Hold Amara Raja Batteries; target of Rs 850: Edelweiss

Edelweiss' report on Amara Raja Batteries

Amara Raja Batteries’ (AMRJ) Q2FY16 revenue and EBIDTA growth of 9% and 10% was lower than our estimates by 7% and 11%, respectively. Key positives were: 1) continued outperformance in automotives with ~8%/27% YoY growth in 4W/2W OEM batteries sales and 18%/14% YoY growth in 4W/2W replacement batteries sales (mere 1%/9% growth reported in 4W  /2W replacement sales and  5% YoY decline in OEM sales by Exide). Further, it reported 6% growth in telecom batteries; 2) sales jumped 9% YoY despite pass on of lead price dip; and 3) 224bps YoY gross margin expansion due to falling lead cost and favourable sales mix. Key negatives were: 1) flat growth in UPS sales; and 2) mere 18bps rise in EBIDTA margin to 17.15% (18% expected) due to 20% YoY jump in staff cost and 23% YoY rise in other expenses led by sales promotion cost. We revise down FY16-17E earnings 7-8% and maintain ‘HOLD’ as valuations at 32.8x/24.8x at  FY16/FY17E EPS, respectively, factor in upsides, even as we value AMRJ at 23x FY17E EPS, at 22% premium to peer Exide, giving benefit of outperformance and ~20% earnings CAGR over FY15-17E.  Robust auto replacement sales; UPS loses steam;Sales growth of 9.2% YoY in Q2FY16 was lower than estimate, but better than the 1.3% YoY dip reported by Exide. This was led by volume spurt of 23%/19%/14%/24% in 4W/2W replacement/4W/2W OEM sales; value growth stood at 18%/14%/8%/27% YoY, respectively. In comparison, Exide reported 1%/9% rise in 4W/2W auto replacement sales and 5% fall in OEM sales. However, AMRJ’s industrial sales slowed down with 10% and 5% volume growth in telecom and UPS and 6% and flat growth in value, respectively. This is compared to decline in each industrial segment by Exide, except traction segment. Gross margin jumped 224bps YoY due to dip in lead costs and favourable mix. However, EBITDA margin expanded mere 18bps YoY and fell 32bps QoQ to 17.2%, leading to EBIDTA growth of ~10.4% YoY. PAT grew 22.2% YoY led by reduction in depreciation and lower tax rate. Management guided for operating margin to sustain at ~17.5%.   Outlook and valuations: Rich; maintain ‘HOLD’We maintain ‘HOLD’ with revised TP of INR 850 (INR 880 earlier) as valuations at 32.8x/24.8x at  FY16/FY17E EPS, respectively, factor in upsides, even as we value AMRJ at 23x FY17E EPS, at 22% premium to peer Exide.For all recommendations, click hereDisclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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