Amara Raja Batteries Replacement demand benefit; Buy :: Anand Rathi

Amara Raja Batteries
Replacement demand benefit; Buy
Key takeaways
Decent performance likely in 3QFY14. Amara Raja Batteries (ARB) is
expected to report decent performance in 3QFY14 on its sustained leadership
in the telecom and UPS segments as well as replacement demand. This will
offer some stability to the automotive segment. We expect 12.7% yoy sales
growth, to `8.6bn, and 15.3% yoy EBITDA growth, to `1.4bn; EBITDA
margin is expected to be 16.4% (lower 80bps qoq, higher 40bps yoy). Backed
by decent EBITDA, adjusted profit growth is expected to be 13.6% yoy, to
`919m.
Auto replacement, industrials driving growth. As in 2QFY14, ARB’s
revenue growth in 3QFY14 too is expected to be driven by double-digit
growth in auto-replacement demand and the industrial segment. However,
auto OEM and home-UPS trading businesses is expected to be sluggish due
to lower auto demand and mild summer/good monsoons, respectively.
ARB’s enhanced two-wheeler capacities are expected to come on-stream in
4QFY14. This would not only help it grow its OEM business in this segment,
but also tap replacement demand. The expanded capacities for medium and
large VRLA batteries are also expected to commence operations in 4Q.
Our take. Competitive intensity in the industry is likely to increase with
continued weakness in OEM demand. However, with a good product range,
greater replacement exposure and decent industrial demand, ARB could
outperform peers in the auto-ancillary segment. The stock had stagnated in
1HCY13 after a re-rating in CY12 and has, thereafter, put up a better
performance. We maintain Buy, with target price of `367. At the ruling price,
it trades at 13.7x FY15e EPS. Risks. Keener competition, input cost rise,
valuations at a substantial premium to its past five-year average of 9.1x.

Feeling happy with index funds? :: Business Line

Aiming for moderate returns on your investments can reduce your regret and make you happy.

Sometime back, we discussed in another column (‘Keep returns expectations moderate’ in Knowledge Arbitrage dated August 10, 2013) that it is good to aim for mediocre returns. Our objective was to help you moderate your regret. But will you be happy earning mediocre returns?

To answer this question, consider long-distance air travel. Suppose you frequently fly business class to the US. While business class is good, you desire to travel first class.

What if your airline upgrades you to first class on one of your return-legs from the US? You would, no doubt enjoy the rich experience of first class travel. But your subsequent travel to the US would most likely be miserable! Why? You will compare the business class travel to your first class experience and feel unhappy about the facilities that the former does not offer.

So, what should you do to enhance your business class experience? Perverse as it may seem, you should travel economy class at least once every year! That way, you would be able to appreciate your business class experience!

In other words, your experience is much better and feeling of regret much less if you occasionally travel economy and frequently fly business class than if you occasionally fly first class and frequently travel business class!

Now, consider your investments. When you aim for mediocre returns, your objective would be to buy index funds.

Comparative happiness

Yet, two factors could make you happy with your index fund investments. One, the occasional losses on your equity portfolio would make your more frequent average-returns experience appear better!

And two, you will be occasionally tempted to invest in high-risk investments that “promise” high returns, e.g., farm land investments and quant-based trading strategies. And when such investments yield losses, your index fund returns appear better!

We are not suggesting that you should never experience luxury services such as first class air travel. Neither are we encouraging you to suffer losses to appreciate mediocre returns on your investments.

Rather, what we are suggesting is that a mediocre outcome will appear good when compared to a bad outcome, whereas a good outcome will appear mediocre when compared to a better outcome. Your happiness will depend on your frame of comparison, not necessarily on the actual returns earned.

In fact, evidence suggests that happiness does not typically increase with wealth after you provide for your basic needs.

This does not mean you should stop aspiring for more wealth. But it may be worthwhile to shift your frame of reference, especially if you fail to acquire more wealth.

If nothing else, it would reduce regret and make you feel happy.

Munjal Showa Growth triggers in place; Buy :: Anand Rathi

Munjal Showa
Growth triggers in place; Buy
Key takeaways
Two-wheeler demand scenario average. Hero MotoCorp, the key
customer for Munjal Showa (MS) witnessed decent 3QFY14 numbers, and on
a lower base the company reported yoy growth for a second successive
quarter (after a yoy decline for the preceding four quarters). Two-wheeler
sales were up 6.9% yoy and 18.7% qoq. Consequent on the weak demand
environment in the auto industry and keener competition, we expect this
challenging industry scenario to continue into 4QFY14.
Benefit to trickle in for MS. In 3QFY13, while the overall automotive
demand continued to be weak. MS’ key customers - Hero MotoCorp. and
Maruti Suzuki - reported a decent performance. Hence, we expect MS’
revenue to grow 10% yoy. We expect its EBITDA margin to come at 6.5%
(60bps lower yoy, though 140bps up qoq). This would result in marginal 0.8%
yoy EBITDA growth. As a result, adjusted profit would grow by a marginal
3.6% yoy, to `166m.
Provision for wage hike. The company’s wage-settlement agreement with its
workers and staff increments are due for renewal. While negotiations are
ongoing, the company has provided `54.73m towards increments for
1HFY14, based upon its estimates. This has also had the effect of lowering
the EBITDA margin, along with reducing operating leverage.
Our take. Although key customers still face demand woes, growth ahead
would be driven by non-HMC customers. Positives ahead are inexpensive
valuations and more revenue from a diversified customer base. We reiterate a
Buy, with a target of `80, based upon 4.2x FY15e (a ~10% discount to its past
five-year average). At the current price, the stock trades at PE of just 4.1x
FY14e and 3.6x FY15e earnings. Risks. Sustained slump in motorcycle sales,
rise in commodity prices and inadequate price hikes allowed by OEMs

Apollo Tyres Acquisition overhang clears; Buy :: Anand Rathi

2 9January 2014
Apollo Tyres
Acquisition overhang clears; Buy
Key takeaways
3Q another good quarter for India operations. Apollo Tyres’ domestic
operation is expected to continue to grow decently, backed by higher
EBITDA margin and sanguine commodity costs. We expect 10% yoy revenue
growth, to `22.4bn, with a 12.9% EBITDA margin (up 280bps yoy, 90bps
qoq). Replacement demand growth is likely to be good. Our EBITDA growth
expectation is 40.5% yoy. We expect 58.8% yoy profit growth, to `1.2bn.
Consolidated profit growth at a slower pace. The slowdown in the
European market would bear heavily on the consolidated results. Being the
peak period for winter tyre demand, this would help sales growth. Yoy,
currency depreciation would also benefit. But in 2Q, the company had taken
price reduction due to competitive pressures. As a result, we expect
consolidated revenues to grow 12% yoy to `36bn, with a 12.8% EBITDA
margin (up 90bps yoy, 50bps qoq). We expect EBITDA to grow 20.8% yoy.
We expect 15.5% yoy profit growth to `2.1bn.
Cooper acquisition overhang over. The proposed Cooper acquisition was a
near-term overhang. With recent events now clearing the potential financial
burden that a leveraged buyout posed, the outlook is much brighter. The only
threat remains from the possibility of penal break-up fees being imposed by
the courts. In our view, given the nature of the break-up, this seems unlikely.
Our take. With the Cooper overhang over, we upgrade the stock to Buy on
continued strong financial performance of the company. While future
expansion plans may include overseas capex or another acquisition, so long as
the scale is not as big as Cooper, it would not pose a severe threat. At CMP,
the stock trades at 6.6x FY15e EPS. Our target price is at 8x earnings.
Risks. Increase in rubber prices, above-expected impact of the European
slowdown, unfavourable forex movements.

Please note that Manappuram NCD Issue will be closing today i.e. January 17, 2014.

Please note that Manappuram NCD Issue will be closing today i.e. January 17, 2014.