Amara Raja Batteries- Results above estimates on higher margins:: Nomura

Above or below expectations?
AMRJ reported another strong set of results. 3QFY13 PAT came in at
INR 809mn, which was 16% ahead of our estimates (INR 694mn)
and 7% ahead of consensus (INR 757mn). EBITDA margins came in
at 16% while we were expecting 14.4%. The beat is led by lower than
expected RM/sales (100 bps) and lower other expenses/sales (60 bps).

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What does the result mean?
Despite a sequential increase in LME lead prices, a strong EBITDA
margin was a key positive. We note that the company has taken around
a 3.5% price increase in Dec-12, which should support margins in 4Q as
well, in our view.
Furthermore, an increase in capex plans announced by the
company highlights increased conviction in volume growth, in our
view. Improved demand in telecom segment is also positive for the
company. We believe that current volume run-rates for both auto
and industrial segments are already coming close to our FY14F
estimates. We may revisit our earnings estimates post management
comments.
Likely stock reaction
We believe that consistent performance of AMRJ vs. disappointing
performance of market leader EXID will be taken as a large positive by
the market. We expect the stock to react positively to these results.
Key highlights from press release
 Volume growth was double digits in the auto segment during the
quarter.
 The company faced capacity constraints in 4-wheeler segment in the
quarter despite weak demand from OEMs.
 Strong customer preference for the company’s brands continues to
help AMRJ gain market share in the replacement market.
 With aftermarket demand expected to pick up in FY14, the company
expects to grow above the industry average in the near future.
 Supply of batteries to OEMs in 2-wheeler segment will commence in
the next couple of months.


 In the industrial segment, the company saw double-digit revenue
growth, led by improved demand in telecom segment and reasonable
volume growth in the UPS segment. Due to capacity constraints,
AMRJ was unable to meet some demand in both telecom and UPS
segments.
 Capacity expansion in medium VRLA segment is on track and will
commence in Q3FY14.
 The company has decided to expand capacity in large VRLA and 4-
wheeler auto segment and has approved capex of INR 4.4bn to be
incurred over the next 16-18 months.
 This is over and above the approved capex of INR 3.04bn for medium
VRLA, 4-wheeler and 2-wheeler capacity expansion plans.
Key numbers
 Net sales at INR 7.6bn came in line with our estimate of INR 7.55bn.
 EBITDA margins came in at 16.4%; above our estimate of 14.4%.
 RM/sales came in at 66% compared with our estimate of 67%.
 Employee cost/sales came in at 4.2%, in line with our estimate of
4.2%.
 Other expenses/sales came in at 13.8% compared with our estimate
of 14.4%.
 Other income came in at INR 71mn compared with our estimate of
INR 75mn.
 Tax rate at 30% was below our estimate of 32%.