December 14, 2015

Amara Raja Batteries: Charging ahead

ARBL remains the better bet among listed battery makers, with Exide still battling the bruises of loss in market share and low profitability. Sanguine outlook for both automotive and telecom batteries and stable prices of lead, the key raw material, also buttress the case for investment in ARBL.

Historically, ARBL traded at a discount to Exide, given the latter’s market leadership position. But with the organised battery market being a virtual duopoly between these two players, the troubles faced by Exide turned into benefits for ARBL, leading to a re-rating of the latter’s stock in the last one year.

ARBL’s valuation now is at 32 times its trailing 12-month earnings, compared to Exide’s 22 times. While this is not cheap per se, what’s comforting is that while profit growth has remained strong in the last few quarters, the correction in the stock price has brought the valuation down from the peak of around 40 times ARBL traded at, earlier this year. Investors with a high risk appetite can take exposure to the stock.

ARBL derives about 55 per cent of its revenue from the sale of automotive batteries and supplies toMaruti Suzuki, Hyundai, Tata Motors and Royal Enfield among others.

After the slowdown that affected the auto industry in the last two-three years, domestic car sales have inched up over 11 per cent so far in 2015-16, while sale of heavy trucks and buses have galloped to show a 31 per cent growth.

An economy on the mend, along with low inflation and falling interest rates should help sustain the upturn in the next one to two years. Irrespective of new vehicle sales, battery manufacturers derive a good portion of revenues from secondary market demand for replacing worn out batteries in existing vehicles. With auto sales gaining speed now, replacement demand will also be strong two-three years down the line.

For the first six months of this fiscal, ARBL’s direct sales to auto manufacturers has grown about 17 per cent year-on-year, while replacement sales have grown 23 per cent.

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