Mid cap : Buy Amara Raja Batteries Ltd For Target Rs. 1,129 - Geojit Financial
Follow us Now on Telegram ! Get daily 10 - 12 important updates on Business, Finance and Investment. Join our Telegram Channel
https://t.me/InvestmentGuruIndiacom
Download Telegram App before Joining the Channel
Future project likely to retain premium valuation.
Amara Raja Batteries Ltd (ARBL) is India’s second largest Lead-acid battery manufacturer. Its segment include 70% from automotive & rest from industrial with a market leadership in Telecom segment.
* During Q3FY21, ARBL revenue came at 12%YoY led by sustained demand recovery both in OEM and replacement sales.
* EBITDA margin came lower at 15.6% (-60bps) due to higher lead price. However, continued cost control initiative offset further decline.
* Investment of Rs350cr for technological & capacity up-gradation in the lithium ion pilot project and 2W/4W batteries is progressing as per schedule, and will drive volume growth in medium to long term.
* Setting up 50MW solar power plant in Andra Pradesh for an outlay of Rs220cr and setting up a Greenfield lead recycling unit with capacity of 1lac ton, for an outlay of Rs280cr to be spend over 18months.
* Given the strong aftermarket reach and brand visibility ARBL to gain market share from the unorganized sector. The aftermarket segment accounts for 40% of the automotive sales & rest from the OEM
* We believe the auto sector is likely to show meaningful pick up in near term owing to lower base and new launches. We value ARBL at 20x FY23EPS and recommend Buy rating at CMP.
Strong replacement demand offset further decline.
During Q3FY21 revenue grew by 12%YoY led by sustained demand recovery both in OEM and replacement sales. Demand for batteries in the after market sales recovered sharply and supplies were ramped up in the quarter, supported by strong OEM export. Both the automotive brands continued its growth momentum across vehicle segments. Similarly the industrial channels like telecom and UPS are doing well. EBITDA margin came lower at 15.6%(-60bps) due to lead price inflation, by 80bps sequentially and 160bpsYoY. However, continuous cost control initiative offset further decline. Additionally PAT came at 18%YoY supported by increase in other income.
Capacity addition in line with future demand
ARBL’s investments in capacity expansion is in line with the future demand for 2W and 4W. AMRL has inaugurated its “Advance lithium Technology Research Hub” with a Pilot plant facility for cell development project based on the technology transferred from ISRO. The company has already got approval for the storage application for major 2W/3W OEM Players. The board approved an investment of Rs350cr to Rs400cr to complete the third Green field unit of automotive battery and other technology and maintenance capex. The company has also announced capex of Rs500cr. towards setting up lead acid recycling plant of 1 lakh tonnes per annum capacity (Rs280cr.) and captive 280 MW solar power plant (Rs220cr.).The strategic investments is focused on improving operational efficiencies, cost optimisation and technology up gradation. The planned investments in solar and lead recycling plants will aid reducing costs and provide long term support to key raw material procurement. .
Margin to expand going forward
Despite increase in lead price globally we expect the cost reduction method and superior product mix to expand margin going forward. We believe that the company’s capacity addition in newer technology and lead recycling plant will reduce material cost for the battery manufactures. ARBL higher penetration in the unorganized sector and reasonable pick up in the telecom sector is likely to expand margin and factor 60bps improvement from FY21E.
Valuations
Despite pressure in margin due to lower material cost pass through to OEM, comparing to its peer Exide, the company continues to be a second formidable player behind Exide in the OEM & Aftermarket sales. This is largely led by the strong franchise network and operational efficiency. We believe the auto sector is likely to show pick up in H2FY21 owing to lower base and new launches. Considering the strong financials and larger visibility we value ARBL at 20x FY23 EPS and recommend Buy rating with a revised target price of Rs1,129.
To Read Complete Report & Disclaimer Click Here
For More Geojit Financial Services Ltd Disclaimer https://www.geojit.com/disclaimer
SEBI Registration Number: INH200000345
Above views are of the author and not of the website kindly read disclaimer
