Stock Pick Of The Week: Amara Raja Batteries

Amara Raja Batteries is one of the favourite stocks because it scores well on all parameters. It is one of the two major players in the batteries sector (Exide being the market leader), has a high RONW of about 26%, enjoys a debt-free status and is quoting at reasonable valuations of about 14 times FY 2013 EPS of Rs. 16.78.

Amara Raja Batteries has given huge returns to its shareholders in the recent past. In the last one year itself, the stock has surged 81% while in 2 years, it has given a 140% return.

In Q4 FY 2013, Amara Raja Batteries’ sales increased 19.4% on a YOY basis (5.7% QoQ) to Rs 804 crore though the net profit slumped 26% to 59 crores as against Rs. 81 crores on a QoQ basis. The EBITDA margins slumped by 209bp on a sequential basis to 13.9%. The reason for this poor performance was because the lead prices (raw material) soared. In addition, the Company wrote off an impairment charge of Rs 8 crore and provided for additional depreciation of Rs 5 crore.

In the aftermath of the results, the stock slumped 13% in just a week from Rs. 284 to the present price of Rs. 247.

In an interview to CNBC-TV18, Suresh Kalyan, CFO, Amara Raja Batteries clarified that the reason for the fall in margins was because of the increased trading activity in the Uninterrupted Power Supply (UPS) and inverter batteries segment (the fourth quarter is the peak quarter for the inverter business). As the Company gets about 5.5-6% margin on the trading, there was a distortion in the overall margin. Suresh Kalyan pointed out that if one removed the trading margin and looked at manufacturing margins in isolation, they are at about 15.2 percent EBITDA, which is only slightly lower than the sequential quarter of Q3, because the lead prices have shot up from Rs 2,000-2,200 in Q4.

Suresh Kalyan made it clear that Q4 FY 2013 was an aberration and that Q1 FY 2014 will reflect the normal margin levels thanks to the softening in the prices of lead. He also pointed out that Amara Raja has also taken a price increase in March could help it maintain the manufacturing margin of about 15.5-16.

If you look at a slightly longer term picture, the future looks promising for Amara Raja. It is presently implementing an ambitious capacity expansion project worth about Rs. 750 crores to increase the capacity in product lines such as large VRLA battery for telecom application and medium VRLA battery for UPS applications. It has also increased capacities in automotive 4-wheelers and 2-wheelers. All these capacities would help Amara Raja keep its’ growth momentum intact. The supplies from these new capacities are expected to come in from H2 of FY14 and Amara Raja is expected to go back to its’ normal levels of about 15-18 percent growth in the UPS as well as the telecom side.

From the valuation perspective, at the CMP of Rs. 248, Amara Raja is presently trading at a PE of 14 times FY 2013 and at a PE of about 12.5 times FY2015E earnings. These are not at all challenging given the strong ROE, debt-free status and expected growth momentum.