Superb run continues…Uninterrupted! • Amara Raja Batteries (ARBL) :: ICICI Securities, PDF link

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Superb run continues…Uninterrupted!
• Amara Raja Batteries (ARBL) reported its best ever quarterly results,
which came in better than estimates on all counts
• The topline at | 1065.6 crore grew ~32% YoY and was a beat on
estimates. Margins at 17.4% came in higher on account of operating
leverage benefit even as lead prices remained unfavourable
• Thus, despite an increase in depreciation and higher tax rate, PAT at
| 100.3 crore came in higher than estimates
Challenger benefits from duopoly battery business…
The Indian battery industry is a duopoly in nature with top players’ viz.
Exide and Amara Raja controlling ~90% of the organised market. The
battery business was considered to be a strong RoCE generator with high
margins and strong pricing power. However, all those assumptions went
out of the window as Exide Industries (EIL) lost its way in the wake of
ARBL’s competitive onslaught. ARBL, on the other hand, was able to gain
on all fronts ranging from market share (4W-replacement rose from 20%-
25%-FY10 to 38%-40%-FY14) to financials (RoCEs rose from 24% in FY09
to 35% in FY14). ARBL, thus, benefited from EIL’s lack of clear strategy to
gain a major foothold in the minds of the customer in a profitable manner.
Simple business strategy= “Be consistent”
ARBL’s key differentiating point is that it has been able to grow its
presence in the battery business across OEMs and end customers in a
very smooth manner. ARBL’s strategy has been smart in the sense it
continues to maintain 8-10% product pricing gap with EIL’s products
while on quality, the general perception remains at least the same if not
better between the two. Thus, customers have taken to ARBL’s products
well and, thereby, led ARBL to be so consistent. The focus on market
share gains and financials has, thus, gone hand in hand. ARBL, vis-à-vis
EIL, has grown in PAT margins from 8.4% (FY11) to 10.6% (FY14) while
EIL’s margins during the same have fallen from 14.7% to 8.2%.
Capacity in place, poised to grow profitably across segments
ARBL launched an expansion plan of ~| 750 crore that is expected to be
complete by mid-FY15E. Automotive capacity would get raised to ~16.6
million units while EIL could be at ~34 million units (our estimate) i.e.
50% of EIL. On the industrial side, VRLA battery capacity expansions are
complete (~1000 mn AmpHr) with ramp-up to happen in FY15E. ARBL is
also witnessing strong growth in the telecom/UPS space, which
contributes ~35% of overall revenues. The board has also approved
capex of | 500 crore for setting up tubular battery facility for home UPS
segment. Thus, in the coming years both automotive and industrial
segments would aid demand growth as we enter into both an auto
demand revival as well as infrastructure led economic growth.
Valuations alluring for quality India recovery play=BUY
ARBL’s performance has continued to be impressive even as the industry
leader struggles with consistency of profitability. ARBL’s consistent
performance, strong return ratios (>25% RoE, ~35% RoCE), good
earnings visibility and a strong balance sheet (net debt negative) make a
strong case for sustained premium valuations. At ~16.5x two-year rolling
EPS, ARBL is a low-risk play on the domestic automotive recovery. We
value ARBL at 19x two-year rolling EPS, to arrive at target price of | 813.
We continue to hold on to our positive stance and maintain BUY with an
upgraded target price of | 813, with an upside potential of 16%.


LINK
http://content.icicidirect.com/mailimages/IDirect_AmaraRaja_Q2FY15.pdf