Amara Raja Batteries’ touched its 52-week high level of Rs 267 on Tuesday; gaining 15.5 per cent a day after the company announced its results. The strong reaction to its results was on account of Amara Raja exceeding analysts’ expectations on many fronts. Though the stock has significantly outperformed its larger peer, Exide Industries over the last one year, analysts believe the re-rating may not be over yet.
Some analysts had pre-empted a strong performance of the stock. Joseph George, analyst, IIFL, in his October 1 report said that Amara Raja now has the same revenue/profit scale which Exide had during its re-rating in FY08. Kaushal Maroo, analyst, Emkay Global Financial Services, pointed out in his September 25 report that the stock is a re-rating candidate given its consistent track record, quasi consumption nature of business, enviable return profile and strong earnings growth trajectory. Amara Raja’s valuation of 13 times FY14 estimated earnings does not look expensive though the valuation gap compared to Exide (15 times) may have narrowed. In fact, analysts believe the gap could narrow further.
Surjit Arora of Prabhudas Lilladher says, "With the sixth consecutive quarter of outperformance of Amara Raja over Exide, we believe the valuation discount between the two could narrow."
| STRONG SHOW, OUTLOOK | ||||
| In Rs crore | Exide | Amara Raja | ||
| Sep-12 | FY13E | Sep-12 | FY13E* | |
| Net sales | 1,521 | 6,181 | 719 | 2,831 |
| % change y-o-y | 29.4 | 21.0 | 27.7 | 19.4 |
| Operating profit | 188 | 890 | 118 | 452 |
| % change y-o-y | 109.0 | 30.0 | 33.0 | 26.3 |
| Net profit | 120 | 596 | 70 | 277 |
| % change y-o-y | 135.0 | 29.2 | 35.0 | 28.8 |
| E: Estimates * For Amara Raja, the FY13 estimates are prior to Q2 results Source: Companies, analyst reports | ||||
All charged up in Q2
The highlight of Amara Raja’s financial performance for the September quarter was a strong sales growth of 27.6 per cent at Rs 719 crore, which has come significantly above analysts’ estimates thanks to strong demand in the replacement market. However, improvement in the operating profit margin was tad a lower than expectations of expansion of at least 100 basis points given that average prices of lead (its key raw material) was down 20 per cent year-on-year. But, Amara Raja can be excused for posting only a 66 basis points improvement in its operating margin to 16.4 per cent since it has grabbed market share from Exide in both the original equipment manufacturers (OEM) and replacement markets. Notably, the company expects margins to sustain at current levels, despite escalation in cost.
Sales and a modest margin growth helped Amara Raja improve its net profit to Rs 70.1 crore from Rs 51.85 crore. On a sequential basis though, its net profit fell from Rs 76.10 crore, largely due to an exceptional charge of Rs 9.36 crore due to a fuel surcharge adjustment claim.
Analysts upbeat
Amara Raja is expected to post strong sales growth as replacement demand picks up from the auto segment, which accounts for 41 per cent of its revenues. Strong double-digit growth witnessed by the auto industry two-three years back will lead to healthy replacement demand. The company has announced a capex of Rs 100 crore for expanding its two-wheeler battery capacity in order to enter the OEM market, where it has no presence.
Industrial batteries, which account for 45 per cent of revenues, are expected to benefit from strong demand in the commercial UPS segment and replacement demand from telecom companies.
Arora says, "Given the strong set of numbers and improving business outlook, we reiterate our positive stance on the stock. We expect revenues to grow at a CAGR (compounded annual growth rate) of 17.9 per cent and net profit to grow at a CAGR of 29.4 per cent for FY12-FY14."
Analysts are upbeat on the stock though they advise monitoring the impact of further market share gains and rupee depreciation on margins.
