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Amararaja Batteries Limited: Powering Ahead

If Electric Vehicles have nothing to do with Lead-Acid batteries, then Exide and ARBL run is over.

No wonder, Exide diverted its cash reserve into an insurance arm a few years ago.

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Hi

I am a little skeptical about Indian companies being able to create Lion batteries at a competitive price on a mass scale. The procurement of lithium itself will be a costly proposition. The closest large deposits of Li is in China. Else we have to get it from Africa or Australia and the best option is Latin America - Argentina and Chile etc. I think just like solar panels Lion batteries will be controlled to a large extent by the Chinese.

On doing some scuttlebutt came to know of a person who has been employed by Tesla for procuring Li deposits from Argentina to lower costs for them. How will our producers manage this supply chain at a market competitive cost I cant figure out.

Honestly I like the idea of EV vehicles plying on our roads but I think it is a piped dream for a decade. These are my personal opinions.

Regards
Deepak

Disc: was invested in Amara and exide but exited amara.

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Reliance Jio is using lithium ion batteries for its mobile towers and not lead acid. Orders for the batteries were placed in 2013. The advantage is that Li Iion batteries can have a backup of 10 hours and 80% of its tower sites no longer have a diesel generator. Li ion is far more expensive but the payback is through the elimination of higher power backup cost of diesel.

Bharti Infratel and Indus towers are also using Lithium ion for some sites.

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Toshiba has extraction agreement. Toshiba is going to setup a factory in Gujarat to supply to Suzuki. The scale may not be much until demand picks up.

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More details on the Gujarat plant here.

Exited Amara recently - In my opinion - Multiple headwinds - Increasing RM costs, Competition, Uncertainty on responses to technology changes (Li Ion). However, too early to comment ABL is in difficult situation. They could always turn the tide in their favour in right moves are made - they are seasoned players in their game. .

Hi All,

I propose that we should take away all the Electric Car/Li-ion battery and similar discussion to a new thread or we have a Electric Cars/Bus under Question & Answer section.

If we do not do that all the knowledge regarding Electric Vehicle/Li-Ion battery will be lost in Exide and Amara raja battery thread.

Thanks.
Gaurav Agarwal

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Looks like the market has gotten spooked by the sharp fall in EBITDA margins from 16%+ to 12.9% level seen in Q1 FY18. From the end of Sep the stock price seems to be tracking the LME Lead prices in an inverse way, so for the short term it does look like further increase in Lead price will lead to lower levels.

What the market does not appear to be giving much weight to is -

  1. Increase in net block by almost 50% over last 2 years, all funded by internal accruals
  2. The recent headway that they have made into Hero and Bajaj auto to supply batteries for the OEM segment, their market share in 2W OEM has always been low and has scope to grow
  3. Favorable industry structure
  4. Even if Li Ion were to take off in a respectable way (which looks like a pipe dream to me as of now), the installed base of the vehicles sold will convert this business into a cash cow
  5. Higher Lead prices are passed on with a lag in the OEM segment, that is how their contracts are structured, management has been consistent on this over the years
  6. They keep taking price hikes in the replacement segment which is not a price sensitive market
  7. The company has seen the 2003-2008 commodity boom and knows how to deal with such situations

What is getting overweighted seems to be the possibility of EBITDA margins continuing to stay below their long term range of 14-16% and the remote possibility that Li Ion will make a serious dent within the next 5 years.

At an operating cash flow of 600 Cr for FY18 and market cap of 12,000 Cr this is starting to look interesting to me finally after a period of 4 years

Disclosure: Invested since 2011, will add further if the current downtrend in price continues

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just to add one more positive can be as a GST outcome, movement of market from unorganised to organised sector. and organised sector is just duopoly.

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I agree, this might fuel the negative sentiment further and create buying opportunities for those still believe in the business fundamentals. Should also act as a precursor to Q2 earnings.

Lead Prices Hit Highest Point Since August 2011

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Based on long term charts, 670 seems to be the next support zone.

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Amara Raja is still quiet expensive even after this decline. With EPS trending down price is fast catching up. In hindsight we can say that a near 5x run from Sep 2013 to Sep 2015 was way overdone.


Source: Capitaline

Source: Capitaline

Once the PE ratio crossed 25 in 2014, future returns turned out be bad.Companies in this sector should trade between 15 to 20 times earnings with few good ones like Amara Raja deserving a premium but not too much.

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Being a market leader, I believe the future growth strategy will be sketched up in the next 6 to 18 months. EV is a very long play since a huge infrastructure setup is needed for which India is currently not prepared for. Hence the demand wont vanish right away. Rs.630-650 would be a decent level to add in SIP mode at every 15% correction.

Disclosure - Holding tracking position since Jan’16.

Better than expected numbers. Industrial (especially telecom) battery impact fading out. Lead cost seems batter managed in pricing. 024612cb-425e-47aa-85d1-acea515c3a55.pdf (1.8 MB)

Important cues from the Q2 result in my opinion -

  1. Higher Lead prices appear to be have been passed onto customers, consistent with the trends I have seen over the past and what the management has been communicating all this while - prices get passed on with a lag. Core EBITDA (or Operating margins) are back to 16%+, whether they stay there going forward needs to be watched. My take is that they will be volatile and it will not be prudent to call for too much consistency here

  2. Continued top line growth augurs well for the medium term. As long as this number is over 10%, one need not worry too much about froth in valuations at CMP. Q2 was closer to 7-8% adjusted for excise duties, need to see what numbers show up in Q3 and Q4

  3. Management continues to talk about the prospect of EV at every opportunity, no that I am particularly worried about this at this point of time. Goes to show that they are watching this space

  4. Capex plans appear to be going on track. Gross asset turns still well below the historical average, at some point of time we will see the benefits of operating leverage play out if top line growth continues to be healthy. For this reason the PE optically looks high right now, business is already geared up to deliver 50% higher earnings from here if the business environment supports

Stock not cheap, neither expensive the way I see it.

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Good data/graph …Is this data access free from Capitaline?

Maruti sells close to 50% of passenger cars. They have a lithium cell plant coming up soon and in 2 years, we may see the battery used in place of lead acid for B and C segment cars along with ISG. This will give them scale to move to full electric after several years.

Maruti currently has ISG in Ciaz and Ertiga, driven by a lead acid battery supplied by Exide. Replacing it with lithium is very easy. Government now penalizes use of hybrid and this needs to change for Maruti to equip it in sub 4 m and < 1200 cc cars.

So please evaluate the impact of this hypothetical scenario happening in 2019!

Disclosure: I hold 40% of my portfolio in Maruti and none in Amara Raja.

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Gravita India Limited, a leading recycling company having its manufacturing presence around the globe, is glad to inform that company has signed a contract with Amara Raja Batteries Limited for Lead Acid Battery Scrap Collection and Recycling arrangements. Under this contract Gravita shall collect/purchase Lead Acid Battery scrap from designated locations of Amara Raja.

Gravita targets supply of approx. 8000 MT of Lead to Amara Raja under the said contract which will help the company to strengthen its top line in FY 2018-19 coupled with cost effective recycling and long term business association with Amara Raja.

Any estimation on

  1. Benefit Amararaja may have anually
  2. Top line amount for Gravita on annual basis