Amara Raja Batteries Limited

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1 Amara Raja Batteries Limited BUY CMP: Rs Date: December 11 th, Key Ratios: Particulars FY09 (12 m) FY10E (12 m) FY11E (12 m) OPM (%) NPM (%) ROE (%) ROCE (%) P/BV(x) P/E(x) EV/EBDITA(x) Debt equity ratio Key Data: Sector Automobile Ancillary Face Value Rs wk. High/Low Rs /30.50 Volume (2 wk V.S.R. Sastry Vice President Equity Research Desk vsrsastry@firstcallindiaequity.com Target price: Rs Market Cap. : Rs mn. SYNOPSIS Amara Raja Batteries Ltd. (ARBL) is one of the largest players in the Indian storage battery industry, manufacturing batteries for both industrial and automotive applications. The company supplies automotive batteries to players like Maruti and Tata Motors. They find application in sectors like railways, UPS, defence, oil and gas, and power control. The company has completed Medium VRLA battery capacity expansion from 1.20 million units to 1.80 million units on schedule. The company is planning to incur a capex of Rs. 90 crores in 2010 through its internal accruals. The company has entered into a tie-up with Maruti Suzuki. Along with the largest car manufacturer, it has launched the cobranded replacement battery under 'Amaron MGB' brand. The company is expecting sales from its industrial batteries division to touch Rs 10 billion in fiscal year The company s top line and bottom line are expected to grow at a CAGR of 14% and 29% over FY08 to FY11E. Share Holding Pattern: Dr. V.V.L.N. Sastry Ph.D. Chief Research Officer drsastry@firstcallindia.com Firstcall India Equity Advisors Pvt Ltd 1

2 Table of Content Content Page No. 1. Investment Highlights Peer Group Comparison Key Concerns Financials Charts & Graph Outlook and Conclusion Industry Overview 12 Firstcall India Equity Advisors Pvt Ltd 2

3 Investment Highlights Result Updates (Q2FY10) For the second quarter, the top line of the company increased 6%YoY and stood at Rs mn against Rs mn of the same period of the last year. The bottom line of the company for the quarter stood at Rs mn from Rs mn of the corresponding period of the previous year i.e., an increase of 155%YoY. EPS of the company for the quarter stood at Rs.5.61 for equity share of Rs.2.00 each. Firstcall India Equity Advisors Pvt Ltd 3

4 Expenditure for the quarter stood at Rs mn, which is around 9% lower than the corresponding period of the previous year. Raw material cost of the company for the quarter accounts for 59 % of the sales of the company and stood at Rs mn from Rs mn of the corresponding period of the previous year i.e., a decrease of 2%YoY. Employee cost stood at Rs mn from Rs mn. and accounts for 4% of the revenue of the company for the quarter i.e., an increase of 36%YoY. OPM and NPM for the quarter stood at 24% and 13% respectively from 12% and 6% respectively of the same period of the last year. Firstcall India Equity Advisors Pvt Ltd 4

5 The Industrial Battery business has shown a steady growth in Q2. The UPS battery markets continue to remain robust. The company has completed Medium VRLA battery capacity expansion from 1.20 million units to 1.80 million units on schedule, which will provide growth and help in garnering additional market share going forward. Telecom market potential in near future is influenced by trends in infrastructure sharing, roll out of rural network and implementation of GSM projects by new licensees. Growth in automotive OE business tracked the strong revival in passenger vehicle demand. The commercial vehicle segment has also begun to look up. The aftermarket continues to grow in both the formats of AMARON and POWERZONETM. In the space of 2-wheeler battery market, AMARON ProbikeRiderTM has gained momentum and further capacity addition is on the anvil. Based on buoyant industry growth forecast, automotive battery business is expected to be on a strong growth path. Capex plan The company is planning to incur a capex of Rs. 90 crores in 2010 through its internal accruals. The company will be investing Rs. 50 crores in the UPS segment and Rs. 20 crores in the Motor cycle segment. The rest of it will be used for the industrial segment. ARBL is not looking at expanding the capacity in the automotive batteries segment in the near future. Amara Raja expects industrial batteries sales to touch Rs 10bn by FY10 Firstcall India Equity Advisors Pvt Ltd 5

6 Amara Raja Batteries is expecting sales from its industrial batteries division to touch Rs 10 billion in fiscal year By fiscal year 2010, the company`s revenue from industrial segment will account for more than half of total sales on the back of capacity addition. The company said that it saw industrial batteries sales in the current fiscal at about Rs 7.5 billion. Amara Raja ties up with Maruti Suzuki The company has entered into a tie-up with Maruti Suzuki. Along with the largest car manufacturer, it has launched the co-branded replacement battery under 'Amaron MGB' brand. This is aimed at capitalizing on the Amaron brand, which has been an OE fitment in the automotive battery segment for most models of passenger cars from the Maruti stable. The tie-up has made 'Amaron' as the brand endorsed by Maruti Suzuki as a replacement battery. Amaron MGB will now be an addition to Maruti Suzuki's existing array of genuine spares offerings. Amaron MGB now presents customers with the dual advantage of Amara Raja's finest battery technology and a wide availability through Maruti Suzuki's largest network of 3,000 plus authorized outlets across the length and breadth of the country. Peer Group Comparison Name of the company CMP(Rs.) (As on Dec 11 th,2009 ) Market Cap. (Rs. Mn.) EPS (Rs.) P/E (x) P/BV (x) Dividend (%) (FY08) Amara raja batteries ltd Exide industries Bosch Firstcall India Equity Advisors Pvt Ltd 6

7 Motherson Sumi Systems Amtek Auto Key Concerns Adverse Govt. policies Economic slow down. Highly competition Financials Results Update 12 months ended Profit and Loss A/C (Standalone): Value(Rs in million) FY08A FY09A FY10E FY11E Description 12m 12m 12m 12m Net Sales Other Income Total Income Expenditure Operating Profit Interest Firstcall India Equity Advisors Pvt Ltd 7

8 Gross Profit Depreciation Profit before Tax Tax Net Profit Equity Capital Reserves Face Value Total No. of Shares EPS Quarterly ended Profit and Loss A/C (Standalone): Value(Rs. in million) 31-Mar Jun Sep Dec-09E Description 3m 3m 3m 3m Net Sales Other Income Total Income Expenditure Operating Profit Interest Firstcall India Equity Advisors Pvt Ltd 8

9 Gross Profit Depreciation Profit before Tax Tax Net Profit Equity Capital Face Value Total No. of Shares EPS Charts Net sales & PAT Firstcall India Equity Advisors Pvt Ltd 9

10 P/E Ratio (x) P/BV (X) Firstcall India Equity Advisors Pvt Ltd 10

11 EV/EBITDA(X) 1 Year Comparative Graph Firstcall India Equity Advisors Pvt Ltd 11

12 Amara Raja BSE SENSEX Outlook and Conclusion At the market price of Rs , the stock is trading at 7.72 x and 6.85 x for FY10E and FY11E respectively. EPS of the company is expected to be at Rs and Rs for the earnings of FY10E and FY11E respectively. On the basis of EV/EBDITA, the stock trades at 4.74 x and 4.72 x for FY10E and FY11E respectively. The price to book value of the company is expected to be at 2.36 x and 1.75 x for FY10E and FY11E respectively. The company has completed Medium VRLA battery capacity expansion from 1.20 million units to 1.80 million units on schedule, which will provide growth and help in garnering additional market share going forward. The flow in profits was aided by operational efficiencies and cost-savings. The uncertainties in telecom infrastructure rollout and volatility in lead price might pose challenges in the second half of the current financial year. However, the expected double-digit growth in automotive industry and projected GDP growth of more than 6% for the current fiscal are positive signals for the industry. Firstcall India Equity Advisors Pvt Ltd 12

13 The company is planning to incur a capex of Rs. 90 crores in 2010 through its internal accruals. The company will be investing Rs. 50 crores in the UPS segment and Rs. 20 crores in the Motor cycle segment. The rest of it will be used for the industrial segment. ARBL is not looking at expanding the capacity in the automotive batteries segment in the near future. The company has entered into a tie-up with Maruti Suzuki. Along with the largest car manufacturer, it has launched the co-branded replacement battery under 'Amaron MGB' brand. The company is expecting sales from its industrial batteries division to touch Rs 10 billion in fiscal year ARBL batteries support the transmission & distribution networks of Power stations. Increased spending by the government in the power sector will boost demand as government plans a 48% growth in transmission grid growth in the eleventh plan. We recommend BUY for this stock with a target price of Rs for long term. Industry Overview The Indian auto ancillary industry has come a long way since it had its small beginnings in the 1940s. If the evolution of the industry is traced in India, it can be classified into three distinct phases namely: Period prior to the entry of Maruti Udhyog Ltd, Period after the entry of Maruti Udhyog Ltd and Period post Liberalization. The period prior to the entry of Maruti Udhyog Ltd was characterized by small number of auto majors like Hindustan Motors, Premier Automobiles, Telco, Bajaj, Mahindra and Mahindra, low technology and assured business for most of the auto-component manufacturers. The entry of Maruti in the 1980s marked the beginning of the second phase of the industry. The auto ancillary industry in the country really showed a spurt in growth during this period. This period witnessed the emergence of a new generation of auto ancillary manufacturers who were required to meet the stringent quality standards of Maruti s Korean collaborator Suzuki of Japan. The good performance of Maruti resulted in an upswing for the domestic auto Firstcall India Equity Advisors Pvt Ltd 13

14 ancillary industry. It was during this period that auto components from India began to be exported. The entry of foreign automobile manufacturers ranging from Mercedes Benz, Ford, and General Motors to Daewoo following the government liberalizing the foreign investment limits saw the beginning of the third phase of the evolution of the industry. The auto ancillary industry witnessed huge capacity expansions and modernization initiatives in the post liberalization period. Technological collaborations and equity partnerships with world leaders in auto components became a common affair. However, the tough competitive scenario saw a lot of consolidation in the industry and it still continues unabated. In , automobile sales are expected to grow by around 12 per cent in value-terms, driven mainly by favourable demographic trends, anticipated growth recovery in commercial vehicles and robust export growth. Consistent growth and dedication have made the Indian automobile industry the secondlargest tractor and two-wheeler manufacturer in the world. It is also the fifthlargest commercial vehicle manufacturer in the world. It is also the fifth-largest commercial vehicle manufacturer in the world. The Indian automobile market is among the largest in Asia. The key players like Hindustan Motors, Maruti Udyog, Fiat India Private Ltd, Tata Motors, Bajaj Motors, Hero Motors, Ashok Leyland, and Mahindra & Mahindra have been dominating the vehicle industry. A few of the foreign players like Toyota Kirloskar Motor Ltd., Skoda India Private Ltd., Honda Siel Cars India Ltd. have also entered the market and have catered to the customers needs to a large extent. Not only the Indian companies but also the international car manufacturing companies are focusing on compact cars to be delivered in the Indian market at a much smaller price. Moreover, the automobile companies are coming up with financial schemes such as easy EMI repayment systems to boost sales. There have been exhibitions like Auto-expo at Pragati Maidan, New Delhi to share the technological advancements. Besides, there are many new projects coming up in the automobile industry leading to the growth of the sector. The Government of India has liberalized the foreign exchange and equity regulations and has also reduced the tariff on imports, contributing significantly to the growth of the sector. Having firmly established its presence in the Firstcall India Equity Advisors Pvt Ltd 14

15 domestic markets, the Indian automobile sector is now penetrating the international arena. Vehicle exports from India are at their highest levels. The leaders of the Indian automobile sector, such as Tate Motors, Maruti and Mahindra and Mahindra are leading the exports to Europe, Middle East and African and Asian markets. The Ministry of Heavy Industries has released the Automotive Plan , with the motive of making India the most popular manufacturing hub for automobiles and its components in Asia. The plan focuses on the removal of all the bottlenecks that are inhibiting its growth in the domestic as well as international arena. Key points: Supply capacity. Demand : The Indian automobile market has some amount of excess : Largely cyclical in nature and dependent up on economic growth and per capita income. Seasonality is also a vital factor. Barriers to entry : High capital costs, technology, distribution network, and availability of auto components. Competition : High Expected to increase even further. Some of the major characteristics of Indian automobile sector are: Second largest two-wheeler market in the world. Fourth largest commercial vehicle market in the world. 11th largest passenger car market in the world. Expected to become the world's third largest automobile market by 2030, behind only China and the US. The Future Growth Drivers: India's huge geographic spread- Mass Transport System. Increasing Road Development. Increasing disposable Income with the service sector. Replacement of aging four wheelers. Graduating from two wheelers to four wheelers. Increasing dispensable income of rural agri sector. Growing Concept of Second Vehicle in Urban Areas. Firstcall India Equity Advisors Pvt Ltd 15

16 Disclaimer: This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable but we do not represent that it is accurate or complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it s affiliates shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Firstcall India Equity Research: info@firstcallindia.com B. Harikrishna Banking B. Prathap IT A. Rajesh Babu FMCG C.V.S.L.Kameswari Pharma U. Janaki Rao Capital Goods E. Swethalatha Oil & Gas D. Ashakirankumar Automobile Rachna Twari Diversified Kavita Singh Diversified Nimesh Gada Diversified Priya Shetty Diversified Tarang Pawar Diversified Neelam Dubey Diversified Firstcall India also provides Firstcall India Equity Advisors Pvt.Ltd focuses on, IPO s, QIP s, F.P.O s, Takeover Offers, Offer for Sale and Buy Back Offerings. Corporate Finance Offerings include Foreign Currency Loan Syndications, Placement of Equity / Debt with multilateral organizations, Short Term Funds Management Debt & Equity, Working Capital Limits, Equity & Debt Syndications and Structured Deals. Corporate Advisory Offerings include Mergers & Acquisitions (domestic and cross-border), divestitures, spin-offs, valuation of business, corporate restructuring-capital and Debt, Turnkey Corporate Revival Planning & Execution, Project Financing, Venture capital, Private Equity and Financial Joint Ventures Firstcall India Equity Advisors Pvt Ltd 16 Firstcall India also provides Financial Advisory services with respect to raising of capital through FCCBs, GDRs, ADRs and listing of the same on International Stock Exchanges namely AIMs, Luxembourg, Singapore Stock Exchanges and

Bharat Forge Limited

Bharat Forge Limited HOLD CMP: Rs.275.00 Date: November 18, 2009 Key Ratios: Particulars FY09 FY10E FY11E OPM (%) 20 25 26 NPM (%) 5 6 7 ROE (%) 7 7 8 ROCE (%) 17 17 18 P/BV(x) 4.12 3.83 3.53 P/E(x) 59.39