Published on 15/03/2017 4:25:14 PM | Source: Emkay Global Financial Services Ltd
Auto Ancillaries Sector - Positively Charged - Emkay
* We recently interacted with battery dealers, Exide and Amara Raja. We understand Exide has garnered market share with its renewed strategy, and this momentum is expected to continue in the short to medium term.
* We believe the battery industry is expected to grow with the ever-increasing vehicle population due to rising income levels and expected shift from unorganized to organized due to GST implementation. We expect a Revenue/PAT CAGR of ~15%/15% and ~13%/16%, respectively, for Exide and Amara Raja in FY17-FY19.
* We resume coverage on Exide with a BUY rating and TP of Rs250 and on Amara Raja with an ACCUMULATE rating and a TP of Rs900. While Exide renewed strategy could lead to relative outperformance in the short to medium term, given the strong financial profile, capacity expansion and likely benefits from its strong technological partner Johnson Amara Raja will continue to give tough competition to Exide over the long term
* Exide marches ahead:
Our recent interaction with dealers suggests Exide has marched ahead of competition in the auto replacement segment due to its manifold strategy of 1) technological upgrades, 2) 10% price cut to bridge the gap between Amara Raja and Exide products, 3) rehaul of the warranty system (the company now replaces batteries in 2-4 days from 8-10 days earlier, offers BATMOBILE service and uses 2Ws), which has helped in regaining consumer confidence, 4) new dealership concept of HIT dealers, in-line with Amara Raja’s franchisee model, and 5) new product lines especially the inverter segment. BOSS has helped Exide to gain share from the unorganized segment. (Detailed feedback on page 2)
* Industry growth momentum to continue; GST benefits likely to kick in:
We believe the battery industry is expected to grow with the ever-increasing vehicle population because of rising income levels and expected shift from the unorganized to organized segment due to GST implementation. We expect a Revenue/PAT CAGR of ~15%/15% and ~13%/16%, respectively, for Exide and Amara Raja in FY17-FY19.
* Resume coverage on Exide and Amara Raja:
We resume coverage on Exide with a BUY rating on the stock and a TP of Rs250, based on 20x P/E FY19E earnings. We assign a value of Rs28 for the company's insurance business, based on 1.5x P/B. We believe given the company's renewed strategy (technology upgradation, improved after-sales service and dealership network), the valuation gap (previously 30-40% discount) between Amara Raja and Exide should reduce going forward.
We resume coverage on Amara Raja with an ACCUMULATE rating and a TP of Rs900, based on 22x FY19 EPS (20% premium to Exide). We like Amara Raja, given its strong financial profile, capacity expansion and likely benefits from its strong technological partner Johnson Controls ahead. However, in the near term, Amara Raja could face some headwinds due to heightened competition from Exide in the automotive replacement segment.
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