Amara Raja Batteries | Value Research Will the company be able to deal effectively with spikes in price of lead?

Amara Raja Batteries

Will the company be able to deal effectively with spikes in price of lead?

Amara Raja Batteries Ltd (ARBL) is the country’s second largest battery manufacturer after Exide with a 27 per cent market share. Johnson Controls, one of the world’s largest battery manufacturers, holds a 26 per cent stake in it.

Strengths and growth initiatives
Strong demand from auto segment: The demand for batteries from the auto segment continues to grow in double digits. Analysts at Angel Broking expect the company’s revenue to grow at a compounded annual rate of 19.3 per cent over the next couple of years, owing to around 21 per cent growth in demand from the auto segment between FY10 and FY12. OEM demand (demand from car and two-wheeler manufacturers) is expected to be robust owing to an expected 12 per cent growth in new vehicle sales. Replacement demand is also expected to remain healthy. Moreover, organised players are expected to enhance their market share at the expense of the unorganised segment.

Demand for UPS intact: Analysts at Angel Broking estimate that revenue from industrial segment will grow at a CAGR of 11.1 per cent between FY10 and FY12. Within this segment demand for UPS and inverters continues to be robust.

Capacity expansion: The company is spending Rs53 crore on expanding its capacity for car batteries by 8 lakh units to 60 lakh units and two-wheeler battery capacity by 18 lakh units to 50 lakh units.

Margins affected by higher lead prices: Lead prices have firmed up. The company’s raw material costs as a percentage of sales rose 777 basis points y-o-y in Q2FY11 owing to higher lead prices (the average this quarter was $2039 per tonne, up 6.1 per cent y-o-y).

Slowdown in telecom demand: The telecom segment contributes 30 per cent of the company’s revenue. Both realisations and volume demand from this segment were low in the Q2FY11. Realisations from the industrial segment tend to be higher than from the auto segment. Subdued realisation therefore affected the company’s operating profit margin.

According to analysts at A C Mehta Investment Intermediates, margin pressures from the telecom segment will continue for the next two to three quarters. However, the management is optimistic that replacement demand from telecom towers will be substantial.

While analysts at Angel Broking expect the company’s revenues to grow at the rate of 19.3 per cent, they expect its profit after tax to grow at only around 7 per cent annually owing to these two factors.

Debt-equity ratio: It has a low debt:equity ratio of 0.17.
Return on capital employed: The company’s RoCE is not as consistent as one would have liked it to be. It ranges from a poor 3.6 per cent in FY05 to a high 25.53 per cent in FY10.

The stock is currently trading at a 12-month trailing PE of 10.97. This is only slightly higher than its five-year median PE of 10.11.

Over the last five years the stock’s earnings per share (EPS) has grown at a compounded annual growth rate of 70.5 per cent. This gives it a price-earnings to growth (PEG) ratio of 0.16. While the stock’s valuations are attractive, there is a question mark on its ability to grow its earnings at a high rate. Wait for an improvement with regards to these issues before buying this stock.

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