 "Amara Raja's premium valuations over Exide to sustain")
Amara Raja delivered another robust performance in the June quarter with margins scaling a five-year high. Lower raw material prices, coupled with steady revenue growth, aided operating profits and margins. Margins were up 110 basis points year-on-year to 18.2 per cent, on the back of a steep 260 bps decline in raw material costs (lead) to 64.2 per cent of sales. This was better than Street expectations. Given the pricing power and falling raw material costs, analysts expect Amara Raja to improve its operating profit margins by 260 bps over FY15-17 to about 19.6 per cent.
Exide, too, benefited from lower raw material costs (down 40 basis points year-on-year) at 66 per cent of sales but its margins at 14.8 per cent are still 340 basis points lower than its smaller peer. Exide is looking at cutting costs to improve its profitability and was able to achieve nearly 15 per cent margins despite drop in sales due to these efforts.
While growth in telecommunication for Amara Raja was in low single digits and the UPS and inverter segments saw seven to eight per cent fall, the revenue growth for the company came from automobile replacement and original equipment manufacturer sales. Its higher growth in the auto replacement segment in FY15, as well as in the June quarter indicates that it has gained market share.
Analysts believe capacity expansion in the inverter battery segment over the next year would help improve its market share in this key profitable segment.
Brokerages have raised their earnings estimates for the next two years to the tune of three to seven per cent. The Amara Raja scrip, which touched its yearly high on Monday, is trading at 22 times its FY17 earnings estimates. This is at a 20 per cent premium to Exide, given higher growth in revenue, profits and better return ratios.
Over the past year while the Amara Raja stock has gained 82 per cent, Exide Industries has traded flat. Analysts believe that Amara Raja will continue to outperform the market leader Exide, given superior execution and product portfolio.
Exide, too, benefited from lower raw material costs (down 40 basis points year-on-year) at 66 per cent of sales but its margins at 14.8 per cent are still 340 basis points lower than its smaller peer. Exide is looking at cutting costs to improve its profitability and was able to achieve nearly 15 per cent margins despite drop in sales due to these efforts.
While growth in telecommunication for Amara Raja was in low single digits and the UPS and inverter segments saw seven to eight per cent fall, the revenue growth for the company came from automobile replacement and original equipment manufacturer sales. Its higher growth in the auto replacement segment in FY15, as well as in the June quarter indicates that it has gained market share.
Analysts believe capacity expansion in the inverter battery segment over the next year would help improve its market share in this key profitable segment.
Brokerages have raised their earnings estimates for the next two years to the tune of three to seven per cent. The Amara Raja scrip, which touched its yearly high on Monday, is trading at 22 times its FY17 earnings estimates. This is at a 20 per cent premium to Exide, given higher growth in revenue, profits and better return ratios.
Over the past year while the Amara Raja stock has gained 82 per cent, Exide Industries has traded flat. Analysts believe that Amara Raja will continue to outperform the market leader Exide, given superior execution and product portfolio.