Valuation rockets in auto proxy play! • Amara Raja Batteries :: ICICI Securities, report

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Valuation rockets in auto proxy play! • Amara Raja Batteries (ARBL) reported its best ever quarterly results, which came in better than estimates on all counts • The topline at | 1066.5 crore grew ~24% YoY and was lower than estimates. EBITDA margins at 16.9%, came in lower than anticipated on account of higher other expenses and weaker product mix • Thus, PAT also came in lower at | 102.3 crore due to overall operational miss 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 automotive strategy has been smart in the sense that it continues to maintain 8-10% product pricing gap with EIL’s products maintaining highest quality standards. Thus, customers have taken to ARBL’s products well and, thereby, led ARBL to be so consistent. On the dominant telecom business, it withstood the challenging times from FY10-13 by maintaining pricing discipline for its high quality products, thereby aiding profitable albeit relatively slower growth. Thus, the overall focus on market share gains and financials has led ARBL to grow its PAT margins from 8.4% (FY11) to 10.6% (FY14). Capacity to be in place, poised to grow profitably across segments ARBL launched an expansion plan of ~| 750 crore that is being commissioned. It also has ventured into tubular expansion of 1.4 million units worth ~| 500 crore. Automotive capacity would get raised to ~18 million units while EIL could be at ~34-35 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 FY16E. ARBL is also witnessing strong growth in the telecom/UPS space, which contribute ~35% of overall revenues. Thus, in the coming years, both automotive and industrial segments would aid demand growth as we enter both an auto demand/infrastructure revival. Valuations racing too fast though it remains a quality India recovery play ARBL’s performance has continued to be impressive even as the industry leader struggles with consistency in 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. ARBL is a great proxy play on the domestic automotive recovery but at ~22x FY17E EPS we believe valuations are factoring lot of positives. Thus, we downgrade the stock to HOLD with an upgraded target price of | 932, valuing the stock at 22x FY17E. We advise investors to look for better entry points for the stock.

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http://content.icicidirect.com/mailimages/IDirect_AmaraRaja_Q3FY15.pdf