On a cursory glance on screener.in data, for the last five quarters, YoY growth in revenue/Net profit and OPM for Amara Raja still seems to be better/ok in comparison to Exide. Need to dwell further in this data in detail.
Exide, in my opinion, is a much better bet at the current price in this space. Their penetration is much better in OEMs and there is optionality in their insurance business.
Sir, At current market capitalization of 14k crore. With 15% YOY revenue growth and normalize PAT margin of 10% doesn’t it look really cheap being a consumer company in a Duopoly? It is currently trading at closer to 22.2XFY18 PE multiple.
Basic Assumptions
a) 15% CAGR growth in FY17 and FY18. Gives us revenues of approx 6.3k crore. I have not assumed any impact of GST.
b) 10% Normalized PAT margin gives 630cr profit for year FY18. Current margins will rise because of a) 10% Price hike which they recently took b) Operational Leverage coming into play.
Valuations of both Exide and ARB are almost same now.
and currently ARB trades at lesser historical valuations.
Thanks
Kanv
Disc.Recently added at avg price of 903 - Now forms 10% of my portfolio.
@desaidhwanil you views are also welcome.
P.S. - I am trying to understand the valuation and this is a buy and sell recommendation.
Todays Business standard article on Amararaja,
“The Amara Raja stock hit a 52-week low on Thursday as higher lead prices, expensive valuations and higher exposure to the telecom segment weighed on the scrip. Lead prices on the London Metal Exchange, which had risen 28 per cent year-on-year to $2,149 per tonne in the December 2016 quarter, are up about 12 per cent since the start of 2017. Lead prices are currently trading at $2,227 per tonne. The rise in lead prices is attributed to mine shutdowns. Given that lead accounts for 60 per cent of the raw material costs, it will have a bearing on the operating profit margins.
Some of the higher raw material costs will be offset by the price hike of three-seven per cent taken by the company in December 2016. Given demand issues especially in the industrial segment front, the company will have to balance the need to protect margins while improving volumes and market share.
The company faced the double whammy of demonetisation and higher input costs in the December 2016 quarter, which led to revenue growth of 9.6 per cent, the slowest growth in 29 quarters. Operating profit margin of 15.35 per cent, too, was the lowest in about 12 quarters. Amara Raja had highlighted price challenges due to the sudden increase in lead prices. Revenue growth for Exide came in at 13 per cent while its operating profit margins were at13.3 per cent.
One area that Amara Raja could be impacted more than Exide is the telecom segment. This segment accounts for 24 per cent of the company’s overall revenues as compared to Exide’s five per cent exposure. Slowdown in tower additions as well as tower sharing will impact replacement demand going ahead, believe analysts. Increased adoption of lithium-ion can be another headwind for battery makers like Amara Raja which are currently selling lead-acid batteries to this segment.
Given the headwinds, brokerages such as Goldman Sachs recently downgraded the stock. Though the stock has corrected 21 per cent since October 2016, it is still trading at 24 times its FY18 earnings estimates. This is at a 15 per cent premium to larger peer Exide Industries.”
Apart from this there is an article on lithium ion battery technology developed by ISRO alongwith ARAI (Automotive Research Association of India), which might be given to BHEL for manufacturing. This should impact their PE ratios as the duopoly advantage might be diluted.
Will be nice if someone could throw light on the likely impact of such a scenario.
NO idea on Litihium ION batteries. Is it globally accepted by all Auto Majors ? BHEL is not able to deliver on its core competencies on Turbine stuff…Do you think it will be successful on Consumer Industrials? Then good luck to BHEL and its investors.
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I agree that ARBL has corrected significantly over last year. However, the performance of the company too has lagged its competitor Exide at least for the last year. My sense is that ARBL benefited immensely from the inaction/complacency of Exide in last few years and its growth was aided significantly by this factor. From whatever I can see, Exide is getting its act together hence, it won’t be as easy as before for ARBL to walk away with market share going forward. Hence, I feel it is time that both Exide and ARBL gets valued equally as the former (Exide) is still market leader by a margin and much larger in scale.
Another part, which I feel market is not yet paying attention to is Exide’s life insurance business which is growing, has reached critical size and is profitable too. If you assign a reasonable value to that business (2-2.5 times Embedded value), battery business will start looking attractive. Alternatively, if we think ARBL and Exide should command similar valuation, one is getting Exide’s insurance business for free.
Having said that, ARBL remains an excellent business in its own right. However, from here on, it may not grow at 30% (as it used to) due to much larger base, agile competition,structural challenges on industrial battery side and limited room for margin expansion. I feel 15-20% growth rate is reasonable assumption for ARBL going forward. I personally, assign exit multiple of 22-25 times trailing and 20 times forward for such businesses (Where there is no optionality; non existence of non-linearity in growth). Thus, if one’s return expectation of 18-20% CAGR, it makes sense to get into such businesses.
Disclaimer: This is not an investment advise. The views reflected here are just thoughts around the business. Investor should do their own due diligence or consult an investment adviser before making an investment decision.
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Very structured thoughts.
however, only spoiler for Exide may be a big infusion of Capex planned now. They are still operating at a premium price as compared to Amararaja. and if they go with agressive capex with price lead competition, profitability in next few years may get dampened.
As compared to that, Amararaja has enhanced capacity time to time and will have good capacity available for taking care of next few years requirement (based on what i remember so far of having gone through their earning calls and interviews).
Any view on this please…
If you hear the commentary of both the managements (Exide and ARBL), they have behaved like rational competitors in the past. Even when Exide was losing market share to ARBL, it never resorted to price war…which they were capable of considering their leadership. Hence, I see that as a low probability event.
In terms of planned capex, I think it will boil down to whether the additional capex is return dilutive or not. If we compare Exide and ARBL, ARBL commands much higher EBIDTA margins inspite of Exide having its own lead smelter…leading to potentially higher gross margins. Management has been saying that large part of capex is for technological upgradation (new technology and more automated manufacturing) which will improve margins. Thus, I feel impending capex is not such a big challenge for Capex…especially considering their strong cash flows.
In terms of valuation…it will boil down to what value one assigns to their insurance business.
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Just checked up with one of the Telecom Infra person for Volume of batteries expected next year with reference to current FY. Answer is not less. Exide is nowhere in the competition as of now. 2nd competitor in this segment is HBL. however, ground level users always demand Amararaja when HBL is given to them. This is purely due to Quality and Support (which hardly is required for ARaja)
With reference to Exide Capex going to Technology and Automation, i am bit sceptical, unless they spell out what exactly it is and how will it provide an edge with Amararaja set up / technology as of date.
My Views may be totally biased as i am invested in Amararaja for really long long period. Though i am fully in agreement of Amararaja’s success is to a great extent due to space provided by Exide.
But anyway in business at the end, earning counts.
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I have just finished my study on AMARA RAJA and I’m a little late in analysing this segment and the Lead acid storage derives 60% of its business from Automobile segment and the remaining from Industrial divisions and Home and other segments . Both these companies account for nearly 90 % of market share in Replacement Auto segment and not aware of its market share in OEM .
In AMARA RAJA’s AR of 2016 its said that the Auto segment growth will be a big driver for the company and the segment would be around 300 Billion $ by 2026 . Having a 5 year view could change the picture but then again can it be sustainable . Currently I think ARBL is having near 28% market share in Replacement segment and higher in telecom near 45% ( Data from AR 2014 please share latest market share date) if it could have maintained it through the years then revenues can add up . Currently multiples seems to be rich and no space for growth in the stock even though if there’s development in the company . The promoter JAYADEV GALLA seems to be a LOK SABHA MP . Which ties it to politics too so not clinging to these original thesis it’s better to be more Bayesian kind of decision maker to see how events unfold .
At @desaidhwanil , I was going through the AR of Amara Raja batteries and found that management took 61 cr salary approx and the PAT was closer to 477 crore. Isn’t this the violation of the 10% rule? It will be of great help if you can say something on this.
@basumallick Hello, are you still invested in this? I am unable to understand this quarter’s numbers. Despite rise in revenues, their profits are going down. They margins are down even Q-o-Q, previous quarter was supposed to be the least margin quarter since they have taken price hikes in January and March. In AR, they keep mentioning about cost controls and all, but they are not visible since other expenses have gone up. Would be interested to know your views.
Thanks
Kanv
Disc. I increased my holding steadily to 20% of PF (avg 870 odd) and currently I am scared. 
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I have sold out earlier. Lead prices have been on the rise so the margins have been squeezed. So, profits are much lower than top line growth. Unlike Decide which has their own lead smelters, which gives them some benefit of reduced lead cost, ARBL buys lead from the market.
Also, telecom battery segment and inverter battery segment is perhaps not not doing as expected.
Does anyone here think ARBL or Exide will get a positive impetus considering the fact that Solar Electricity is going to change the whole Power equation world over. If Solar is such a big story, then Batteries too will see a huge demand anytime soon.
Remember that Lithium batteries will be better for solar than these crude lead acid. Neither Exide India nor Amararaja have plans to enter it. Even Maruti has to form JV with Toshiba in Gujarat plant for producing Li-ion batteries in-house.
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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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