Market volatility has seen the Amara Raja Batteries (ARBL) stock drop 25 per cent from its one-year high of Rs.1,132 recorded in end-August 2015. With valuation down to more comfortable levels at present and prospects still intact, the fall is an attractive entry point for long-term investors.
ARBL remains the better bet among listed battery makers, with Exide still battling the bruises of loss in market share and low profitability. Sanguine outlook for both automotive and telecom batteries and stable prices of lead, the key raw material, also buttress the case for investment in ARBL.
Historically, ARBL traded at a discount to Exide, given the latter’s market leadership position. But with the organised battery market being a virtual duopoly between these two players, the troubles faced by Exide turned into benefits for ARBL, leading to a re-rating of the latter’s stock in the last one year.
ARBL’s valuation now is at 32 times its trailing 12-month earnings, compared to Exide’s 22 times. While this is not cheap per se, what’s comforting is that while profit growth has remained strong in the last few quarters, the correction in the stock price has brought the valuation down from the peak of around 40 times ARBL traded at, earlier this year. Investors with a high risk appetite can take exposure to the stock.
Autos gaining speed
ARBL derives about 55 per cent of its revenue from the sale of automotive batteries and supplies toMaruti Suzuki, Hyundai, Tata Motors and Royal Enfield among others.
After the slowdown that affected the auto industry in the last two-three years, domestic car sales have inched up over 11 per cent so far in 2015-16, while sale of heavy trucks and buses have galloped to show a 31 per cent growth.
An economy on the mend, along with low inflation and falling interest rates should help sustain the upturn in the next one to two years. Irrespective of new vehicle sales, battery manufacturers derive a good portion of revenues from secondary market demand for replacing worn out batteries in existing vehicles. With auto sales gaining speed now, replacement demand will also be strong two-three years down the line.
For the first six months of this fiscal, ARBL’s direct sales to auto manufacturers has grown about 17 per cent year-on-year, while replacement sales have grown 23 per cent.
Upbeat on telecom and UPS
ARBL has also seen its market share in the replacement segment increase to 27-28 per cent in the first half of this fiscal from about 25 per cent for the year ended March 2015 (20 per cent for Exide). This augurs well for margins as battery makers typically enjoy greater pricing power in the replacement segment.
The company is also positive on demand for telecom batteries, which accounts for about half the revenue of the industrial batteries division.
Telecom players have embarked on adding towers after a lull, thanks to the need for improved voice quality and increasing mobile data usage. ARBL serves almost every company in the telecom space.. Demand in the UPS segment is expected to pick up in the coming quarters, thanks to initiatives, such as Smart Cities and Digital India.
ARBL is setting up manufacturing capacities for home inverter batteries, which was earlier a traded segment. Demand in this segment tends to be erratic based on power shortage situation. But in-house manufacturing should help on the margin front.
For the quarter ended September 2015, net sales grew 9.2 per cent over the same period last year to ₹1,158 crore. Net profit grew 22.2 per cent to Rs.122.6 crore. Operating margin was 17.2 per cent compared with 16.9 per cent a year ago. Benign input costs have helped the company clock 16-17 per cent margins in the recent quarters. Lead prices are not expected to move up in a hurry, thanks to weak demand from China. Hence, high margins may continue.