Over the last few years, misfortunes faced by market leader Exide Industries in terms of capacity constraints, market share losses and shrinking margins turned into an opportunity for Amara Raja Batteries. The stock witnessed a strong re-rating in this period and now trades at about 32 times its trailing 12-month earnings, compared with about 11 times five years ago.
The up-move is not without support from the numbers. Even as Exide struggled with dip in profits, Amara Raja’s profits have grown 11-45 per cent each year since 2011-12.
With revenues divided almost equally between the auto and industrial batteries segment, a slowdown in new vehicle sales in 2013 and 2014 saw the company up the ante in the replacement market for batteries, which brings higher margins. With auto sales somewhat recovering in the last year or so, the company’s efforts to make further inroads into supplies to OEMs ( auto manufacturers) has also helped.
Similarly, in the industrial segment, as demand for telecom batteries witnessed a lull in this period, an uptick in UPS and home inverter batteries kept the cash registers ringing.
Softer lead prices also helped the company expand operating margins in the last two years to 16-17 per cent levels compared with 13-14 per cent earlier. Even if the benefits of lower prices of raw material may be scaled down, going forward, prospects remain sound.
Car and bike sales are expected to get a leg-up from factors such as lower borrowing costs, Pay Commission doles and a pick-up in rural demand. Demand for telecom batteries, too, is witnessing a comeback.
The stock has lost about 20 per cent until now from its one-year high of Rs.1,132 (August 2015), taking off some of the froth.
Although still on the higher side, valuations have corrected from its peak of about 40 times.
Given the promising prospects, the stock remains a good bet.