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The time for the challenger has come…
Amara Raja Batteries (ARBL) is the second largest battery maker in India
with strong credentials to challenge Exide industries’ dominance in the
lucrative auto-ancillary segment. ARBL commands a market share of
(~25%) in the OEM auto space and ~16% in the replacement segment.
In the industrial segments, it commands an overall market share of
~35% led by telecom and commercial UPS segment. We are firm
believers of the long term automotive story, which is expected to fuel a
CAGR sales growth of ~16% over FY11-14E. Even industrial demand is
expected to grow in the commercial power supply segment. On the
softer points, strong brand franchise and efficient two-tiered dealer
network provides a strong edge in terms of barriers to entry. We find
the battery business at the most attractive on a longer term among
other auto-ancillary businesses. Margins for ARBL are expected to
improve with higher aftermarket sales and operating leverage coupled
with stable lead prices. We estimate revenues and PAT will grow at
~22% CAGR over FY11-13E to ~| 2638 and ~| 222 crore, respectively.
We are initiating coverage on ARBL with a BUY rating.
Auto-replacement to be game changer
The domestic auto sector has entered a structural bull run on the back of
low penetration and growing income levels. We estimate the OEM
demand will reach ~26 million units in FY14E with a CAGR of ~13.5%.
Another key point is the shift of the total industry towards electric start
(two-wheelers the last entrant) variants leading to higher usage and lower
average battery life. Both these factors combined would help in ushering
in a new wave of the replacement cycle, which we estimate will grow at
~18.7% CAGR FY11-14E to ~37 million units.
Aggressive entry into OEMs along with unique distribution to bear fruit
ARBL has expanded capacities to set up dedicated channels for OEMs like
HMSI, Honda and Bajaj Auto, thereby providing strong dedicated lines of
revenue. This, coupled with the unique two-tiered franchised distribution
model will help in deeper penetration and improved after market service
coupled with more replacement sales opportunities for ARBL.
Valuation
At the CMP of | 203, Amara Raja is trading at 9.6x FY12E EPS of | 20.1
and 7.8x FY13E EPS of | 26.0. We have valued the company at 9x its
FY13 EPS of | 26.0 (~35% discount to Exide Industries’ core business
multiple) to arrive at a target price of | 234 with an upside potential of
15%. We are initiating coverage on the stock with a BUY rating.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The time for the challenger has come…
Amara Raja Batteries (ARBL) is the second largest battery maker in India
with strong credentials to challenge Exide industries’ dominance in the
lucrative auto-ancillary segment. ARBL commands a market share of
(~25%) in the OEM auto space and ~16% in the replacement segment.
In the industrial segments, it commands an overall market share of
~35% led by telecom and commercial UPS segment. We are firm
believers of the long term automotive story, which is expected to fuel a
CAGR sales growth of ~16% over FY11-14E. Even industrial demand is
expected to grow in the commercial power supply segment. On the
softer points, strong brand franchise and efficient two-tiered dealer
network provides a strong edge in terms of barriers to entry. We find
the battery business at the most attractive on a longer term among
other auto-ancillary businesses. Margins for ARBL are expected to
improve with higher aftermarket sales and operating leverage coupled
with stable lead prices. We estimate revenues and PAT will grow at
~22% CAGR over FY11-13E to ~| 2638 and ~| 222 crore, respectively.
We are initiating coverage on ARBL with a BUY rating.
Auto-replacement to be game changer
The domestic auto sector has entered a structural bull run on the back of
low penetration and growing income levels. We estimate the OEM
demand will reach ~26 million units in FY14E with a CAGR of ~13.5%.
Another key point is the shift of the total industry towards electric start
(two-wheelers the last entrant) variants leading to higher usage and lower
average battery life. Both these factors combined would help in ushering
in a new wave of the replacement cycle, which we estimate will grow at
~18.7% CAGR FY11-14E to ~37 million units.
Aggressive entry into OEMs along with unique distribution to bear fruit
ARBL has expanded capacities to set up dedicated channels for OEMs like
HMSI, Honda and Bajaj Auto, thereby providing strong dedicated lines of
revenue. This, coupled with the unique two-tiered franchised distribution
model will help in deeper penetration and improved after market service
coupled with more replacement sales opportunities for ARBL.
Valuation
At the CMP of | 203, Amara Raja is trading at 9.6x FY12E EPS of | 20.1
and 7.8x FY13E EPS of | 26.0. We have valued the company at 9x its
FY13 EPS of | 26.0 (~35% discount to Exide Industries’ core business
multiple) to arrive at a target price of | 234 with an upside potential of
15%. We are initiating coverage on the stock with a BUY rating.
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