Amara Raja: Running on battery

Hyundai deal boosts stock

Amara Raja Batteries has struck an agreement with Hyundai Motor India through which it expects to supply 60,000 units of the Amaron range of batteries over the next twelve months.

This bit of news led to a 20 per cent jump in the company's stock price to Rs 150. In value terms, the rise on Thursday added Rs 28.5 crore to Amara Raja's market cap.

What's interesting is that even if one were to consider the retail value of the Amaron range, the deal would at best be worth Rs 20-22 crore. Needless to say, the actual value of the deal would be much lower since it's an OE agreement.

What's more, Amara Raja's net profit margin is around 5 per cent, which means that the contribution to the bottomline would be even lower. The 20 per cent jump in the company's stock price, therefore seems overdone.

At the same time, it's important to note that this isn't the only announcement that's come from the company lately. In fact, there have been a spate of announcements - earlier this month, the company had announced that it would be the exclusive supplier for Maruti's latest model, Swift.

In February, it had decided to expand capacity at its Tirupati plant by 60 per cent to 2.4 million units per annum. In October last year, it had signed an OE agreement with Maruti to supply 100,000 batteries in 12 months time.

Apart from these developments, there has been a marked improvement in Amara Raja's financial performance this fiscal. In the nine-month period till December 2004, its profit before tax and exceptionals jumped 49 per cent on the back of a 32 per cent rise in sales.

The performance is impressive, especially considering that the price of lead had risen sharply during the period.

But the improved performance and the better prospects were already well reflected in the price, which had risen about 125 per cent before accounting for the rise on Thursday.

Besides, the stock now trades at about 16 times annualised nine-month earnings till December 2004.

India Glycols

India Glycols Ltd (IGL) has reported a 63.45 per cent drop in its profit before tax to Rs 10.25 crore in the March quarter, despite net sales rising 18.63 per cent.

The company was only partly able to leverage the buoyant pricing conditions for mono-ethylene glycol (MEG) as its plant was shut for about a month in the last quarter due to the capacity expansion under way.

Revenues from MEG currently constitute about 54 per cent of its total revenues and this is set to rise further to about 425 tonne per day.

India Glycols is one of the few manufacturers of MEG that uses the molasses route. However, the underlying concern has been the rising prices of the key input molasses and that has led to the consumption of raw materials jumping 44.28 per cent on a y-o-y basis to Rs 57.21 crore in the last quarter.

Meanwhile, realisations from the company's other products like ethoxylates and performance chemicals, which constitute about 30 per cent of revenues, was also up about 10 per cent on a y-o-y basis, thanks to strong demand from the textile and automobile industries.

Nevertherless, reduced operational days led to the company's operating profit margin falling sharply to 12.18 per cent in the last quarter. The stock too dipped about 1.4 per cent on Thursday.

Going forward, enhanced MEG capacity should help the company grow, but margins could be squeezed from higher molasses prices. However, that could be partially neutralised with its industrial gases division coming on stream coupled with the tax benefits that this business will enjoy from the local government.

Gokaldas Exports

Gokaldas Exports has been one of the scrips that didn't do too well in the recent rally, losing around 5 per cent in the last five days. That's because the textile major's FY 05 results disappointed analysts.

The company reported revenues of Rs 724.05 crore for FY 05, and profit after tax of Rs 39.79 crore. With earnings per share for the year at Rs 28.87, the scrip is currently trading at a PE of 21 times trailing earnings. That's more or less in line with Arvind Mill's trailing PE.

Expectations from Gokaldas had been higher not only because of its high-profile IPO and its position as a prime beneficiary of the opportunities in textiles in the post-quota environment, but also because of more mundane reasons.

For the first half of FY 05, the company had posted consolidated net profits of Rs 24.79 crore, which, after adjustments in accounting policies, amounted to Rs 27.94 crore.

With the company poised to benefit from the dismantling of quotas from January this year, it's no wonder that analysts expected net profits to at least double from the level reached in the first half of the year, especially when "other income" has been so high, and with revenues growing by 35 per cent.

Analysts point out that FY 05 net profit was affected by rupee appreciation, costs of capacity expansion, higher quota rents, and pricing pressure.

Going forward, the company points to its full order book, its wider product range and its capacity expansion, although it also says that the pricing environment remains volatile.

With contributions from Mobis Philipose and Amriteshwar Mathur.