Whatever the stock analysis may be, the fact that their auditor is an ex-employee of them, and it does auditing for ARBL only is a big black spot for ARBL. To me this single fact is enough for saying “ta ta bye bye” to ARBL. Those who are investing and allocating good percentage of their portfolio in ARBL should always remember this fact, as it can bite you at a time when you are least expecting.
Disc: As expected I have already said good bye to ARBL. I feel I can have better sleep investing in other equally growing stocks like Ajanta/Astral/Cera/La Opala.
Subash,
I would’ve lost sleep had ARBL been a totally Indian company,but with Johnson Controls holding 26%,its NOT.You expect the world’s leading battery maker to exercise atleast decent corporate governance.Moreover,the fact that they teamed up with ARBL in 1997,when it was really small,speaks volumes about the promoters(Galla family) Anyways,all of us can see clearly that Amaron is a great product.Go to Youtube: ‘Amara Raja Corporate Video’ & you can check out their other ‘innovations’ & products.Reliance’s foray into 4G can bring even better times,so that the auto slowdown will be very well encountered.Personally,I feel surprised that people still use Exide batteries(lower warranty,higher maintenance) What is saving them is their age,distribution network(greater than ARBL) Also,since ARBL is spending much lesser than Exide,their margins won’t suffer as much.So,for me,at 240 or less,ARBL is a great buy.
Any negative point on otherwise good looking story should be given the priority attention.
Couple of points…
how big an issue is this, an ex-employee as the auditor of company ?? I see they are auditors with ARBL for last couple of years. any thing changed recently…?
Johnson’s 26% stake in ARBL does provide some comfort…is that enough to put this question of auditors at rest…or something else needs to be done…and if yes, what can be done to reach a conclusion here…views invited…
As such having an auditor (who is ex employee) means you have the power to influence the auditors. This would result in a fact that many accounting issues shall be dropped without adjusting in the financials. The auditor would not state his observations
All in all, your comfort on the Annual Report would drop - since we are not sure if all issues have been properly highlighted/addressed.
i am curious …why should an ex-employee be more easy to influence ? its not like the employee is some kind of a mole or spy for the company. if they wanted, they may could do the same with the auditors without having an ex-employee too. satyam did it and so have countless others.
In the IT services industry, a lot of people join their clients. do you think they still keep ‘working’ for their ex-employer ? unless someone is corrupt and taking kickbacks, no one does that.
if the numbers are cooked, that could be happening ex-employee or not …
I agree it’s not easy to take a call on a mgmt. just because of this issue. However, Let me put an argument about, why it’s better to stay away.
Retail investors, basically accept on good faith, whatever promoter’s tell us about company finances.Auditor is part of the checks & balances process, where he is supposed to take an independent view of the finances as per established norms.
Promoter-Auditor relation is unlike other business relation which is supposed to be maintained at a feel good level. I have even heard that auditor’s should be changed at certain interval so that good relation don’t interfere in good judgement.
So, why would a company of this level, with good stake from foreign partner engage an ex-employee as auditor knowing that it will raise eyebrows in the investor circle ?
Doesn’t that speak badly of promoters ? unless of course there is a scarcity of good auditing firms in the country ?
ARBL’s business consists of manufacturing & selling of batteries-both to-aam janta as well as Corporates.Regarding the aam janta sales,we can always analyse it by customer feedbacks(someone in our own family maybe using it! Or a neighbour),retailer feedbacks(how is demand,etc)
Unlike Opto,CEBBCO,Satyam Comp.,etc where business was based on ‘clients’ way beyond our reach,the biz of ARBL can be quiet accurately tracked.This fact alone is comforting.Secondly,I can see increasingly more stores in my city:this means that the capex has been well done too.So where can be the trouble? (as alleged)
Anyways,as long as I can see that the business is flourishing,I have no reason to worry
Maybe i am missing something, but why is an ex-employee working with your auditor a red flag, especially if the company is using two different audit firms and that too the same audit firms for the last 13 years ?
one fine morning, the company’s employee joins the audit firm. do you think the company should go and fire the entire audit firm just because one employee joined them ? will that not be strange ?
are there not easier ways to cook the books than having your ex-employee work for you with the audit firm ? we know from satyam and countless others that it is much easier to cook the books.
most companies i have checked, rarely change auditors for long periods of time …sometimes spanning 10+ years. ideally they should be changed …but reality is different
Is there a smoking gun which we are missing …some fishy numbers or something else or we are suspecting the numbers are cooked because the auditor has an ex-employee ?
The AR of Amara Raja batteries is out. It is quite an impressive document which gives a lot of details on the business, future direction and quite exhaustive in their disclosures in terms of numbers.
The overall health of the business looks good. However, there are a few red flags.
1). We always knew that the salary and the commissions paid to the promotors is quite high, but it is only going up. It has gone up from Rs 27.8 crores to Rs 37.6 crores between Fy12 to FY 13. As a percentage of the total wage bill of the company of Rs 126.6 crs, it is 30%. Two people accounting for 30% of the total wage bill is amazing.
2). The related party transactions also are quite bemusing.
a) The donation paid to the trusts controlled by the promotors is Rs 11.2 crores. This might be going for the CSR activities, but this needs to be explained. At face value, it looks like the promotors diverting funds into personal trusts.
b) The inter- party transaction are a whopping Rs 334 crores. These are all companies held by the Galla family in their personal capacity. Once again it is possible that these group companies are the most suited for the goods and services that they supply, but are they they best? Not sure.
c) There is another Rs 78.3 of capital goods bought from the group companies. Out of this, Rs 66.6 crores was from Amara Raja Infra. I am presuming that this was for the ongoing capital expansion. Again, not very sure what to make of these transactions.
All of the above could be genuine business relationships but we need to be aware of the same. The promotors control around 15% of the shareholding, but seem to exert dis-propotionate influence.
This leaves an investor with some unanswered questions and i for one am hesitating to increase allocation in ARB despite it being a very good business.
very valid points and i am for sure not investing in this,whatever is the future potential of the battery business.Nobody wants to earn money by dividends,everybody wants money upfront.
In a similar case i was shocked by Mr.A.M.Naiks demand to increase salary despite L&T going through a rough phase.Institutional investors are passive watchkeepers ,and there is little a minority shareholder do.
I think promoter integrity/morals should be given a high marking while choosing a stock .
Hi P Sharma,
Very good observations.More than the inter-party transactions,I am worried about the wage hikes:27.8 cr. to 37.6 cr. is almost 40%,much more than the PAT growth in the past year.This sure is discouraging given the fact that the company is on an expansion spree & thus,should not be spending its funds like that.The dilemma at the moment seems to be: a great business but maybe-a-not-so-good-company.Hope it doesn’t turn out that way.
The AGM is still to take place.If anyone is attending,can’t these questions be posed to the management?
Do Johnson Controls get any regular payment for its technology? I do not see any such payment in AR. When last time it was paid for any technology absorption. What kind of agreement company has withJohnson Controls for tech transfer?
Johnson Controls owns 26% of the company. It does not get any technology transfer fee. As per the AR, the last time major tech transfer happened was in 1998! Which probably in a way is understandable, as batteries are definitely not hi-tech in any way.
More concerning is the remuneration that the Indian promoters (Galla’s) are fleecing from the company. Stinks of a pathetic mindset to say the least.
The related party transactions are mainly with AR Electronics which is a business solutions provider and Mangal Industries which is a confused company trying to do precision engineering, sheet metals, plastics and foods!!!
Honestly, the company is doing well, because it has a lot of tailwind. But overall corporate governance stinks. I will look at Exide now to see if I can switch.
Disclosure: I have reasonable percentage of my portfolio in ARBL, so my views are likely to be biased.
An interesting thing from the AR is that both Johnson Control and ARB are pooling their lead demand for international markets and hence ARB seems to be getting a good deal on the lead pricing. Therefore it seems that Johnson controls is keeping their end of the bargain by being an active promoter.
What i am surprised at is that Johnson controls has around 12% more promoter stake than the Galla’s and yet they seem to be mute spectators to this blatant fleecing by the Galla’s.
Stupendous performance of Kaveri deserves a serious discussion to fathom its journey ahead, but at the same time we should also focus on other top Valuepickers stocks. Amaraja is ofcorse one of them.
Posted storng sets of nos.
Sales grew around 29%. Total Sales 886.8 Cr (Highest Ever Quarterly Revenues)
PAT is 97.8 Cr equally good with 28.5% increase on QOQ basis.
Hi Krishna,
The nos. are really very encouraging.I strongly felt that Q4 was misunderstood by the market,hope this time it sustains 300+ levels.The stock has undergone a time correction for a good deal of months now.Thought the move from 217 has been sharp.
Btw,I don’t know how many people saw the Exide Chairman’s interview(on CNBC Awaaz) He seemed pretty much clueless about the co’s trajectory,attributing it to the uncertain macros.While ARBL’s management has guided atleast for stable margins(15-16%) The way I see it is,Exide had been enjoying a monopoly position in a growing market.The co.'s profits grew at a CAGR of 50%+ for quiet a few years.ARBL struck them with a technology led product basket & by far the quality is better(& so is the ‘life’) All these thinsgs have been discussed much better here,all I am suggesting is that the stock should,over a period of time command equal,if not higher,P/E than rusty Exide.
I agree with you. Amaraja performed well above expectations. Economy specially Automobile sector is going through a bad time yet Amara Raja did pretty well.Looks like they will continue eating Exide’s market share.
Certainly Amara Raja deserve higher PE around 19-20.
Very good set of numbers and at current price, very attractively poised! However, looking at the risks, one of the significant one that I perceive is that capacity remain significantly underutilized after capacity expansion comes on stream due to either market condition or change incompetitve scenario.(case in point GRP)
Though,the probability of that happening looks small because, ARBL is not in commodity business and operates in duoopoly.
On the brighter side, they have made first dent in two wheeler OEM segment with supplying batteries to Honda (and Honda’s twowheeler salesitself is growing fast giving run for their money to Hero and Bajaj both). Moreover, management has consistently maintained that almost all divisions are facing capacity constraints, indicating robust demand.
So, looks like, one can still enter at this level and make good money over if one holds ARBL for long period of time.
