Amara Raja Disappoints, Outlook Remains Positive

Amara Raja Batteries (ARB) announced its Q4FY13 results on May 14, 2013. The company’s volume and revenue growth has been robust. However, the company has faced tremendous pressure on its margins. This led to the stock prices of ARB declining by 5.25% post result announcement to Rs 265.20 per share.

In Q4FY13, revenues of ARB grew by 19.37% to Rs 803.75 crore, as compared to Q4FY12. However, the EBIT grew by a mere 2.59% to Rs 85.17 crore and the net profit by 2.25% to Rs 59.6 crore on a yearly basis. This translates into a reduction in the EBIT margin by 173 basis points and in the net profit margin by 124 basis points.

Although the quarterly performance of ARB was disappointing, its yearly performance displayed strength. In FY13, its revenues grew by 25.21% to Rs 2981.08 crore as compared to FY12. Its operating profit increased by 30.85% to Rs 405.1 crore and its net profit by 33.31% to Rs 286.7 crore.

In FY13, the company saw a volume growth in two-wheeler and four-wheeler batteries of 39% and 20% respectively. In line with this, revenues too grew in double-digits. Even during the difficult situation of the automobile industry in FY13, the company managed to pull-off a strong performance and also gain on market share in the OEM (Original Equipment Manufacturer) and replacement markets. ARB said that it is making progress towards bulk sales in the newly entered two-wheeler market to OEMs.

ARB’s performance in the industrial segment has been relatively moderate. There has been a significant slowdown in the expansion and upgradation in the telecom sector. At the same time, there has been moderation in the demand for UPS. This has led to sales taking an effect. However, the company has retained the market share in the telecom and UPS businesses.

ARB has committed to invest about Rs 760 crore on the following capacity enhancement measures through greenfield and brownfield projects

1. Enhancing four-wheeler capacity from 5.6 million units to 8.25 million units per annum
2. Increasing two-wheeler capacity from 4.8 million units to 8.4 million units per annum
3. Capacity expansion in the medium VRLA product line from 1.8 million units to 3.6 million units per annum
4. Expansion in large VRLA product line to 900 million Ah per annum

We have been bullish on the long-term prospects of ARB. We also recommended the scrip in Dalal Street Investment Journal in Vol 28 Issue No. 4 at a price of Rs 295 per share. The stock is currently trading at Rs 265 per share. But considering constraints in supply, capacity expansion plans, robust demand, strong performance in the replacement market, potential of the two-wheeler market and prospects in the industrial segment, we are bullish on the long-term outlook of ARB. We thus maintain our recommendation of investing in the scrip. Considering the stock has come down considerably, it would be a good idea to buy into it to gain further.