High growth prospects, debt-free status have made analysts bullish on Amara Raja Batteries

With revenue and net profit growth of 9 per cent and 6 per cent respectively year-on-year, Amara Raja Batteries’ results for the fourth quarter of 2015-16 were muted. However, analysts are getting bullish on this leading industrial and automotive battery maker. This is because Amara Raja is expected to get back to its high speed growth once again and, as per consensus estimates, its profit is expected grow at an annualised rate of 20 per cent between 2015-16 and 2017-18.

The Indian battery market grew slowly in the past 2-3 years because of a weak monsoon and an economic slowdown, among other things. But, because of the government’s effort to speed up growth and forecast of a good monsoon this year, the battery industry’s fortune is expected to turn around in the coming years. Passage of the GST (Goods and Services Tax) Bill will also help organise the market—around 40 per cent of the market is unorganised.

Indian organised battery market is a virtual duopoly with Amara Raja and Exide constituting around 90 per cent of the organised market. While Exide is the leader in the auto segment, Amara Raja leads the industrial segment.

The auto and industrial segments contribute around 55 per cent and 45 per cent respectively to Amara Raja’s revenue. The company has also been able to increase its market share both in the segments. To increase its hold in the auto segment further, Amara Raja is planning to more than double its manufacturing capacity for two-wheeler batteries, from 1.1 crore units per annum to 2.5 crore units. This will be done in four stages and will be spread over a four-year period. The company plans to increase its four-wheeler battery capacity from 83 lakh units to 1.1 crore is also on track. Amara Raja’s plan to enter the home inverter market in 2016-17 is a major move that will help increase its market share in the industrial segment further.

Though operating margins fell a little in the fourth quarter, Amara Raja should be able to recover its high margins due to industry-wide pricing discipline (no cartelisation). Fall in prices of lead, a key raw material, is another factor that is helping support margins. Amara Raja was also able to reduce its cost of production by implementing a new manufacturing technologies from Johnson Controls, which has a 26 per cent stake in the company.

Though Amara Raja is now quoting at higher valuations, analysts say that its strong fundamentals—consistent growth, free cash generation, debt free status, etc.—justify the high valuations.

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