The case of Exide Industries Ltd and Amara Raja Batteries Ltd is quite similar to the trend witnessed across sectors wherein top companies / stocks have reported contrasting performance. Here, against the six per cent decline witnessed by Exide’s stock over one year, Amara Raja’s scrip has gained over 200 per cent. What’s more, given better prospects and absence of any overhangs, analysts believe Amara Raja’s stock will continue to re-rate and outperform its larger peer. According to Bloomberg data, 36 per cent of analysts have a ‘sell’ and 34 per cent have a ‘hold’ rating on Exide. For Amara Raja, 82 per cent have a ‘buy’ rating on the stock.
Exide’s stock has fallen 12 per cent after the company reported disappointing performance for the December quarter on January 17. The core business is likely to remain under pressure for some time as the company has relatively larger (compared to Amara Raja) market share in and contribution to revenues from the low-yielding original equipment manufacturer (OEM) market, which is witnessing tough times.
The recent announcement of acquisition of the 50 per cent stake of the partners in loss-making ING Vysya Life Insurance — which, with 1.3 per cent share of the Indian life insurance market, is a marginal player — for Rs 550 crore is also seen as negatively by analysts, who have downgraded the stock. Thus, analysts expect Exide’s stock (currently at Rs 122) to remain depressed, at least till the company finds a new partner for the life insurance business.
| AMARA RAJA: GAINING CHARGE | ||||
| Amara Raja | Exide | |||
| In Rs crore | Q3’FY13 | FY13E | Q3’FY13 | FY13E |
| Revenues | 759.2 | 2,944.0 | 1,463.0 | 6,137.8 |
| % change y-o-y | 23.7 | 24.0 | 17.3 | 20.1 |
| Operating profit | 121.9 | 478.2 | 164.6 | 785.7 |
| % change y-o-y | 14.6 | 33.7 | 1.1 | 14.2 |
| Net profit | 80.9 | 301.7 | 104.1 | 515.7 |
| % change y-o-y | 22.6 | 40.3 | -0.2 | 11.8 |
| EPS (Rs) | - | 17.6 | - | 6.2 |
| P/E (x) | - | 17.9 | - | 19.8 |
| Source: Company, Analysts’ estimates | ||||
In contrast, Amara Raja is better placed both in terms of business and stock outlook. The company reported a robust financial performance for the December quarter and the management is gung-ho about the future. Not surprisingly, Amara Raja’s stock zoomed 7.6 per cent to Rs 318 after the announcement of results on Monday evening; taking year-to-date gains to 36 per cent. Though the valuations capture near-term positives, analysts still remain positive and expect its outperformance versus Exide to continue.
Q3: Good show by Amara Raja…
In the third quarter, both companies witnessed robust double-digit volume growth, especially in the four-wheeler replacement market, and rising lead prices aggravated by rupee depreciation. But Amara Raja reported better revenue and net profit growth and lesser margin pressure compared to Exide (see table). Amara Raja had taken around 3.5 per cent price hike in the December quarter, which should support its margins (already higher than Exide), going forward. Even in case of industrial batteries, Exide saw subdued demand in home UPS and inverter battery segments, while Amara Raja witnessed improved demand and reasonable volume growth in both the telecom and UPS markets.
…and bigger capex plans
While Exide estimates FY13 capital expenditure (capex) at Rs 190 crore, Amara Raja has guided for Rs 440 crore in addition to Rs 304 crore approved earlier. The latter’s management sees a pick-up in replacement demand in FY14 and expects its automotive business to grow above industry average. Says Jayadev Galla, managing director, Amara Raja: “The company is confident of its growth prospects and hence continues to invest on capacities and products to support the market, leading growth in the medium and long term.”
While Exide’s management is also seeing a pick-up in replacement demand, in a conference call, it said margins might remain compressed in the March quarter.
“An increase in capex plans announced by the company (Amara Raja) highlights increased conviction in volume growth, in our view. Improved demand in the telecom segment is also positive for the company. We believe current volume run-rates for both auto and industrial segments are already coming close to our FY14 estimates,” says Kapil Singh, an analyst at Nomura Equity Research, in his post results note.
Valuations, outlook
Though both companies are debt-free with significant free cash reserves, Exide’s acquisition of partners’ stake in ING Vysya Life will drain its resources till the time it finds an international strategic partner as desired and could limit the growth of the core business. Says Sahil Kedia, analyst at Barclays, in his post-event note: “The acquisition is likely to result in a significant reduction in the surplus cash and pose a risk to the cash flows of the core battery business in case they are sacrificed for the expansion of the insurance business.” Adds Jamshed Dadabhoy, analyst, Citi Research: “We view this acquisition negatively and expect the stock to de-rate. We downgrade to sell and cut our target multiple to 14x from 18x, representing the lower band of the past three-year trading range.” Dadabhoy has cut the stock’s target price by almost 21 per cent to Rs 1,118. For FY14, while Exide’s profit growth is estimated between 22-25 per cent (partly aided by lower base of FY13), top line growth is pegged at 14-15 per cent.
On the other hand, Amara Raja can use its surplus cash for future investments in the core business and sustain higher growth. In FY14, analysts estimate its top line to grow 21-23 per cent and profits 20-22 per cent in spite of a 40 per cent jump in FY13. Overall, despite valuation of 15 times FY14 estimated earnings (versus Exide’s 16.2 times) and smaller size, analysts continue to favour Amara and expect its stock to re-rate further.
