Amara Raja Batteries: Enjoying sustainable advantage
In FY16, we think Amara has done well to grow at 11% in a tough macro environment. Its growth was led by its outperformance in the auto replacement segment where it posted a 23% revenue growth. As per the management, it has gained ~150bps market share in the auto replacement segment in FY16. Even in the telecom segment, though demand remained weak, it gained ~200bps market share to ~58%. While Amara continued to outperform Exide in FY16, the pace of growth was slower than expected. As a result, we lower our estimates of FY17/FY18 earnings by 15%/11%. Going forward, we expect Amara’s revenue to recover on the back of a pick-up in auto demand, steady demand from the replacement segment and its entry in the tubular invertor battery segment, leading to our estimate of 21% revenue CAGR over FY16-18. Overall, we expect Amara to post 23% earnings CAGR over FY16-18E. We lower our DCF-based FV from Rs1198 to Rs1011 and reiterate our Buy rating.
Amara continues to gain share in auto and telecom
Despite a sluggish demand environment, we think AMRJ has done well in FY16 to grow its revenues at 11% yoy (compares with -1.5% for Exide). Its growth has been led by its outperformance in the auto replacement (2Ws: 18%, 4Ws: 25%) and telecom segments (+7%). While it has gained ~150bps market share in the auto replacement segment, it has gained ~200bps share in the telecom segment in FY16, as per the management.
Revenue growth to improve on pick-up in auto demand, entry in invertor batteries
We expect Amara’s revenue growth to improve in FY17E on the back of pick-up in automobile demand and its entry in the tubular Invertor battery segment. Further, given that Amara enjoys a sustainable competitive advantage over peers given its best in class technology and low cost structure, we expect AMRJ to continue to outperform the auto replacement segment, which would in turn boost revenues. Overall, we factor in Amara to post 21% revenue CAGR over FY16-18E.
Investing in new capacity to help sustain momentum
Given that most of its segments (except MVRLA) are running at optimum utilisation, Amara is already investing to increase its capacity. It has recently installed new greenfield capacity in Chittoor for the tubular invertor battery segment with an initial installed capacity of 0.9mn units (can be ramped up to 1.5mn units). It is expanding its two wheeler capacity by 4mn units which will be operational by FY18, and it is expanding its 4W capacity by 2.25mn units by FY17E.
Reiterate Buy with a revised FV of Rs1,011
While Amara continued to outperform Exide even in FY16, its pace of growth has been lower than expectations. On account of slower than previously estimated growth, we have lowered our FY17/FY18E earnings by 15%/11%. On the back of a pick-up in auto demand, sustained momentum in replacement segment and its entry in the tubular invertor battery segment, we expect Amara will post 21% revenue CAGR over FY16-18E. Overall, we expect the company to post 23% earnings CAGR. We reiterate our Buy rating with a revised DCF-based FV of Rs1,011.