Know Your Company-Amara Raja Batteries-VRK100-12Sep2012

Rama Krishna Vadlamudi, HYDERABAD   12 September 2012
www.ramakrishnavadlamudi.blogspot.com

When I first analyzed the stock of Amara Raja Batteries three years back (18 September 2009), the stock price of the company was quoting at Rs 140 and the Sensex was around 16,700. In the last three years, the Sensex barely moved with a return of less than eight per cent, while the company’s price has given a phenomenal return of 175 per cent – that is, a compounded annual growth rate of 40 per cent.

After such a tremendous gain, is the company’s valuation gone too far ahead of its fundamentals or is the current valuation right for accumulating the stock? Find out:.

Promoters and Shareholding Pattern:

The total promoter shareholding in Amara Raja Batteries Limited is 52 per cent as at the end of 30 June 2012. Indian promoters, Galla family, hold 20.5 per cent and another 31.5 per cent is held by a foreign promoter company, Johnson Controls. Johnson Controls is a leading US player in the world with superior technology in batteries. Foreign Institutional Investors (FIIs) hold around six per cent and Indian mutual funds hold 19 per cent stake as on 30 June 2012.

               

Pledge of Shares by Promoters:

Out of Indian promoters’ share of 20.5 per cent of the total paid-up equity, the Indian promoters have pledged 16.3 per cent of their holding or 3.34 per cent of the total paid-up equity capital.

Business Model:

The company gets its revenues from two segments, namely, industrial and automotive battery divisions. In the industrial segment, the company is the largest supplier of batteries to Telecom and UPS sectors and to Indian Railways. Its brands are ‘Powerstack’ and ‘Quanta.’

The company is the second largest player in the automotive battery business in India. The major OEM (original equipment manufacturer) customers include Ford, Maruti Suzuki, Hyundia, Honda, Tata Motors, and TAFE Tractors. Its powerful brand in this category is ‘Amaron.’ The unorganised sector  accounts  for a large proportion of the automotive battery segment.

Capacity Addition:

The company proposes to invest an amount of Rs 190 crore during the next 12 months for augmenting its capacity. The funding, the company hopes, will be through internal accruals.

Retail Network and Plant:

The company has got a network of 274 Amaron franchisees and 18,000 Amaron retailers and 900+ PowerZone retail network for rural and semi-urban areas.

The company’s manufacturing facility is located near Tirupati, Andhra Pradesh, India.

Growth Drivers for the Company:

ü  The company’s ever-increasing distribution network across the country

ü  Reserve Bank of India is promoting white-label ATMs, which may increase demand for batteries. Banks too are fast expanding their ATM network.

ü  Government of India’s initiatives to increase e-governance and broadband connectivity in the country

ü  3G and 4G rollout by Indian telecom operators is likely to increase the demand for batteries

ü  Replacement demand for telecom operators

ü  Improving market share in the automotive battery business by expanding Amaron franchisee networks and after-sales service

ü  Growing IT and ITeS sectors and rural tele-density

ü  Mounting  power  deficit, enhancing the need for  back-up  batteries  in critical equipment and processes

ü  Household sector’s usage of batteries is also going up due to severe power outages

Risks associated with the company:

Slowdown in India’s GDP: India’s national income or gross domestic product is showing increasing signs of a serious slowdown. After recording lowest multi-quarter growth rate of 5.3 per cent in January-March 2012 quarter, the real economy expanded by 5.5 per cent during April-June 2012 confirming the fears of a structural decline in GDP in the backdrop of rising fiscal deficit, ballooning current account deficit, elevated inflation, steep depreciation of the rupee, policy inaction from the Government and sovereign debt and economic crisis in the eurozone. India’s falling GDP is likely to adversely impact sales and profit margin of the company.

Raw  material procurement: The key input and major cost element – more than 60 per cent – in battery manufacture  is  lead  and lead alloys. Any rise in lead prices will adversely impact the company’s profitability. Commodity prices are vulnerable to global demand and supply.

Forex losses on account of net forex outgo: The foreign exchange gain during 2011-12 is Rs 12.4 crore on account of cost of raw materials, revenues and others. This may turn adverse in the next few quarters depending on rupee movement and company’s hedges. Net foreign exchange outgo during 2011-12 was Rs 610 crore due mainly due to procurement of raw materials from abroad.

Cash Flow:

Net cash inflow from operating activities for the year 2011-12 is Rs 296 crore, net cash outflow from investing activities is Rs 70 crore and net cash outflow from financing activities is Rs 43 crore. The cash and cash equivalents as at the close of 31 March 2012 are Rs 229 crore.

The company has been reducing its debt using the comfortable cash flows. The total debt of the company is Rs 86 crore (31 March 2012) and its debt-equity ratio is at a very comfortable 0.10.  

Competition:

Exide Industries is the leading player in batteries market in India. The second largest player is Amara Raja Batteries. Exide is a fully integrated player with some backward integration into smelters. Exide enjoys better market share and brand power compared to Amara Raja Batteries.

Share Price Information:

Amara Raja Batteries Limited is proposing to undertake a stock split, by sub-dividing the company’s equity share of face of Rs 2/- into two equity shares of Re 1/- each. The record date is 26 September 2012 and the Ex-date is 25 September 2012. The 52-week high of the stock price is Rs 403.80 (16 August 2012) and the 52-week low is Rs 190 (19 December 2011).

Latest Quarterly Results:

The company recorded a net profit of Rs 76 crores, showing a growth of 95 per cent compared to the previous quarter of last year; while the revenues are at Rs 694 crore, indicating a growth of 32 per cent. The company has been showing good and consistent growth in sales and net profit during the last four quarters.

Valuation and Prospects:

The current market price is Rs 383 per share at the close of 12Sep2012. In the last three months, the company’s stock has given a return of around 25 per cent. Its current market cap is Rs 3,270 crore. The earning per share (trailing twelve months) is Rs 29.5 and the price-earnings ratio works out to 13; whereas at the book value of Rs 96.4 per share, the price-book value ratio works out 3.97. The company paid a dividend of Rs 3.78 per share in August 2012, which works out to a dividend yield of around one per cent.

The comparable data for its main competitor, Exide Industries, are as follows: P/E ratio of 25.8, and a P/B ratio of 4.47. Prima facie, the data indicates the valuation of Amara Raja Batteries is cheaper compared to Exide Industries. However, Exide Industries’ premium valuation stems from the fact that its market share and brand value are much bigger compared to that of Amara Raja Batteries. That way the higher premium for Exide Industries is justified.

What should investors do in such circumstances? The financial position of Amara Raja Industries as evidenced by its balance sheet, profit and loss account and cash flow statement is very strong. The company’s business model is sound and its track record in sales and net profit for the last four years indicates that the company has been gaining market share through introduction of new products and wider reach to new and untapped customer segments. The booming automotive industry in India also has helped the company.

While the past has been good, the future appears to be tricky considering the fact that Indian economy has decelerated substantially in the past two quarters. The slowing economy will have negative impact on the automotive industry as well as the company. In addition, rating agencies like, Standard and Poor’s, have put the outlook on India as negative and they further cautioned that they may downgrade India’s country owing to ballooning fiscal deficit, steep rupee depreciation and inflation higher than the comfort zone of the Reserve Bank of India and the Government of India. If and when the threatened downgrade happens, it will have negative repercussions on Indian stock market.

The company’s stock price will continue to do well in future provided the company is able to increase its market share and if and when the economy starts to expand at higher growth rates of 6.5 per cent or 7.5 per cent. Considering the fact the Indian economy’s growth path is not showing any signs of sudden acceleration, investors are better off if they wait for some price correction in Amara Raja Batteries’ equity shares. My sense is that investors can pick up the stock in the range of Rs 310 and Rs 340 provided the company continues to maintain its present position in the battery industry.

My previous article on Amara Raja Batteries can be reached at:

http://ramakrishnavadlamudi.blogspot.in/2009/12/amara-raja-batteries-snapshot-vrk100.html

Disclosure: The author does not hold any shares in the company, nor in Exide Industries.

Disclaimer: This should not be construed as a recommendation by the author. The author has a vested interest in the general stock market going up. The views of the author are personal and he changes his views on the market very quickly depending on the then current situation. Readers or investors must consult their certified financial advisor before taking any decision on their equity investments and the investment should be in line with their risk profile & risk appetite and their general market perception.

Sources: NSE, BSE, company’s annual report, etc.