23-Oct-2017 : Amara Raja Batteries is the second largest lead acid manufacturer of India. It produces both Automotive and Industrial batteries. In India, Amara Raja is supplier to major telecom service providers, Telecom equipment manufacturers, UPS sector, Indian Railways and to Power, Oil & Gas among other industry segments. Amara Raja manufactures automotive batteries under the brands – Amaron and Powerzone. The company supplies automotive batteries under OE relationships to Ashok Leyland, Ford India, Honda, Hyundai, Mahindra & Mahindra, Maruti Suzuki and Tata Motors. The company’s Industrial and automotive batteries are exported to Asia Pacific, Africa and Middle East.
The Galla family and Johnson control each hold 26% equity in the company. Johnson controls is the technology leader and is one of the largest manufacturers of lead acid batteries for both Industrial and automotive applications.
For the first quarter of FY-2018, the company earned revenue of 1671 crore against 1456 crore in the first quarter of FY-2017, an increase of 14.77%. However, PBT and PAT both decreased to 151 crore and 100 crore from 191 crore and 131 crore. This is mainly due to increase in lead price. Increase in revenue is mainly contributed by the growth in the automotive segment. Automotive exports and inverter battery sales have grown significantly over the previous year resulting in higher utilization of plant capacity.
However, the Industrial battery segment remained muted in the quarter gone by. The muted performance in the telecom sector is mainly responsible for the same. The fierce competition among the telecom operators forced the large telecom operators to drive cost efficiencies.
Amara Raja is one of the beneficiaries of GST regime. Commenting on the GST, the management said that the company has smoothly transitioned into the GST regime. The management is hopeful that GST tax structure will create a level playing field and are optimistic of increasing market share in price sensitive product segments. They said that higher lead prices and slowing demand for industrial batteries will remain a concern area. To counter the higher lead price, the company has increased price of battery.
In FY 2017, the company has commissioned a 1 million unit tubular facility. It also emerged as the exclusive battery supplier for Renault Kwid. In the two-wheeler battery space, the Company commenced supplies to Bajaj Auto and finalized the deal with Hero, India’s largest two-wheeler manufacturer; product dispatches are expected to commence in the current year. In the Commercial Vehicle space, the Company enlisted Volvo as its customer, supplying batteries for its earth-moving vehicles.
Amara Raja’s automotive battery segment remained robust so far. To address the increasing demand, the Company is investing in three additional lines at its Chittoor facility. This brownfield expansion initiative will also include material handling automation solutions on the shop floor. In addition, the Company is working on improving processes which could improve man-machine productivity and reduce wastages. The company has planned to ramp up its 4 wheeler battery capacity from 8.25 million units to 10.5 million and 2 wheeler battery capacity from 11 million to 15 million in the financial year 2018.
Apart from the normal operation, Amara Raja sees opportunity in diversified segments. In the E-rickshaw segment, it see an opportunity of 1500-2000 crore. Currently, it derives 2% of the revenue from the E-rickshaw segment. In the Solar power segment, Lithium battery is the preferred solution. Amara Raja has the plan to explore the lithium battery space with the help of Johnson Control’s technology.
The Indian Battery market is projected to grow at a CAGR of 16.5% by 2020. The Lead-acid battery industry caters to two broad market categories: automotive and industrial and finds wide application in transportation, communications, power and railway industries. The automotive and communications sector account for 90% of total lead-acid battery consumption.
Other applications like electric and hybrid vehicle are likely to be driven by initiatives like FAME India Scheme (Faster Adoption and Manufacturing of Hybrid and Electric vehicles in India). Under this scheme incentives are being rolled out for electric and hybrid vehicles with a target of 6-7 million electric vehicles on road by 2020.
We believe that Auto sector will be out of the disruption caused by demonetization and GST very soon. Once the auto sector will come back to normal growth path, the battery manufacturer like Exide and Amara Raja will be major beneficiaries.
Amara Raja battery came down from above Rs 1000 to around Rs 685. It is currently trading around a trailing PE of 26.16 lower than its historical PE. We believe that Auto segment will continue to do well and turnaround of telecom sector is expected soon. Over and above, the initiatives taken by the battery manufacturer in 2017, will yield result in FY 2018. On conservative basis, we believe that the stock will touch Rs 1000 in the next 12 months.
NSE Code : AMARAJABAT
BSE Code : 500008
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