Amara Raja Batteries – Maintaining Momentum

We rate Amara Raja Batteries a BUY. Amara Raja is engaged in manufacturing batteries for industrial and automotive purposes. It introduced Valve Regulated Lead Acid (VRLA) batteries for industrial usage. These batteries cater to the telecom sector and UPS back-up systems while other end-user segments include the Indian Railways and power utilities.

Major products straddle large, medium and small VRLA batteries catering to Original Equipment Manufacturers (OEMs) and the aftermarket. Conducts automotive batteries business through JV with Johnson Controls Inc. During Q2 2010, net sales increased by 6% y-o-y to INR3,606 million. PAT stood at INR479 million, recording a growth of 155% over Q2 2009.

Investment Highlights

Strong segmental growth. The industrial batteries business maintained its momentum and recorded a 50% CAGR over the last four years. As the company continued to enjoy a preferred supplier status among leading telecom operators and UPS manufacturers, telecom and UPS segments remained the main drivers of the industrial battery business. In automotive battery business, it tied up with Maruti. The company continued to weather the slowdown in the automotive industry owing to a continued focus on channel building and realigned product portfolio.

Rationalised approach. Amara Raja rationalized capital investment per unit in every successive brown field expansion programme through prudent planning and execution. It reinforced the business model through tactical revenue stream from institutional and retail segments. In the automotive battery business, it grew its presence among OEMs (volumedriven) & aftermarket (value-driven) and in the industrial battery business, it forged strong relationships with institutional customers both for original and replacement demand.

Robust balance sheet. Amara Raja created free reserves of INR3,885 million as of March 31, 2009 and maintained a debt-equity ratio of 0.7:1 while utilizing less than 50% of its sanctioned working capital limit during 2008-09. A growing number of OEMs seek to partner with companies that possess strong balance sheet so that vendor companies can scale their capacities and upgrade product portfolio.

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