Amara Raja Batteries - Higher Depreciation And Tax Rate Dents PAT - Nirmal Bang

Amara Raja Batteries' (ARBL) earnings for 4QFY13 at Rs596mn missed our estimate by 24% on account of lower gross margin, higher depreciation (up 119% YoY) and higher tax rate (up 541bps QoQ). However, at the EBITDA level, the earnings missed our estimate by only 7%. Net sales at Rs8.04bn were in line with our estimate, implying a growth of 19% YoY and 6% QoQ. Major disappointment came in on the gross margin front, down 272bps QoQ on account of higher lead costs. However, on the positive side, other expenditure as a percentage of sales fell by 81bps QoQ, despite the rise in power costs, which is a positive. The sharp increase in depreciation was due to a provision towards impairment in the value of assets amounting to Rs76mn (we await more clarity on impairment in the value of assets) and the rise in depreciation at Rs52mn due to revision in the estimated useful life of the assets. Tax rate, in our view, rose due to full year adjustments and increase in surcharge. We have retained our sales/EBITDA estimates for FY14E/FY15E but cut earnings estimates by 5%/4%, respectively, for the same period, to factor in higher depreciation. We have retained our Buy rating on the stock, but revised our target price downwards to Rs330 (14.5x FY15E EPS) from Rs343 earlier.

Sales continue their robust growth: ARBL reported Rs8.04bn of net sales, which were in line with our estimate, but 2% above Bloomberg consensus estimate. The company posted robust top-line growth of 19% YoY and 6% QoQ led by higher average realisation and higher volume. ARBL, which is running its plants at close to their peak capacity, has managed to report a 6% QoQ top-line growth, which, in our view, is commendable. We expect the top-line to post a CAGR of 21% over FY13-FY15E.

EBITDA margin likely to stage a recovery: Following a sharp rise in lead prices in 3QFY13 and 4QFY13, gross margin was expected to come under pressure and hence we had factored in a 100bps QoQ EBITDA margin erosion, but the company reported 209bps QoQ EBITDA margin erosion. Lead prices have come off sharply since March 2013 - from a high of ~US$2,400/tn in February 2013 to ~US$1,990/tn currently - and hence we believe that margins could stage a recovery to ~15.5% level in the near term. We have retained our margin estimates for FY14E/FY15E at 15.4% and 15.6%, respectively. There are upside risks to our margin estimates, given the sharp fall in lead prices.

Marginal revision in earnings estimates; Retain Buy: We have retained our sales/EBITDA estimates for FY14E/FY15E, but cut earnings estimates by 5%/4%, respectively, for the same period to factor in higher depreciation. We have retained our Buy rating on the stock with a revised TP of Rs330 (14.5x FY15E EPS) from Rs343 earlier.

Source : Equity Bulls

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