Amara Raja Batteries (AMARAJ) 870

Transcription

1 Result Update Rating matrix Rating : Hold Target : 925 Target Period : 12 months Potential Upside : 6% What s Changed? Target Changed from 1000 to 925 EPS FY16E Changed from 29.8 to 30.2 EPS FY17E Changed from 39.5 to 35.0 EPS FY18E Introduced at 42.1 Rating Changed from Buy to Hold Quarterly Performance Q3FY16 Q3FY15 YoY (%) Q2FY16 QoQ (%) Revenue 1, , , EBITDA EBITDA (%) bps bps PAT Key Financials Crore FY15 FY16E FY17E FY18E Net Sales 4,178 4,762 5,602 6,600 EBITDA ,176 Net Profit EPS ( ) Valuation summary FY15 FY16E FY17E FY18E P/E (x) Target P/E(x) EV / EBITDA(x) P/BV (x) RoNW (%) RoCE (%) Stock data Particular Amount Market Capitalization Crore Total Debt (FY15) 74.1 Crore Cash and Investments (FY15) Crore EV (FY15) Crore 52 week H/L ( ) 1132 / 773 Equity capital ( crore) 17.1 Crore Face value ( ) 1 Price performance (%) 1M 3M 6M 12M Amara Raja Batteries Ltd Exide Industries Ltd Research Analyst Nishit Zota nishit.zota@icicisecurities.com Vidrum Mehta vidrum.mehta@icicisecurities.com February 3, 2016 Amara Raja Batteries (AMARAJ) 870 Strong performance; valuations stretched Amara Raja Batteries (ARBL) revenues grew 14.9% YoY to 1,225 crore vs. our estimate of 1,185 crore. The growth was led by both automotive (replacement & OEMs) and industrial battery segment. The quarter was mainly driven by strong volumes of 4-W batteries in the replacement segment and higher demand from the telecom sector (primarily due to data growth) in the industrial space EBITDA margins were at 18.7% (up 178 bps YoY and 148 bps) mainly due to gross margin expansion (of 366 bps YoY & 246 bps QoQ). Part of this benefit was offset by higher employee & other expense PAT grew 33.1% YoY to 136 crore vs. estimate of 126 crore ARBL is likely to continue its growth momentum. However, margins may get softer assuming higher lead prices, going ahead. Valuations also look stretched ARBL well placed in duopoly battery business The Indian battery industry is a duopoly in nature with top players, viz. Exide and Amara Raja controlling ~90% of the organised market. The battery business was considered to be a strong RoCE generator with high margins and strong pricing power. However, all those assumptions went out of the window as Exide Industries (EIL) lost its way in the wake of ARBL s competitive onslaught. ARBL, on the other hand, was able to gain on all fronts ranging from market share [4W-replacement rose from 20%- 25% (FY10) to 38-40% (FY15)] to financials (RoCEs rose from 24% in FY09 to 34% in FY15). ARBL, thus, benefited from EIL s lack of clear strategy to gain a major foothold in the minds of customers in a profitable manner. Consistent business strategy drives performance ARBL s key differentiator is that it has been able to grow its presence in the battery business across OEMs and end customers in a very smooth manner. ARBL s automotive strategy has been smart in the sense that it continues to maintain 8-10% product pricing gap with EIL s products maintaining highest quality standards. Thus, customers have taken to ARBL s products well, thereby, enabling ARBL to be consistent. On the dominant telecom business, it withstood the challenging times but maintained price discipline for its high quality products, thereby aiding profitable albeit relatively slower growth. Thus, the overall focus on market share gains and financials has allowed ARBL to post better results. Capacity to be in place, poised to grow profitably across segments ARBL launched an expansion plan of ~ 750 crore that is being commissioned. It has also ventured into tubular battery expansion of 1.4 million units worth ~ 500 crore. Automotive capacity is expected to rise to ~19 million units in FY16E from ~10 million units in FY13. On the industrial side, VRLA battery capacity expansions are complete (~1000 million Amp Hr) with ramp-up set to happen in FY16E. ARBL is also witnessing strong growth in the telecom/ups space, which contributes ~40% of overall revenues. The gradual demand revival in the auto/infra demand is likely to aid growth, going ahead. Quality play but available at steep valuations ARBL s performance continues to be impressive even as the industry leader struggles with consistency in profitability. It posted a consistent performance, strong return ratios (~23% RoE, ~31% RoCE), good earnings visibility & a strong balance sheet (net debt negative). However, ARBL is trading at huge premium (>30% compared to EIL). Hence, we have HOLD rating on the stock with a TP of 925, valuing at 22x FY18E. ICICI Securities Ltd Retail Equity Research

2 Variance analysis- Standalone Q3FY16 Q3FY16E Q3FY15 YoY (%) Q2FY16 QoQ (%) Comments Total Operating Income Sales driven by both the automotive (replacement and OEM) and industrial segment (registered double digit) Raw Material Expenses Mainly due to lower raw material (lead) cost Employee Expenses Other Expenses EBITDA EBITDA Margin (%) bps bps Margin expanded mainly due to higher gross margins but part of this benefit was offset by higher employee and other expense Other Income Depreciation Interest Tax Reported PAT Higher than estimated revenue and margins lifted profitability, which came in above our estimates EPS ( ) Key Metrics Sales ( crore) 1, , , , RM cost (% to net sales) bps bps Benefit of lower raw material cost (average lead price down ~10.6% YoY) Other expenses (% to net sales) bps bps Employee Exp (% to net sales) bps bps Change in estimates FY16E FY17E FY18E ( Crore) Old New % Change Old New % Change Introduced Comments Revenue 4,746 4, ,603 5, ,622 Introduced FY18 estimates. Better-than-expected numbers resulted into a marginal increase in our estimates for FY1E & FY17E EBITDA , ,176 EBITDA Margin (%) bps bps 17.8 Margin may contract assuming the reversing of lead prices, going ahead PAT EPS ( ) Assumptions Current Earlier FY18E Comments Units (mn) FY14P FY15E FY16E FY17E FY16E FY17E Introduced Automotive volume growth moderated; after subdued OEM demand & with replacement demand likely to grow at a slower pace (assuming three phase cycle) Automotive volumes Industrial volumes ASP/Battery ( ) 2,278 2,393 2,393 2,460 2,348 2,434 2,564 Better product mix likely to drive average ASP higher, going forward RM/Battery ( ) 1,542 1,512 1,523 1,563 1,519 1,520 1,634 Lead cost ( / Kg) ICICI Securities Ltd Retail Equity Research Page 2

3 Company Analysis Revenue to rise as OEM demand picks up along with replacement! We expect revenues to grow at 16.5% CAGR in FY15-18E to 6,622 crore driven by increasing share of demand from the auto OEM side as well as a gradual pick-up in the replacement battery segment (due to ARBL s strong position in the organised market as well shortening life cycle). The company had embarked on a strong capacity addition programme vis-àvis FY13, FY14, which would also aid new market growth. Capacity, on the automotive side, is expected to go up to ~19 million units in FY16E from ~10 million units in FY13 on the automotive side. On the industrial side, large VRLA capacity is expanding to ~1000 million AmpHr from 760 million AmpHr in FY13. The small VRLA battery capacity is also expected to go up to ~5 million units from ~2.1 million units in FY13 on the back of 1.4 million capex for the tubular segment. The gradual demand recovery in the industrial segment is likely to aid growth, going forward. ARBL benefits from strong brand equity and distribution network and now has in excess of ~30,000 touch points on the automotive side and ~100 aqua channel partners on the industrial side. Exhibit 1: We build in revenue growth at 16.5% CAGR in FY15-18E 7,000 6,622 6,000 5,624 5, ,772 ( crore) 4,000 3,000 2,364 2,961 3,437 2,000 1,000 0 FY12 FY13 FY14 FY15 FY16E FY17E FY18E EBITDA margins to moderate marginally! The duopoly nature of the industry lends decent pricing power to ARBL vis-à-vis EIL. However, we believe a northward movement of lead prices, going ahead, may adversely impact ARBL s margins over the next two or three years. The smelting contribution for ARBL is ~15%, which could provide a cushion in the coming years. Also, its gradual focus on tapping the lower margin OEM segment would dent margins. Hence, we expect EBITDA to rise to ~ 1176 crore, assuming a marginal contraction of bps on margins to 17.8%. ICICI Securities Ltd Retail Equity Research Page 3

4 Exhibit 2: EBITDA margins to rise steadily 1,250 ( crore) 1, FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E (%) EBITDA - LHS Margin (%) - RHS Return ratios to remain strong! Return ratios are expected to remain healthy with rising profitability. Return ratios witnessed a decline in FY11 primarily due to the significant investment to boost the manufacturing capacity. However, post the same, ratios moved higher. With new capacity coming on stream over the next six to nine months, the initial lower utilisation level is likely to result in higher overhead cost. Thus, it is likely to moderate return ratios marginally. Despite the same, we believe the company has maintained strong return in the past and is likely to post strong RoNW & RoCE of ~31% & ~23%, respectively, for FY18E. Exhibit 3: Strong return ratios 45.0 (%) FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E RoCE RoNW ICICI Securities Ltd Retail Equity Research Page 4

5 ARBL remains a cash generating franchise, which has an annual CFO in excess of ~ 951 crore (FY18E). The company has maintained tight control on the working capital and maintained around a month s lead inventory in FY15. PAT is expected to grow to 720 crore at ~20.5% CAGR (FY15-18E). We believe ARBL could increase dividend payouts in coming years as major capex expenses for the immediate period start to get over. Exhibit 4: Profit to continue to grow strong! FY12 FY13 FY14 FY15 FY16E FY17E FY18E PAT (crore) PAT margin (%) (RHS) Source: Company press release, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 5

6 Outlook and valuation Amara Raja s financial performance has been ahead of market leader Exide Industries for quite some time. Amara Raja has been able to chip away at Exide s market share in the replacement segment despite Exide s early start in establishing a large penetrated dealer network. This serves to highlight the fact that the replacement market, especially the automotive replacement segment, is large enough for two players in the market to grow. Now, with ARBL s focus on growing the OEM side of the business, we expect ARBL to further gain market share. The increase in volumes to Honda Motorcycles India (the only fast growing 2-W OEM) has also aided in higher utilisations and brings benefits of operating leverage. We remain positive on the long-term growth prospects of the auto industry and believe the duopolistic battery segment will be a major beneficiary of the return to growth for the auto industry. ARBL s performance has continued to be impressive even as the industry leader struggles with consistency of profitability. ARBL has put up a consistent performance; strong return ratio (~23% RoE, ~31% RoCE), good earnings visibility and a strong balance sheet (net debt negative). However, ARBL is trading at a huge premium (>30% compared to EIL). Hence, we revise our recommendation from BUY to HOLD on the stock with a target price of 925 (earlier 1,000), valuing at 22x FY18E. Exhibit 5: Valuation Revenues Growth EPS Growth PE EV/EBITDA RoNW RoCE ( cr) (%) ( ) (%) (x) (x) (%) (%) FY15 4, FY16E 4, FY17E 5, FY18E 6, ICICI Securities Ltd Retail Equity Research Page 6

7 Company snapshot 1,200 1,000 Target Price: Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Apr-09 May-09 Nov-10 Mar-11 Mar-12 Aug-12 Mar-12 Mar-13 Oct-13 May-14 Nov-14 Apr-15 May-15 Event ARBL reports strong EBITDA margin jump of 500 bps to ~20% for FY10 results The company undertakes new capacity expansion drive in the industrial battery side both of large VRLA and medium VRLA Receives best supply chain leader in the auto components business The company is able to gain on EIL's loss of market share in replacement market and increases replacement share by 6% QoQ The increase in costs of lead causes decline in gross margins for the complete battery industry The stock gets re-rated vis-à-vis EIL due to consistency of earnings as EIL's financial performance deteriorates ARBL reports strong EBITDA margins performance The company announces next growth capex of 700 crore across various segments ARBL commissions the new two wheeler capacity aiding volume growth Surprises on the negative side on the EBITDA margins front ARBL announces new capacity expansion plan of 500 crore for tubular battery with 1.4 million unit capacity Company commissions 4-W battery plant at Chittoor with installed capacity at 2.25 million p.a. taking total capacity to 8.25 million per annum Clocks highest ever revenue & PAT in FY15 Top 10 Shareholders Shareholding Pattern Rank Name Latest Filing Date % O/S Position (m) Change (m) (in %) Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 1 Johnson Controls Mauritius Pvt. Ltd. 30-Sep Promoter Galla (Jayadev) 30-Sep FII Galla (Ramachandra N) 30-Sep DII Gourineni (Ramadevi) 30-Sep Others Galla (Amara Kumari) 30-Sep Franklin Templeton Asset Management (India) Pvt. Ltd. 30-Sep Franklin Advisers, Inc. 30-Sep Amara Raja Group 30-Sep ICICI Prudential Asset Management Co. Ltd. 30-Sep Capital Research Global Investors 31-Dec Source: Reuters, ICICIdirect.com Research Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares William Blair Investment Management, LLC HDFC Asset Management Co., Ltd Wasatch Advisors, Inc Franklin Templeton Asset Management (India) Pvt. Ltd J O Hambro Capital Management Limited Franklin Advisers, Inc Motilal Oswal Asset Management Company Ltd William Blair & Company, L.L.C UBS Global Asset Management (Americas), Inc Birla Sun Life Asset Management Company Ltd ICICI Securities Ltd Retail Equity Research Page 7

8 Financial summary Profit and loss statement Crore (Year-end March) FY15 FY16E FY17E FY18E Total operating Income 4,178 4,762 5,602 6,600 Growth (%) Raw Material Expenses 2, , , ,205.5 Employee Expenses Other Expenses Total Operating Expenditure 3, , , ,446.2 EBITDA ,176 Growth (%) Depreciation Interest Exceptional Items PBT ,058.2 Total Tax PAT Growth (%) EPS ( ) Cash flow statement Crore (Year-end March) FY15 FY16E FY17E FY18E Profit after Tax Add: Depreciation (Inc)/dec in Current Assets Inc/(dec) in CL and Provisions CF from operating activities (Inc)/dec in Investments (Inc)/dec in Fixed Assets Others CF from investing activities (391.2) (390.0) (390.0) (350.0) Issue/(Buy back) of Equity Inc/(dec) in loan funds Dividend paid & dividend tax CF from financing activities (180.6) (3.1) (129.5) (159.3) Net Cash flow Opening Cash Closing Cash Balance sheet Crore (Year-end March) FY15 FY16E FY17E FY18E Liabilities Equity Capital Reserve and Surplus 1, , , ,127.9 Total Shareholders funds 1, , , ,145.0 Total Debt Deferred Tax Liability Total Liabilities 1, , , ,256.0 Assets Gross Block 1, , , ,482.8 Less: Acc Depreciation Net Block , , ,504.2 Capital WIP Total Fixed Assets 1, , , ,590.3 Investments Inventory Debtors Loans and Advances Other Current Assets Cash Total Current Assets 1, , , ,588.9 Creditors Provisions Other current liabilities Total Current Liabilities ,020.6 Net Current Assets , ,568.2 Other Non-Current Assets Application of Funds 1, , , ,256.0 Key ratios (Year-end March) FY15 FY16E FY17E FY18E Per share data ( ) EPS Cash EPS BV DPS Cash Per Share Operating Ratios (%) EBITDA Margin PBT / Net sales PAT Margin Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/Equity Current Ratio Quick Ratio ICICI Securities Ltd Retail Equity Research Page 8

9 ICICIdirect.com coverage universe (Auto & Auto Ancillary) CMP M Cap EPS ( ) P/E (x) EV/EBITDA (x) RoCE (%) RoE ( %) Sector / Company ( ) TP( ) Rating ( Cr) FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E Amara Raja (AMARAJ) Hold Apollo Tyre (APOTYR) Buy Ashok Leyland (ASHLEY) Hold Bajaj Auto (BAAUTO) Buy Balkrishna Ind. (BALIND) Hold Bharat Forge (BHAFOR) Buy Bosch (MICO) Buy Eicher Motors (EICMOT) Hold Exide Industries (EXIIND) Buy Hero Mototcorp (HERHON) Hold JK Tyre & Ind (JKIND) Buy M&M (MAHMAH) Buy Mahindra CIE (MAHAUT) Buy NA Maruti Suzuki (MARUTI) Buy Motherson (MOTSUM) Hold Tata Motors (TELCO) Buy Wabco India (WABTVS) Hold ICICI Securities Ltd Retail Equity Research Page 9

10 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 10

11 ANALYST CERTIFICATION We /I, Nishit Zota, MBA & Vidrum Mehta, MBA Research Analyst, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited is a Sebi registered Research Analyst having registration no. INH ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. 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ICICI Securities Ltd Retail Equity Research Page 11