Amara Raja Batteries (AMARAJ) 790

Transcription

1 Result Update Rating matrix Rating : Hold Target : 830 Target Period : 12 months Potential Upside : 5% What s Changed? Target Changed from 870 to 830 EPS FY18E Changed from 27.5 to 28.4 EPS FY19E Changed from 37.6 to 36 Rating Unchanged Quarterly Performance Q2FY18 Q2FY17 YoY (%) Q1FY18 QoQ (%) Revenue 1, , , EBITDA EBITDA (%) bps bps PAT Key Financials Crore FY16 FY17 FY18E FY19E Net Sales 4,618 5,317 5,950 6,878 EBITDA ,101 Net Profit EPS ( ) Valuation summary FY16 FY17 FY18E FY19E P/E (x) Target P/E (x) EV / EBITDA(x) P/BV (x) RoNW (%) RoCE (%) Stock data Particular Amount Market Capitalization Crore Total Debt (FY17) 69.0 Cash and Investments (FY17) EV (FY17) Crore 52 week H/L ( ) 1009 / 665 Equity capital ( crore) 17.1 Face value ( ) 1 Price performance (%) 1M 3M 6M 12M Amara Raja Batteries Ltd Exide Industries Ltd Research Analyst Nishit Zota nishit.zota@icicisecurities.com Vidrum Mehta vidrum.mehta@icicisecurities.com Top-line disappoints; margin surprises November 13, 2017 Amara Raja Batteries (AMARAJ) 790 Amara Raja Batteries (ARBL) revenue came in at 1,428 crore (up 7.1% YoY). According to the management, the automotive segment (2-W+ 4-W) showed impressive double digit growth. The Industrial segment was impacted after the telecom space which continues to witness significant growth challenges mainly due to disruption in the space. The demand for batteries in the Telecom sector declined Q2FY18, thereby impacting the overall growth EBITDA margin contracted 55bps YoY, however expanded 380bps QoQ to 16.7%. Despite increase in key raw material prices (average lead prices up 20% YoY & 8% QoQ to 151/kg) its gross margin expanded by 404bps QoQ. ARBL has been able to offset the input price pressure by a mix of cost reduction strategies & pricing actions Subsequently, reported PAT declined 6.7% YoY to 127 crore Going forward management expects double digit growth (13%-15%) revenue growth largely driven by the automotive segment while expects sustainable long term margin to be in the range of 14%-16% ARBL - Well placed in duopoly battery business The domestic industry is a duopoly in nature with, Exide (EIL) & ARBL controlling ~90% of the organised market. The implementation of GST has improved their cost competitiveness vis-à-vis unorganised players (~40% share) which will help them in gaining market share, going forward. We believe ARBL has been consistent in its performance and been able to gain on all fronts (from market share to financials). In the OEM segment, ARBL currently has 12% & 35% market share in 2-W & 4- W, respectively. In the replacement segment, it holds 32% & 30% in the 2- W & 4-W, respectively. ARBL not only has a strong foothold in the replacement market (through a pan-india network) but is also increasing its OEMs presence. In the industrial segment, ARBL has been among the preferred vendor in a wide spectrum of industries like telecom, power, railways & others. However, disruption in telecom space resulted in revenue & margin erosion for telecom operators putting pressure on tower companies to drive cost efficiencies thereby impacting ARBL. Capacity expansion on track = to cater to rising demand! ARBL is increasing its 2-W battery capacity, from 11 million units (FY17) to 25 mn unit p.a. by FY20. First phase would take its 2-W capacity to 15 mn pa by FY18E. In 4-W space, ARBL added capacity of 2.25 mn pa in FY16 taking total capacity to 10.5 mn pa. The capacity expansion is to cater to rising demand & is likely to drive its next phase of growth. Price hikes + cost reduction strategies = support EBITDA margin The management earlier had indicated that the increase in lead price had resulted in cost challenges. However, the same is addressed by pricing action (hiked prices 6-7 times over the past 12 months) & cost reduction strategies, which is evident in Q2FY18 where the company ehibited gross margin expansion of 404bps QoQ thereby driving overall margins. The management has maintained its long term margin guidance of 14%-16%. Valuations stretched; maintain HOLD ARBL s key differentiator is the fact that it has consistently been able to grow its presence in the battery business across markets. Even though, ARBL is working on the lithium-ion battery front, the uncertainty in the automotive battery space, considering newer players (including OEMs setting up the battery plant) could impact ARBL performance going forward. Hence we maintain our HOLD recommendation on the stock with target of 830, valuing at 23x FY19E EPS of 36/share. ICICI Securities Ltd Retail Equity Research

2 Variance analysis- Standalone Q2FY18 Q2Y18E Q2FY17 YoY (%) Q1FY18 QoQ (%) Comments Total Operating Income The automotive segment (2-W+ 4-W) showed impressive growth in Q2FY18. The Industrial segment also reported good volume growth, except the telecom space which continues to witness disruptive changes. The demand for batteries in the Telecom sector declined in Q2FY18 Raw Material Expenses Despite increase in its key raw material prices (average lead prices up increased 20% YoY & 8% QoQ to 151/kg) its gross margin expanded by 404bps QoQ. This is mainly after ARBL has been able to offset the input price pressure by a mix of cost management strategies and pricing actions Employee Expenses Other Expenses EBITDA EBITDA Margin (%) bps bps Other Income Depreciation Interest Tax Reported PAT Higher than expected margin further lifted the PAT EPS ( ) Key Metrics Sales ( crore) 1,428 1,532 1, , RM cost (% to net sales) bps bps Gross margin for the company expanded QoQ basis Other expenses (% to net sales) bps bps Employee Expense (% to net sales) bps bps Change in estimates FY18E FY19E ( Crore) Old New % Change Old New % Change Comments Revenue 6,017 5, ,005 6, We have revised our revenue estimate lower primarily due to subdued demand from the industrial battery segment (disruption in telecom sector) EBITDA ,150 1, Stronger margin in Q2FY18; has resulted us to revise FY18E margin higher. While FY19E margin are largely in line with management guidance of 14%-16% EBITDA Margin (%) bps bps PAT Downward revision in revenue & margin estimates is resulting into lower profitability EPS ( ) Assumptions Current Earlier Comments Units (mn) FY16 FY17 FY18E FY19E FY18E FY19E Automotive volumes Automotive volumes is marginally revised lower Industrial volumes Disruption in telecom sector is likely to impact ARBL's industrial segment going forward. Management is also concerned on the slowing demand from the industrial segment ICICI Securities Ltd Retail Equity Research Page 2

3 Key conference call takeaways Going forward management expects double digit growth (13%- 15%) revenue growth largely driven by the automotive segment while expects sustainable long term margin to be in the range of 14%-16% The automotive segment (2-W+ 4-W) showed impressive double digit growth. The Industrial segment reported decent volume growth, except the telecom space which continues to witness significant growth challenges mainly due to disruption in the space. The demand for batteries in the Telecom sector declined Q2FY18, thereby impacting the overall growth EBITDA margin expanded 380bps QoQ to 16.7% mainly due to 1) better product mix, 2) production efficiencies and 3) pricing action. ARBL is expanding its 2-W capacity by ~4mn units in Q4FY18 taking the overall 2-W capacity to 15mn units. It is planning to add the 2 nd phase of expansion for 4-W of 2.2mn units & the 3 rd phase of 2.25mn units is expected to come towards end of FY19E. Capex guidance for FY18E stands at 500 crore. According to management, the lead price is expected to remain in the range of $2,400 to $2,500/tonne. Further the average procurement cost of lead for ARBL stands at $2170/tonne in Q2FY18 as against $1750/tonne in Q2FY17. ARBL has taken price hikes (6-7 times) in the past 12 months, while the average price hike for Q3FY18 stands in the range of 3%-5%. According to the management, 2/3 rd (66%) of its business has price escalation/variation clause while the remaining of 1/3 rd (33%) is exposed to lead price volatility risk. ARBL s 4-W market share stands at 38% & 32% for OEM and replacement respectively while for 2-W its market share stands at 15% & 20% for OEM and replacement respectively. The company is working on lithium-ion battery and is considering the same as one of the priority area of work. According to the management, the company will make the right move at the right time on the lithium-ion battery solutions. The lithium ion-battery is 3-4 times costlier vis-à-vis lead acid battery; however has higher lifecycle and economics advantage compared to lead acid battery. ICICI Securities Ltd Retail Equity Research Page 3

4 ( crore) Company Analysis New capacity to drive next phase of growth! ARBL s automotive and industrial revenue mix was at 60% & 40%, respectively. Within the automotive space, replacement segment accounts for ~46% of its revenue while OEM accounts for ~14% of its revenue. ARBL has embarked on a strong capacity addition programme in the next four years, which would aid new market growth. Capacity, on the automotive side, is expected to go up to ~36 million (mn) units by FY20 from ~22 mn units in FY17 on the automotive side. Its 2-W capacity is expected to increase from ~11 mn units in FY17 to 15 mn units in FY18E and further to 25 mn units in FY20. Its 4-W capacity increased from 8.25 mn units in FY16 to 10.5 mn units in FY17. On the industrial side, large VRLA capacity expanded to ~1300 million AmpHr in FY17 (with utilisation level 95%) from 760 million AmpHr in FY13. Further ~50% of the industrial revenue is derived from the telecom segment which currently is facing major disruption impacting the demand. The gradual demand recovery in the industrial segment is likely to aid growth, going forward. We expect revenues to grow at ~14% CAGR in FY17-19E to 6,878 crore driven by increasing share of demand from the auto OEM side as well as a gradual pick-up in the replacement battery segment (due to ARBL s strong position in the organised market as well shortening life cycle). ARBL benefits from strong brand equity and distribution network and now has >30,000 touch points (retailers) on the automotive side and ~100 aqua channel partners on the industrial side. Exhibit 1: We build in revenue growth at ~13% CAGR in FY17-19E 8,000 7,000 6,000 5,000 4,000 3,000 2,364 2,961 3, ,618 5,317 5,950 6,878 2,000 1,000 0 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E Price hikes + cost strategies = to support EBITDA margins! The duopoly nature of the industry lends decent pricing power to ARBL vis-à-vis EIL. Over the past 12 months, lead price has been more volatile, impacting ARBL s gross margins, which fell 574 bps YoY & 286 bps QoQ in Q4FY17 & 380 bps YoY & 203 bps QoQ in Q1FY18 thereby impacting EBITDA margins. The management has indicated that the increase in lead price has resulted into cost challenges. However, the same is addressed by pricing action (ARBL has hiked prices 6-7 times over the past 12 months) & cost effective strategies & is evident in the Q2FY18 result which posted gross margin expansion of 404bps QoQ thereby driving the overall margins. The smelting contribution for ARBL is ~15%, and will also provide some cushion going forward. Hence, we expect EBITDA to increase to ~ 1101 crore, assuming margins of 16% in FY19E. ICICI Securities Ltd Retail Equity Research Page 4

5 ( crore) 1101 (%) Exhibit 2: EBITDA margins to rise steadily 1, ,200 1, FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E 10 EBITDA - LHS Margin (%) - RHS Profitability to remain intact in FY19E ARBL remains a cash generating franchise, which has an annual CFO in excess of 753 crore (FY19E). PAT is expected to grow to 615 crore at ~13% CAGR (FY17-19E). Exhibit 3: Profit to continue with strong growth momentum! FY13 FY14 FY15 FY16 FY17 FY18E FY19E 0 PAT ( crore) PAT margin (%) (RHS) Source: Company press release, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 5

6 (%) Return ratios to remain healthy! Return ratios are expected to remain healthy with rising profitability. Return ratios witnessed a decline in FY11 primarily due to the significant investment to boost the manufacturing capacity. However, post the same, ratios moved higher. With new capacity coming on stream, the initial lower utilisation level is likely to result in higher overhead cost or start-up cost. Thus, it is likely to moderate return ratios in FY18, though is expected to recover from FY19E onwards. We expect RoNW & RoCE of ~18% & ~25%, respectively, for FY19E. Exhibit 4: Strong return ratios FY13 FY14 FY15 FY16 FY17 FY18E FY19E RoCE RoNW ICICI Securities Ltd Retail Equity Research Page 6

7 Outlook and valuation ARBL s performance has continued to be impressive even as the industry leader struggles with consistency in profitability. ARBL has put up a consistent performance; strong return ratio (~18% RoE, ~25% RoCE), good earnings visibility and a strong balance sheet (net debt negative). Even though, ARBL is working on the lithium-ion battery front, the uncertainty in the automotive battery space, considering newer players (including OEMs setting up the battery plant) could impact ARBL performance going forward. Hence we maintain HOLD recommendation on the stock with target of 830, valuing at 23x FY19E EPS of 36/share Exhibit 5: Valuation Revenues Growth EPS Growth PE EV/EBITDA RoNW RoCE ( cr) (%) ( ) (%) (x) (x) (%) (%) FY16 4, FY17E 5, (2.7) FY18E 5, FY19E 6, ICICI Securities Ltd Retail Equity Research Page 7

8 (%) ( ) Recommendation history vs. consensus 1,200 1,100 1, Nov-15 Jan-16 Apr-16 Jun-16 Aug-16 Nov-16 Jan-17 Apr-17 Jun-17 Aug Nov-17 Price Idirect target Consensus Target Mean % Consensus with BUY Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Apr-09 May-09 Nov-10 Mar-11 Mar-12 Aug-12 Mar-12 Mar-13 Oct-13 May-14 Nov-14 Apr-15 May-15 Event ARBL reports strong EBITDA margin jump of 500 bps to ~20% for FY10 results The company undertakes new capacity expansion drive in the industrial battery side both of large VRLA and medium VRLA Receives best supply chain leader in the auto components business The company is able to gain on EIL's loss of market share in replacement market and increases replacement share by 6% QoQ The increase in costs of lead causes decline in gross margins for the complete battery industry The stock gets re-rated vis-à-vis EIL due to consistency of earnings as EIL's financial performance deteriorates ARBL reports strong EBITDA margins performance The company announces next growth capex of 700 crore across various segments ARBL commissions the new two wheeler capacity aiding volume growth Surprises on the negative side on the EBITDA margins front ARBL announces new capacity expansion plan of 500 crore for tubular battery with 1.4 million unit capacity Company commissions 4-W battery plant at Chittoor with installed capacity at 2.25 million p.a. taking total capacity to 8.25 million per annum Clocks highest ever revenue & PAT in FY15 Top 10 Shareholders Rank Name Latest Filing Date % O/S Position (m) Change (m) 1 Johnson Controls Mauritius Pvt. Ltd. 30-Sep RNGalla Family Pvt. Ltd. 30-Sep Nalanda Capital Pte Ltd 30-Sep Franklin Templeton Asset Management (India) Pvt. Ltd. 30-Jun ICICI Prudential Asset Management Co. Ltd. 30-Sep Amara Raja Group 30-Sep Reliance Nippon Life Asset Management Limited 30-Sep Wasatch Advisors, Inc. 30-Jun J O Hambro Capital Management Limited 30-Jun Baron Capital Management, Inc. 30-Sep Source: Reuters, ICICIdirect.com Research Shareholding Pattern (in %) Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Promoter FII DII Others Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares Nalanda Capital Pte Ltd Galla (Jayadev) Reliance Nippon Life Asset Management Limited Galla (Ramachandra N) J O Hambro Capital Management Limited Gourineni (Ramadevi) Baron Capital Management, Inc Galla (Amara Kumari) Kotak Mahindra Asset Management Company Ltd Franklin Advisers, Inc Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 8

9 Financial summary Profit and loss statement Crore (Year-end March) FY16 FY17 FY18E FY19E Total operating Income 4,618 5,317 5,950 6,878 Growth (%) Raw Material Expenses 2, , , ,600.8 Employee Expenses Other Expenses Total Operating Expenditure 3, , , ,776.9 EBITDA ,101 Growth (%) Depreciation Interest Exceptional Items PBT Total Tax PAT Growth (%) EPS ( ) Cash flow statement Crore (Year-end March) FY16 FY17 FY18E FY19E Profit after Tax Add: Depreciation (Inc)/dec in Current Assets Inc/(dec) in CL and Provisions CF from operating activities (Inc)/dec in Investments (Inc)/dec in Fixed Assets Others CF from investing activities (522.2) (484.8) (512.2) (439.2) Issue/(Buy back) of Equity Inc/(dec) in loan funds Dividend paid & dividend tax CF from financing activities (89.0) (83.9) (92.5) (102.8) Net Cash flow Opening Cash Closing Cash Balance sheet Crore (Year-end March) FY16 FY17 FY18E FY19E Liabilities Equity Capital Reserve and Surplus 2, , , ,481.1 Total Shareholders funds 2, , , ,498.2 Total Debt Deferred Tax Liability Total Liabilities 2, , , ,728.6 Assets Gross Block 1, , , ,897.8 Less: Acc Depreciation Net Block 1, , , ,092.3 Capital WIP Total Fixed Assets 1, , , ,197.4 Investments Inventory Debtors Loans and Advances Other Current Assets Cash Total Current Assets 1, , , ,299.4 Creditors Provisions Other current liabilities Total Current Liabilities Net Current Assets , ,384.5 Other Non-Current Assets Application of Funds 2, , , ,728.6 Key ratios (Year-end March) FY16 FY17 FY18E FY19E Per share data ( ) EPS Cash EPS BV DPS Cash Per Share Operating Ratios (%) EBITDA Margin PBT / Net sales PAT Margin Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/Equity Current Ratio Quick Ratio ICICI Securities Ltd Retail Equity Research Page 9

10 ICICIdirect.com coverage universe (Auto & Auto Ancillary) CMP M Cap EPS ( ) P/E (x) EV/EBITDA (x) RoCE (%) RoE (%) Sector / Company ( ) TP( ) Rating ( Cr) FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E Amara Raja (AMARAJ) Hold Apollo Tyre (APOTYR) Buy Ashok Leyland (ASHLEY) Buy Bajaj Auto (BAAUTO) Hold Balkrishna Ind. (BALIND) Buy Bharat Forge (BHAFOR) Buy Bosch (MICO) Hold Eicher Motors (EICMOT) Buy Exide Industries (EXIIND) Buy Hero Moto (HERHON) Buy JK Tyre & Ind (JKIND) Hold Mahindra CIE (MAHAUT) Buy Maruti Suzuki (MARUTI) Buy Motherson (MOTSUM) Hold Tata Motors (TELCO) Buy Wabco India (WABTVS) Hold ICICI Securities Ltd Retail Equity Research Page 10

11 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 11

12 ANALYST CERTIFICATION We /I, Nishit Zota, MBA & Vidrum Mehta, MBA Research Analyst, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. ICICI Securities Limited is a Sebi registered Research Analyst having registration no. 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