Buy Amara Raja Batteries - Microsec

We rate Amara Raja Batteries Limited a BUY. Amara Raja Batteries Limited specializes in the manufacture of Industrial and automotive batteries. The company manufactures industrial batteries primarily for the telecom and UPS sectors. Amara Raja manufactures automotive batteries for the original equipment manufacturers and the aftermarket.

Amara Raja to hike four-wheeler battery capacity

Amara Raja Batteries is expanding its four-wheeler battery manufacturing capacity at its Chittoor plant with an outlay of Rs 14 crore. This expansion will take the battery capacity up from 5.6 million units to 6 million units a year. The capacity utilization for four-wheeler batteries is now at 86% and projected to touch 90% by the year end. The two-wheeler battery capacity is 4.8 million units a year; of this, 3.6 million units go to replacement and the rest to OEMs.

Improvement of Margin may attract investor

Amara Raja Batteries reported 32% YoY growth in its top-line at Rs694Cr. On a QoQ basis, top-line improved by ~3%. On account of better product mix and robust top-line, EBITDA grew by a massive 76% YoY at Rs120Cr. Led by robust operational performance and higher other income, PAT grew by 95% YoY to Rs76Cr.

Replacement demand to boost volumes & margin

In the past, auto industry has registered an extraordinary sales growth of ~30% in Original Equipment Manufacturer. As per SIAM, the overall industry is expected to grow around 9%-11% for FY13E. OEM segment contributed around 26 % of the total turnover in 2011-12 in the replacement market and is expected to register a growth of 11-13 % in 2012-13. Going forward we expect the demand coming from replacement market which will drive the volume and margin for the company.

Valuation

We maintain our positive outlook on Amara Raja Batteries. At the CMP of INR388.80, the stock is trading at 12.60x its FY13E EPS of INR30.84.

Key Risks

If there is slowdown in the Automobile sector then it may adversely impact Amara Raja Batteries.

Significant rise in lead price is one of the key risks as it directly impacts Amara Raja Batteries margin.

Source : Equity Bulls

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