Amara Raja Batteries - Replacement demand benefit; Buy - Anand Rathi

Decent performance likely in 3QFY14. Amara Raja Batteries (ARB) is expected to report decent performance in 3QFY14 on its sustained leadership in the telecom and UPS segments as well as replacement demand. This will offer some stability to the automotive segment. We expect 12.7% yoy sales growth, to Rs. 8.6bn, and 15.3% yoy EBITDA growth, to Rs. 1.4bn; EBITDA margin is expected to be 16.4% (lower 80bps qoq, higher 40bps yoy). Backed by decent EBITDA, adjusted profit growth is expected to be 13.6% yoy, to Rs. 919m.

Auto replacement, industrials driving growth. As in 2QFY14, ARB's revenue growth in 3QFY14 too is expected to be driven by double-digit growth in auto-replacement demand and the industrial segment. However, auto OEM and home-UPS trading businesses is expected to be sluggish due to lower auto demand and mild summer/good monsoons, respectively.

ARB's enhanced two-wheeler capacities are expected to come on-stream in 4QFY14. This would not only help it grow its OEM business in this segment, but also tap replacement demand. The expanded capacities for medium and large VRLA batteries are also expected to commence operations in 4Q.

Our take. Competitive intensity in the industry is likely to increase with continued weakness in OEM demand. However, with a good product range, greater replacement exposure and decent industrial demand, ARB could outperform peers in the auto-ancillary segment. The stock had stagnated in 1HCY13 after a re-rating in CY12 and has, thereafter, put up a better performance. We maintain Buy, with target price of Rs. 367. At the ruling price, it trades at 13.7x FY15e EPS. Risks. Keener competition, input cost rise, valuations at a substantial premium to its past five-year average of 9.1x.

Source : Equity Bulls

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