Amararaja Batteries Limited: Powering Ahead


(Krishna Agrawal) #121

Techically speaking, stockhad bounced back from 210 odds with very low volumes (May be Big fishes of market got some insider news about upcoming good results). However, yesterdays move was supported by huge volumes (Highest after Jan’13).

284 will provide samll resistance, crossing the same will lead this stock till 300. Real test will happen thr. If able to cross and sustain above 300 stock will test the previous high of 328.


(P Sharma) #122

Hi Dhawanil,

Good to see you back.

I had raised some corporate governance issues with respect to the remuneration of the Galla family, their family trust and the inter company transactions. What is your take on this? I for one feel uncomfortable putting more money into this company.

Thanks


(Dhwanil Desai) #123

Dear Mr.Sharma,

I do acknowledge the concern that you have raised on corporate governance. However, I belong to the school of thught that if a promoter is building a strong and scalable business from scratch, he is entitled to earn good money. Hence, I am generally ok with high salries to management directors as long as business continue to do well and management does not increase in tough times.

On the related party transactions, I do share the concern that you have raised. As an ideal case, i would not want to see substantial portion of cost/revenue as related party transaction. On this front, numbers are concerning. The only comfort that I have is that ARBL management has not taken any overt actions that against the interests of minority shareholders.

On the other hand, I feel that, ARBL’s business economics is very strong and scale of opportunity is very large. Moreover, it opeates in duopoly environment and has moderate pricing power. All these put together with attractive valuation and comfort of JhonsonsControls beingequity partner of the company makes up for the concerns on corporate governance. Though, I will be closely watching for any actions from management that undemine minority shareholder’s interest. In case of such event (As happened in Oriental Carbon!), Ipersonally will not be comfortableowning part of the business.

Best Regards,

Dhwanil Desai


(mvalue) #124

Hi Dhawanil,

what was the action of promotor which raised a red flag in OCCL ? I had taken a starter position in OCCL around 120 levels(1% of pf). Was thinking crash in OCCL was due to demand issues and due to being put in PCAS system. was not aware of any promotor integrity issues. Sorry for hijacking the thread…


(Abhishek Basumallick) #125

Power Deficit Attracts Johnson Controls Venture: Corporate India

Amara Raja Batteries Ltd. (AMRJ), backed by the largest U.S. auto-parts maker, is setting up a plant to make batteries for home backup power systems to revive profit growth thatas slowing amid weakening car sales in India.

The company, 26 percent owned by Johnson Controls Inc. (JCI:US), is targeting a fivefold jump in revenue from selling backup power batteries in the next three years, Chief Financial Officer K. Suresh said in an interview in Hyderabad. It will build a factory in the southern state of Andhra Pradesh, which will start making the product by March 2016, he said.

Indiaas chronic power shortages are an opportunity for Amara Raja to reduce its reliance on automotive batteries. The company will vie with competitors including the local unit of Schneider Electric SA (SU) for a share of a market for inverters that Frost & Sullivan estimates will more than triple to $1.4 billion in the seven years through March 2017.

aWith the power deficit growing every day, the demand for inverters will only keep rising and very soon, every household will require one,a said Suresh. aWe expect inverters to be our fastest-growing segment.a

Power shortages continue to plague India as inadequate availability of fuel, losses at state-owned distribution companies and delays in government approvals discourage private investments in utilities. Peak electricity supply fell 4.6 percent short of demand in the six months ended September, according to the Central Electricity Authority.

Home UPS

Inverters, an electrical power converter that changes direct current from a battery to alternating current, have gained popularity in India for use in homes over the past decade as they are silent and convenient to use.

Amara Raja will have to compete with Exide Industries Ltd. (EXID), Indiaas biggest maker of automotive batteries, Luminous Power Technologies Pvt., in which Schneider Electric bought a 74 percent stake in 2011, and Su-Kam Power Systems Ltd.

aTo replicate the kind of brand recall Amara Raja has in the auto segment in the inverter segment wonat be easy,a said Arun Kejriwal, director, Kejriwal Research & Investments Pvt. aIt will require a sustained marketing push, which will come at a cost.a

The maker of Amaron brand of batteries currently buys inverter batteries from small manufacturers and sells them under its brand name, Suresh said. It will spend 1.5 billion rupees ($24 million) on the factory, he said.

Margin Benefit

aRight now, we are only participating in the distribution margin,a said Suresh. aOnce I start manufacturing, I would also be participating in the manufacturing margin.a

The business has operating profit margin of about 4.5 percent and that will increase to double digits once the company starts producing on its own, he said.

Operating profit margins from the business can be about 15 percent with its own manufacturing, said Rajasekhar R., an analyst with Cholamandalam Securities Ltd.

Amara Raja sells its batteries in more than 21,000 retail stores and has expanded its PowerZone outlets to 1,100 outlets in rural and semi-urban areas, according to its annual report.

aItas a strong growth area considering the power shortages prevalent in the country,a said Mamta Verma, an analyst at DC India Research LLP. aThey already have a strong distribution network which will help them gain market share.a

Earnings Outlook

Annual profit and sales at Amara Raja, which has partnered Johnson Controls since 1997, are expected to expand at a slower pace for a second year in the 12 months ending March. Net income will rise 22 percent to 3.5 billion rupees in the period, according to the median of 22 analystsa estimates compiled by Bloomberg. Sales will probably increase 21 percent.

Shares of Amara Raja have gained 28 percent in Mumbai trading this year, compared with the 6.1 percent increase in the benchmark S&P BSE Sensex.

Inverter batteries accounted for about 7 percent of Amara Rajaas sales of 29.6 billion rupees in the year ended March. The company targets the business to generate 10 billion rupees in revenue in the 12 months ending March 2016, Suresh said.

The company gets 40 percent revenue from sale of batteries to provide power backup to telecommunications towers, uninterrupted power supply for computers and inverter batteries.

The growth in the UPS business is slowing as it is linked to government spending on e-governance, which is not taking place, Suresh said. While addition of new mobile-phone towers has slowed, there is demand for replacing diesel-powered generators with batteries, he said.

Replacement Demand

Amara Raja, which gets more than half its revenue from the automotive segment, is benefiting from demand for replacement batteries. Car sales in India had surged in 2009 and 2010.

About 75 percent of its automotive battery sales comes from the replacement market, Suresh said. Sales directly to automakers fell 2 percent in the quarter ended June, he said.

Indiaas automakersa body last month forecast the first annual drop in passenger vehicle sales in more than a decade as an economic slowdown damps demand for cars and SUVs.

Amara Raja plans to spend 5.1 billion rupees to expand its automotive battery capacity, which will be available by the quarter ending in September 2014, Suresh said.

aWe expect things to look up in the auto industry by that time,a said Suresh.

http://www.businessweek.com/news/2013-10-14/power-deficit-attracts-johnson-controls-venture-corporate-india


(Dhwanil Desai) #126

ARBL has once again come out with very decent set of numbers. Though, topline growth is muted, it is the margin improvement which stole the show for Q2. What is really heartening to see is the pricing power demonstrated through margin improvement. I understand that ARBL has been taking price hikes continuously to pass on the cost of rupee depreciation and lead prices. The story is quite different for Exide which is reeling under margin pressure and despite of calibrated price increases only, it is getting difficult to get back the lost market share.

ARBL is also getting into two wheeler OEM segment where till now Exide has not faced competition. Though, in OEM business has lowest margin amongst all segment, being OEM supplier can help you grow in replacement market. So, looks like, things are looking good for ARBL and stock continues to trade at decent valuation.

Discl: continue to hold ARBL and have added position periodically at different price levels.

Thanks & Regards,

Dhwanil Desai


(Sunil) #127

Good Q3 Results

Sales 859.9 Cr (13% YoY growth)

PAT - 95.01Cr (17% YoY growth)

EPS for quarter - 5.56


(Sagar Saxena) #128

This performance comes against the backdrop of poor show from Exide.I guess its high time markets started rewarding ARBL with a higher multiple.They have deliberately gone slow on the OEM market,since its both low margin & nowadays,low growth.Their Telecom vertical is another pillar of strength.Probably RIL’s 4G foray will add another revenue stream.On 22nd Jan.,ARBL has started operations at the world’s largest MVRLA plant at Chittoor,AP.The going has been very good,especially with the consistency & maintainance of high return ratios.Still looks solid.


(Dhwanil Desai) #129

ARBL has once again put up decent show and that too in not so conducive environment. However, the headwinds in the near term are getting stronger as indicated both during Exide concall and ARBL press release. Auto replacement market growth is tapering down reflecting lower growth in new sales of automotive market in past 2-3 years. ARBL largely benefited from replacement market sales in last couple of years as they snatched away significant market share from Exide in this high margin segment. Moreover, till industrial growth revives, UPS segment also will be flattish. Against that, supply to two wheeler OEM market (HMSI) has started which will bring some volume growth (though lower margin). Telecom space also is likely to see revival where ARBL is clearly a leader so there will be some volume growth likely to come from there (again a low margin business and more so with Exide aggressively entering this market).

Overall, I feel that growth in range of 20% (and not 30% as demonstrated in last 2 years) and slightly lower margin is expected in near term.

Having said this is an excellent long term portfolio stock for sure considering extremely large opportunity size, pricing power (no predatory pricing, unless ARBL begins it, In Exide concall it was made very clear that competition will not be on price) and duopoly, good economics of the industry. As it happens many a time in a bull market, such stories are re-rated and significant P/E expansions happen rewarding the consistency in performance. If the pendulum swings to irrational exuberance in overall market, upside from re-rating will be icing on the cake.


(Bhupesh) #130

It is now ~20 PE based on trailing year earning.


(Dinesh Agrawal) #131

Elon Musk’s Tesla Motors has audacious plan “Gigafactory” for producing more lithium ion batteries in 2020 annually than were produced world wide in 2013 with 30% cost savings.

This can significantly impact operating margins of battery companies by increase cost of raw material due to high demand from Tesla and reducing price of finished product. Might even make business difficult for inefficient players.

Although this is several year later but shouldn’t be treated as speculation given the track record of Tesla. What impact it can have to battery industry in general and Indian companies Amara raja, Exide in particular.


(Bhupesh) #132

Did you see Miniutes of29 thAGM ofAmara Raja

Mr N Sri Vishnu Raju, T R Narayanaswamy’ appointment received 18505433 negative votes 14.89% of total votes casted for this item.

Lease Agreement with Amara Raja Infra Private Limitedreceived14863761negative votes, 20.07 % of total votes castedfor this item.

Good to see these negative votes, who are these shareholders? Any one attended AGM?


(Bhupesh) #133

Business Standard writes on the land deal of the promoter company …

Amara Raja wants to pay promoter entity upfront for 99-yr lease


(Bhupesh) #134

Disclosure: invested since 2008-9 … no new position in recent years


#135

Suckered: Amara Raja to Pay Promoters 40 cr. Upfront to Lease Land It Doesnât Need

I own Amara Raja and thinking to offload. What are the views of the other boarders?


(HG) #136

Its frustrating to see such actions of promoters. Looks like a similar thing has happened at Kaveri Seeds where a related party land transaction resolution got 23% negative votes. That stock is getting hammered…


(Arun S G) #137

I think its important to place this matter in perspective. THe market cap of Amara is todayupwards of 10,000 crores and the Gallas own 20% of it, i.e. 2000 crores.

The day this news about lease broke, the market punished the stock about 10%, so in effectthe rap on the knuckles was worth 200 crores to the Gallas.

Now one can argue that the company does not need the land ( though the justification wasit does) and the promoters are misusing the money. Maybe they are. But something tells methat for someone to own 2000 crores and yet stake the reputation and eventually to pay a pricefor a measly 40 crores does not seem to bright.

If there is any comparison to Rajus of Satyam, one must remember that they defrauded the companyand the extent was very high. Here, there does not seem to be intent to defraud. Do allmembers believe that the land is not needed at all?

Regards,
Arun

Disc: I am invested since 2008-09.


(HG) #138

I’m staying invested. As far as the business story goes, there aren’t alarm bells yet. Plus, my holding cost is quite low compared to CMP. But the articles bring out enough to make additional investments into the stock out of the question for now.


(narendra ) #139

I used to hold Amara Raja , but sold after one of the promoter who is responsible for the growth entered full time politics I sold my shares ( read Professor Bhakshi http://fundooprofessor.wordpress.com/2013/10/12/oo1-to-oo3/ ).

If you are are having concentrated portfolio and do not track the portfolio frequently , then you should be bit more careful with promoter’s actions.

Having said that I feel this company as a business should do good because of their relationship with Johnson controls .


(P Sharma) #140

Unfortunately, the share holders of ARB will have to live with this. This is just a small tip of the inter-party transactions that the Galla family have been involved in the last few years. This thread has some of the the details.

As someone pointed out earlier, fresh allocations will need a serious rethink.In my opinion, investors from lower levels can stay invested.

Having said that, we must also applaud the promoters for the progress that this company has made in the past few years. The superior technology with a tie up with Johnson Controls, the very bold strategy of bringing the car battery out of the hood literally and creating a consumer brand out of it, the capacity expansions, they have got almost everything right.

Political connections in industry are nothing new. They are either overt or covert. I would rather that the influence is out in the open than through proxies. Political influence can be a big advantage in natural resource related industries, but count for a lot less in consumer facing brands. Siddharth of Cafe Coffee Day? Is it just political influence or the understanding of the changing social habits and brilliant product positioning?

Hero Motocorp investing in Chitoor rather than in North Karnataka. Is that the brilliance of the known hand or the incompetence of the lesser concerned? Political influence which is well directed can do a lot of good.