY11. First, lower off-take of telecom batteries resulted in subdued realizations in its industrial segment. The strong demand for automotive batteries from original equipment manufacturers (OEMs) where margins are relatively lower and spiralling lead prices also played spoilsport on margins.
For the year ended March 2011, net sales grew by 20 per cent year on year to Rs 1,761 crore while net profits dropped by 7 per cent to Rs 148 crore. Operating margins came in at 15 per cent against the 20 per cent seen in the previous year.
The company is poised to see better times. The buoyant replacement demand for automotive batteries and capacity expansions for the same, sanguine outlook for the telecom segment and the increasing need for UPS and inverter batteries lend promise to earnings growth in the next few years. Hence, investors with an appetite for risk and a perspective of two years or more can consider exposures to the ARBL stock.
The company derives about 60 per cent of revenues from the auto segment where it counts Maruti, Hyundai, Mahindra and Mahindra, Tata Motors, Ashok Leyland and Honda among its clients. The industrial division chips in with the rest. At the current market price of Rs 219the stock trades at 10.3 times its estimated earnings for FY-12.
This is at a discount to Exide Industries, the market leader, which trades at 17 times its estimated earnings for the current year.

STRONG REPLACEMENT DEMAND

After a scorching pace of growth in the last two years, the auto industry is preparing for moderation in the months to come. With most component makers too bracing themselves for a slowdown, tyre and battery makers stand apart as they have a huge replacement market.
ARBL derives about 65 per cent of its auto segment revenues from the replacement market.
In the near to medium term, even if OE sales take a back seat, the company will witness volume growth from the battery replacement demand for vehicles that were sold in the last few years. This will also boost operating margins as the ability to pass on cost escalations and effect price increases is higher here than in supplies to OEMs.
To cash in on the replacement wave, ARBL has tied up with some OE clients to service the replacement demand of their (OEM's) customers.
ARBL is also expanding capacities for four-wheeler batteries from 5 to 5.5 million units this year.
The performance of the telecom batteries division, which brings in about half of the industrial segment revenues, has been a dampener for the company last year. A slowing down of network expansion plans and sharing of tower infrastructure by telecom operators has kept the demand for telecom batteries down. This could change beginning FY 12 as the replacement demand for batteries supplied in the last few years kick in. Besides, WiMax and 3G spectrum availability necessitate enhancing efficiency and upgrading of existing networks.
Driven by this upgrade need, the company has seen a pick-up in demand in the last few months. Given the strong tie-ups it has with players such as BSNL, Airtel and Idea, ARBL is expected to witness increased off take in the telecom segment, beginning this year. Besides this, large-scale computerisation of banks and government departments, creation of high-powered data centres in the IT and financial services industry, increasing penetration of PCs and thepower shortage situation are expected to keep the market for UPS batteries ticking.
To cater to the improved efficiency requirements in industrial batteries, ARBL has come out with a new battery, Amaron Volt for such telecom, high-end UPS and data centre applications.

INPUT COSTS PRESSURES

Although ARBL has a sizeable market share and enjoys good pricing power, Exide Industries, a much bigger player, scores on the raw material front. The latter sources about 50 per cent of its lead requirements form captive smelters, shielding itself from volatility in lead prices to a certain extent.
Hence, margin pressures from a further rise in lead prices remains a risk . This may, however, be partly mitigated by higher replacement market sales and better telecom realisations

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