Amara Raja Batteries Limited (ARBL) is engaged in the production of storage batteries used in the industrial and automotive segments since 1985. ARBL had entered into a JV with Johnson Controls Inc, USA for the import of technology for the manufacture of Automotive (SLI) batteries.ARBL declared its Q1FY10 results which were in line with our expectations. The company reported revenues of Rs. 307.4 crores as against Rs. 325.2 crores in Q1FY09 i. e. a fall of 5.5% on a YoY basis and Rs. 333.6 crores in Q4FY09, a 7.8% fall on a QoQ basis. The fall was because the lead prices have cooled off a bit and are approximately $1200 per ton for Q1FY10 which were passed on to the customers resulting in lower sales.
Operating profits for Q1FY10 were Rs. 72.6 crores from Rs. 34.3 crores in Q1FY09 up by 111.9% on a YoY basis and Rs. 57 crores in Q4FY09 a rise of 27.4% on a QoQ basis. The raw material cost of the company has reduced to Rs. 163.3 crores in Q1FY10 from Rs. 239 crores in Q1FY09 a fall of 31.7% on a YoY basis due to the falling lead prices.
PAT was up by 177.8% at Rs. 42.5 crores from Rs. 15.3 crores on a YoY basis and Rs. 30.3 crores in Q4FY09, up by 40.3% on a QoQ basis. The interest cost of the company has reduced 23.9% on a YoY basis from Rs. 3.9 crores in Q1FY09 to Rs. 3.0 crores in Q1FY10 and 38.7% fall on a QoQ basis from Rs. 4.9 crores in Q4FY09.
The operating margins of the company stood at 23.7% as against 0.9% in Q1FY09 and 17.3% in Q4FY09. Net margins stood at 12.4% compared to 4.7% in Q1FY09 and 8.5% in Q4FY09. The improving margins are on account of the higher sales to the replacement market which constitute 70% of the automotive batteries segment revenues and generates margins of approximately 25% coupled with increase in sales of two wheeler batteries which command higher margins in the range of 30%.
The company has incurred a loss on working capital amounting to Rs. 4.6 crores in Q1FY10 which is a onetime expense due to higher lead prices in the previous quarter and hence will not be occurring in the future.
In Q1FY10, the company generated revenues of Rs. 307.4 crores out of which 55% was from the industrial segment and 45% was from the automotive segment. Within the industrial segment, 60% was to telecom, 35% was the sales of UPS batteries and 5% comprised the others viz. power and railways. In the automotive segment, 70% were the sales in the replacement market and 30% were to the OEMs. In the 2]wheeler segment, 80000 units were sold on a monthly basis.
Industrial Segment: In the industrial segment, we see demand increasing in the rural India and across all sectors over the years. The company is increasing its production in the UPS segment from 1.2 million units to 1.8 million units by the end of FY10. The margins are expected to be in the range of about 22-23%.
Automotive Segment: In this segment, the company is looking for more tie-ups in the OEM segment. In the motor cycle segment, the company is in talks with Honda Motors, Japan. The company plans to increase its two wheeler capacity from 1.8mn units to 2.4mn units in the current year. The two wheeler battery segment with its higher margins of 25-30% will improve the overall margins of the company going forward. We believe going forward Domestic segment will be the major growth driver as exports might be lower even in FY10 due to global slowdown.The company is planning to incur a capex of Rs. 90 crores in 2010 through its internal accruals. The company will be investing Rs. 50 crores in the UPS segment and Rs. 20 crores in the Motor cycle segment. The rest of it will be used for the industrial segment. ARBL is not looking at expanding the capacity in the automotive batteries segment in the near future.
Market Cap 984.31
* EPS (TTM) 12.66
* P/E 9.10
P/C 6.90
Book Value 47.49
Price/Book 2.43
Div(%) 40.00
Div Yield(%) 0.69
Market Lot 1.00
Face Value 2.00
Industry P/E 20.83
At the current market price of Rs 120 per share, ARBL is currently trading at a PE of 7.6x FY10E and 5.7x FY11E earnings, which looks quite attractive. We expect the company to earn an ROCE of 29.2% in FY10E and 31.9% in FY011E.
At around Rs. 115 levels the stock is trading at a discount of 40.6% from our intrinsic price of Rs. 169 per share which is 10.7x FY10E earnings and 8.0x FY11E earnings. We reiterate a BUY rating on the stock with a price target of Rs. 169 per share with a long term view. For the short term perspective, target could be Rs. 135.
