Amara Raja Batteries - More Headroom For Valuation To Rise - Nirmal Bang

We believe Amara Raja Batteries (ARBL) is structurally well placed to reap the long-term benefits in the battery space as the company has developed a strong brand for its products, leading to gains in market share from Exide Industries (EIL) and the unorganised segment. Over the past few quarters, ARBL has outperformed EIL on top-line, margins and earnings fronts, leading to a re-rating of its stock. Going forward, we expect ARBL to report stable EBITDA margin of 15.4%-15.6% over FY13E-FY15E, posting doubledigit sales/earnings CAGRs of 20%/15%, respectively, over the same period with a strong RoE of 26%-27% in FY14E-FY15E. Despite the sharp run-up over the past one year, the stock currently trades at 12x FY15E EPS, which, In our view, is attractive and hence we have recommended a Buy rating on it with a target price of Rs343 (14.5x FY15E earnings).

Double-digit volume growth despite capacity constraints: ARBL's capacity utilisation currently is close to ~93%, and it plans to double capacity across segments with a capex of Rs7.5bn over the next 18 months. However, despite capacity constraints, we expect the company to post top-line growth of ~18% YoY in FY14E, driven by product price hikes, de-bottlenecking and re-alignment of capacities.

Stable EBITDA margin likely: ARBL has posted strong EBITDA margin of 16% in the past and we expect it to report 15.4%/15.6% margins for FY14E/FY15E, respectively, on account of higher sales in the replacement market (expected to be strong in FY14/FY15). The company will also cater to two- wheeler OEMs from FY14, which, in our view, will not be significantly margin dilutive.

Strong return ratios and earnings growth likely over FY13-FY15: ARBL has posted strong return ratios in the past i.e. ~27%-32%, which, in our view, will continue to remain at same level. Further, we expect the company to report strong earnings CAGR of 15% over FY14E-FY15E driven by robust top-line growth and stable EBITDA margin.

Despite strong run-up, stock valuation still attractive: ARBL stock has run up 105% in the past one year on account of strong top-line and earnings growth. Valuation at 12x FY15e earnings, in our view, is still attractive and offer headroom for P/E multiple expansion due to a strong earnings CAGR of 15% likely over FY13E-FY15E. Given the robust earnings growth visibility and high return ratios (~27% in FY15E) likely over FY13E-FY15E, we have valued ARBL at 14.5x and assigned a Buy rating to it with a target price of Rs343.(14.5x FY15E EPS)

Source : Equity Bulls

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