Automobile Ancillary - Battery - Nirmal Bang

Charged!

Battery manufacturers are in a sweet spot as robust replacement demand is expected over the next two years from vehicles sold during FY10-FY12. As a result, we expect the top-line of battery makers to witness a strong double-digit growth. We expect both the companies in our coverage universe - Amara Raja Batteries (ARBL) and Exide Industries (EIL) - to report strong double-digit earnings growth over FY13E-FY15E. The recent correction in stock prices of EIL and ARBL makes their valuation attractive and hence we have initiated coverage on them with Buy ratings and target prices of Rs153 (14.5x FY15E EPS plus Rs18 for the insurance business) and Rs343 (14.5xFY15E EPS), respectively.

Strong top-line growth likely from replacement demand in FY14: Battery makers are set to capitalize on strong replacement demand from automobiles. Demand for vehicles was robust after the global economic turmoil in FY09, with the automobile industry posting a CAGR of 19% over FY10-FY12. Generally, a battery lasts for around three years, and hence the replacement demand from vehicles sold in FY10-FY12 is likely to remain strong over FY14/FY15. We expect EIL and ARBL to post net sales CAGRs of 17%/20% for FY14E-FY15E, respectively.

EBITDA margin to remain strong: We expect both the companies in our coverage to report strong EBITDA margins, in the range of 14%-16%, over FY14E-FY15E. EIL has gone for two price hikes - one in November 2012 and the other in February 2013 - which makes us believe that margins in 3QFY13 have hit a trough. As regards ARBL, we believe a richer product mix and strong demand for its products will lead to stable EBITDA margins in the range of 15.4%-15.6% over FY14E-FY15E.

Expect pricing to be stable: EIL, being the market leader, has always been a price setter and commanded a strong premium over its peers. However, over the past one year, due to capacity constraints and loss in market share, EIL has played around with its pricing, leading to lower profitability. In 3QFY13, EIL regained a bulk of the replacement market share, at 33% from a low of 25% in May 2012, and went for a price hike in February 2013. Going forward, we believe the pricing discipline in the sector will be maintained as EIL regains its market share and ARBL has historically never played with its pricing and the chances of the company doing so over the next two years are remote due to its ~93 plant capacity utilisation.

Valuations attractive: Stock prices of EIL and ARBL have corrected after their 3QFY13 earnings. EIL declined on account of disappointing EBITDA margin and ARBL on account of concerns over growth, given the capacity constraints. EIL went for a price hike in February 2013, which should support its margins going forward, while ARBL due to debottlenecking and improvement in productivity has stated that 15% volume growth in FY14E is possible, despite the capacity utilization rate at ~93%. After the recent correction, the valuations of both the companies have turned attractive, with EIL currently trading at 13.7x FY15E EPS and ARBL at 11.7x FY15E EPS. Given the robust outlook on demand over FY14-FY15 and stable EBITDA margins, we expect both the companies to post strong earnings CAGRs of 21% and 15%, respectively. We have assigned Buy ratings to both the stocks with a target price of Rs153 on EIL (14.5x FY15E EPS plus Rs18 for the insurance business) and a target price of Rs343 (14.5x FY15E EPS) on ARBL.

Source : Equity Bulls

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