Monday, December 21, 2009


Charged up …
Amara Raja Batteries (ARBL) catering to industrial and automotive batteries segment is India’s second largest battery manufacturer in the regulated market. The focus on branding and strong retail network and entry into the two-wheeler segment helped company to gain leading market position. The technological capabilities are strengthened by through technical collaboration with Johnson Control USA, who also holds 26% stake in the company.

Presence in industrial segment cushioned slowdown in automobile ARBL garner around 55% of the revenue from industrial batteries catering telecom, power and railways and the segment played a major role during the slowdown in the automobile segment. Though telecom sector is currently witnessing slowdown but we expect the segment to continue to grow at good rate in coming years. The industrial growth would drive the revenues from the segment going forward

Revival in automobile, the immediate growth driver Auto demand has revived after the slump witnessed during FY09 and this would emerge as immense opportunity in the replacement
market. The company has strong presence in the replacement market driving 66% of the revenue from the segment. The focus on branding, strong network of 169 franchises and 18,000 active retailers and entry into 2 wheeler segment with VLRA battery technology would further help ARBL in penetrating the segment.

Higher EBITDA margins despite rising lead prices Lead prices have doubled in last one year, which is likely to pressurise EBITDA margins. However the pricing power in replacement market would protect EBITDA margins from drastic fall. Past two quarters, the company has reported EBITDA margins of 24% plus as against 10% - 18% range in FY08 and FY09.

At CMP of Rs 161, ARBL discounts FY10E and FY11E EPS by 8.3x and 7.9x respectively. The revival of auto volumes , and industrial growth provides us strong earning visibility. We recommend the stock with 10% upside from current levels as our Pick of the Week.

To read the full report: ARBL