ICICI Direct recommended hold rating on Amara Raja Batteries with a target price of Rs 870 in its research report dated August 10, 2017.
ICICI Direct's research report on Amara Raja Batteries
Amara Raja Batteries’ (ARBL) revenues came in at Rs 1,497 crore (up 13.4% YoY) vs. our expectation of Rs 1,557 crore. According to the management, automotive battery business continued to maintain the growth trend but industrial battery business (mainly disruption in the telecom sector) has been subdued thereby resulting in lower volume offtake. Automotive exports & inverter battery sales have grown significantly YoY EBITDA margins contracted 433 bps YoY & 85 bps QoQ to 12.9% mainly on account of higher raw material cost (average lead price during Q1FY18 was up 21.1% YoY but down 8.6% QoQ to Rs 140/kg) impacting gross margin, which declined 380 bps YoY & 203 bps QoQ. Subsequently, reported PAT declined 23.6% YoY to Rs 100 crore below our estimate of Rs 140 crore ARBL has smoothly transitioned into the GST regime and expects a level playing field thereby expanding its market share, going forward. However, higher lead price and slowing demand for industrial battery segment remains a concern for the company.
ARBL’s key differentiator is the fact that it has consistently been able to grow its presence in the battery business across markets. However, we believe ARBL is likely to face key challenges on the margin front, considering higher lead prices in the competitive environment & with no major differentiator in the product. Also, with EIL’s performance gradually reviving, the premium valuation will now narrow down for ARBL. Hence, we maintain our HOLD recommendation on the stock with target of Rs 870, valuing at 23x FY19E EPS of Rs 37.6 per share.
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