Amara Raja Batteries :: Prabhudas Lilladher MID-CAP top pick

Fundamentals intact for the battery industry: We believe that the fundamentals
of the battery industry remains strong and we continue to remain positive on both
the battery companies. Post >25% YoY growth in FY10 and FY11 each, we expect
strong traction in high margin replacement segment (with sufficient pass-on
ability). Shift of shares from unorganized to organized within the replacement
market due to obligation on Exide/ARBL to procure a worn-out battery (source of
lead for unorganized segment) for every new battery sold. Shift to VRLA
technology in two-wheeler batteries is difficult to manufacture for the
unorganized players
Automotive Segment: 65% of automotive business comes from the replacement
market in terms of volume and about 35% comes from OEMs. In revenue terms, it
would be around 28% OEMs and the balance comes from the replacement
markets. The replacement market includes two brand sales which are ‘Amaron’
and ‘Power Zone’ as well as some private label opportunities.
Industrial Battery segment volumes up 15%: Industrial segment registered a
volume growth of 15%+ amidst very competitive market conditions. AMRJ has
gained market share in the both the segments of Telecom and UPS. AMRJ has
increased its market share to ~33% currently in UPS segment at the cost of the
importers in the unorganized market. With China levying a 17.5% export tax on
lead and lead products and rupee depreciating, it is unviable for the traders to
import the UPS batteries. This, together with higher demand in the commercial
UPS segment, augurs well for AMRJ.
Telecom vertical to grow at 6‐8% CAGR over next three years: Overall, the
Telecom Operators and Service Providers have shifted to one-on-one negotiations
with reliable vendors as against the earlier followed norm of reverse auction
mechanism, where the lowest bidders used to get the orders.
Outlook & Valuation: AMRJ has maintained a strong balance sheet, with the
return ratios in excess of 24% for the past few years. We expect revenues to grow
at a CAGR of 15.1% and net profit to grow at a CAGR of 22.2% for FY12-FY14E
period. The stock is currently trading at 11.9x its FY13E EPS and 10.2x FY14E EPS,
which in our view is attractive. We maintain our ‘Accumulate’ rating on the stock.
Our revised Target Price of Rs417 is based on 11.0x FY14E EPS (~26% discount to
15x FY14E earnings target multiple for Exide).

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