Calling it a recurring candidate, some analysts says a likely pickup in replacement and export demand and sustaining margins amid rising lead prices should support the stock going forward.
The company is also seen maintaining its market share, analysts said. “Amara Raja’s market share gains in the two-wheeler space and new business opportunities in telecom would go a long way in building a strong business,” said Anand Rathi Financial Services.
Axis Securities likes Amara Raja for its superior execution track record vis-à-vis industry leader Exide Industries, and for the strong pricing power it has in the replacement segment of the auto sector.
Emkay Global said while a shift towards electric vehicles (EVs) remains a structural risk for Amara Raja, the EV penetration will be a gradual process, it said.
Amara Raja is the second largest automotive battery manufacturer and the largest supplier of industrial storage batteries in India. It is a joint venture between the Galla family, which holds 28 per cent stake, and Brookfield Asset management, which holds 24 per cent.
Sales are well-diversified between the automotive and industrial segments, at 60 per cent and 40 per cent, respectively. The company supplies automotive batteries to Ashok Leyland, Ford India, Honda, Hyundai, M&M, Maruti Suzuki and Tata Motors. Its industrial and automotive batteries are exported to countries in the Indian Ocean Rim.
The company reported a 7.93 per cent drop in consolidated profit after tax at Rs 201.27 crore for the September quarter compared with Rs 218.61 crore reported for the same quarter last year. Revenues rose 14.16 per cent to Rs 1,935.52 crore from Rs 1,695.31 crore YoY.
Edelweiss Securities said the company’s profit fell owing to the impact of lower tax rate in the base quarter. “Still it is 29 per cent above our estimates,” the brokerage said.
“Amara Raja’s Q2 Ebitda of Rs 340 crore was 23 per cent above our and Bloomberg consensus estimates, largely led by a 14 per cent revenue beat. Ebitda margin at 17.6 per cent, up 30 basis points YoY, was also ahead of Nomura’s estimate of 16.3 per cent and consensus projection of 16.2 per cent, led by operating leverage benefit,” Nomura India said.
CEO S Vijayanand said all manufacturing facilities of the company were operating at near 100 per cent capacity to meet the demand.
What the company said
The company reported a jump in both OEM and after-market demand in the automotive segment.
“There was a rebound in vehicle production month-on-month to refill dealer inventories and gear up for festive demand. Personal mobility preferences also led to an increase in two-wheeler and entry-level car purchases. The aftermarket space saw strong pentup demand post the initial lockdown period. With the easing of logistics, channel sales and distribution activities were streamlined to meet the demand,” the company said.
In the case of industrial business, there has been sustained demand in the telecom and commercial UPS segments on the back of enhanced priorities for keeping the data network uptimes near to 100 per cent.
Exports of automotive batteries and industrial batteries also saw a rise, as markets opened up across geographies, the company said.
- Automotive segment: The four-wheeler segment grew 8 per cent YoY during the September quarter. The replacement market saw 10–11 per cent YoY expansion and the OEM segment 3-4 per cent. Growth in the two-wheeler segment stood at 40 per cent YoY, with the replacement growth climbing 15–16 per cent YoY and OEM surging two times YoY on new order wins and volume ramp-up. The home inverters segment saw 35 per cent growth YoY.
- Industrial segment: This segment saw 6 per cent YoY growth on account of 10-11 per cent growth in telecom and 7 per cent expansion in commercial UPS. Overall, sales for the firm grew 14 per cent YoY in Q2FY21 with growth across most segments.
Headwinds: Rising lead prices
Motilal Oswal Securities said the company would see a rise in raw material cost due to a rise in lead prices. But sustenance of the demand momentum would dilute the impact through a price pass-through and operating leverage.
Raw material cost accounts for roughly 65 per cent of Amara’s sales, data showed. Lead prices stood at Rs 139.20 a kg in September quarter, higher than Rs 127.40 a kg in June quarter, but lower than Rs 142.80 a kg reported for the year-ago period.
What does history say
Analysts said Amara Raja clocked a compounded annual growth of 34 per cent in sales and 68 per cent expansion in PAT over FY2004–2016, which far exceeded Exide’s 20 per cent growth in both net sales and PAT. This, they said, was driven by the introduction of maintenance-free, factory-charged and extended-warranty batteries, witty advertising, and a unique franchisee-based distribution model.
“Amara is gearing up to be a leader by consolidating in existing areas, tapping new business opportunities within the battery space – largely home UPS, solar and motive power segments, and through capacity and network expansions,” Motilal Oswal Securities said.
Nomura India continues to prefer Amara Raja to Exide Industries in the battery segment.
“In the four-wheeler replacement segment, we expect Amara to deliver 8-10 per cent growth led by market share gains. Demand from the telecom segment is improving, as network availability has become more important with the prevalence of work from home. Exports growth for Amara in Q2 was only 3-4 per cent, but it is an area with high potential, as the company addresses only 25 per cent of the segment and thus the recovery can be sharper. Also, the company plans to enter new segments like e-rickshaws, solar and motive power in the next two years,” Nomura India said.
Edelweiss said that FY22 battery volumes are likely to touch the FY20 peak, given the replacement cycle of the business. “We expect 13 per cent sales growth in FY22 post a 3 per cent sales dip in FY21,” it said.
Nomura values Amara 15.2 times FY23 earnings per share (EPS). It expects the stock to get re-rated to 18 times FY23 EPS, in line with its long-term average.
“We roll forward our target price to 18 times (unchanged) FY23 EPS from average of FY22-23F EPS earlier. We continue to prefer Amara over Exide Industries Neutral) in the battery segment,” it said. The brokerage has a target of Rs 931 on the stock.
Anand Rathi has a target of Rs 942, as it values the stock at 22 times FY22 EPS. Emkay now has a price target of Rs 863 compared with Rs 803 earlier..
“In the duopolistic batteries market, Amara continues to be the formidable No. 2 behind Exide Industries. The company’s excellent franchise model and operational efficiency have enabled it to deliver a strong performance, and we expect the momentum to persist,” Emkay said.
Axis Securities has a target of Rs 830 against Rs 800 earlier. IDBI Capital sees the stock at Rs 844. The stock traded at Rs 790 on Thursday.