Add Amar Raja Batteries, target price Rs 505: Kotak

We retain a positive view on the battery companies (Exide and Amara Raja) as we expect automobile demand to recover in the next few years, which will improve pricing power.

We believe Amara Raja’s industrial business is in a better shape than Exide’s as it is leader in both telecom and UPS battery segments. We do not estimate any market share gains for Amara Raja over Exide in next few years as we expect rational pricing by both players. We raise target price to R505 (from R440 earlier) and maintain ‘add’ rating.

We expect 16% CAGR in four-wheeler automobile replacement battery volumes over FY15-17, driven by pent-up demand, shift from the unorganised to organised segment, especially in truck and tractor battery segments, after implementation of new emission norms in April 2015 and the possibility of a stricter tax regime with the introduction of GST, which could erode competitiveness of unorganised players.

Amara Raja Batteries’ industrial business is better-placed than Exide, as it is a market leader in both telecom and UPS businesses. The company has been improving market share in both the business segments and we expect further improvement in market share as its capacities come on stream by October 2014. We expect Ebitda margins to improve in FY15-16 as revenue growth improves, which will lead to improvement in pricing in the four-wheeler replacement and OEM segments.

Kotak Institutional Equities