India’s leading manufacturer of lead-acid batteries
Rebooting the energies
The simplest but most relevant analysis you will find on the Company. Read slowly, think carefully & you might agree !.... Do comment at the end for any clarification/ views.
Information last updated - July 12, 2020
A strong candidate to play on the auto sector revival. Has a proven execution track record.
😒 Auto has been significantly under performing since early 2018.
😊 Moderate growth, stable margins/ returns, strong cash flows, negligible debt
😊 Trying to break out of downward sloping channel on long term chart
🤨 Has a reasonably long history with no major red flags. However, Promoter's low shareholding and political association should be kept in mind.
😀 trading significantly cheaper compared to historical levels
😊 Has always been good. Likes of Nalanda, ICICI MF continue to be the believers.
- Aggressive executor with proven track record - over the years has successfully challenged Exide's dominant position thru technologically superior products, better marketing & distribution strategy. In last 12 yrs, Amara Raja's sales grew at a CAGR of 17% vis-a-vis Exide's 11%.
- Established market position with extensive customer relationships in auto, telecom and industrial segments. Along with Exide it controls 90% of the the organized battery segment, which in turn is about 60% of the total market. 65-70% of Amara Raja's revenues are from auto sector.
- Well known brands with strong customer recall - Amaron, Power Zone
- Extensive distribution network of 40,000+ dealers catering to the replacement market
- Increasing focus towards the international markets. Exports currently contribute only 10% of it's total revenues
- Strong financials - decent growth in a challenging market, stable margins & returns, strong cash flows, debt-free position
- Dependence on sectors (auto, telecom, industrial) currently going through weak sentiments. However, batteries in general are better placed vis-a-vis many other components as there is always a replacement demand (batteries in general last for 3-5 yrs).
- Low promoter shareholding - Galla family owns 28% of the shareholding (increased by abt 4% in last 1 year). One most note that low shareholding is not something new and has been the case for long due to joint ownership with Johnson Control, the technological partner since 1997. Johnson sold it's 26% stake in 2019 - 24% to Brookfield and 2% to the Galla family.
- Political risk - Jaydev Galla, the MD of the Company is associated with a regional political party and is a current sitting Member of Parliament.
- Prolonged economic disruption due to Covid2019 impacting overall personal income levels that in turn can impact/ delay auto sector revival
- Galla family has business interests across sectors. These interests include electronic systems, construction/ real estate, power, food, media. Volatility in those can potentially impact Promoter's focus as well as financial transactions with the Company.
- I personally believe Covid2019 will push back people towards personal transportation and hence would result in auto sector revival. This would directly translate into good business growth for established players like Amara Raja.
- Consolidation towards organized players - unorganized industry share is currently estimated at 40%. Due to GST, the price difference between organized and unorganized is estimated to have reduced from 25-30% previously to 10-15% now.
- Company has been gaining traction in the 2-Wheeler segment where it was traditionally weak. During Q4FY20, its OEM volumes in this segment increased by 25% (due to new client additions) and aftermarket by 18-19%. In 4W, volumes were flat as growth in exports and after market got negated by the decline in OEMs.
- Exports provide a significant opportunity for Company to grow. Company currently caters to the niche segment internationally which is only 25-30% of the addressable market. Expansion both within and outside this segment provides significant opportunity.
- After significant disruption over last few years, telecom sector should also be now moving towards stabilization first and then 5G. Amara Raja with it's clear leadership position in telecom batteries should directly benefit.
- Though small currently, lithium (EV included) is expected to grow over time. The Company continues to work in this field and is confident of not getting left behind and evolving with the overall trends.
- Amara Raja is promoter family driven and is currently run by the 2nd generation.
- Jayadev Galla (Promoter’s son) is the current Vice Chairman and MD of the Company. He is also a sitting Member of Parliament from a regional party (TDP).
- Promoters have a good execution track record
- Galla family’s ownership in Amara Raja Batteries continue to be low at 28% (increased by abt 4% in last 1 year). However, low shareholding is nothing new and has been the case due to its technological partnership with Johnson Controls since 1997. Johnson recently in 2019 had sold it’s 26% stake – 24% to Brookfield and 2% to the Galla family.
- Promoter family also has over years diversified into businesses including electronic systems, construction/ real estate, power, food, media.
Auditors - DELOITTE HASKINS & SELLS LLP
Bankers - Kotak Mahindra, SBI
Credit Rating - Crisil: AA+ (Stable), A1+
A consistent performer with strong balance sheet
- Despite sectoral headwinds, reasonable growth in sales
- Working capital levels are controlled and hence are Cash flow from operations. Internal cash flows are expected to remain adequate to meet foreseeable capex requirements (impact of Covid remains to be seen). Company currently seems to be operating at 50-60% capacity and continues to gradually add more.
- Margins and returns continue to be stable and good
- Company has negligible debt
- Valuation multiples are at historically low levels (Please note: March 20 valuations are calculated at Rs 467/ share. Accordingly, please adjust the same as per current market price)
Other Important Observations
- Lead comprises 50-60% of the cost of making a lead-acid battery. Its pricing being volatile can impact short term financial performance of battery manufacturers including Amara Raja. However, over period it’s not a key factor as the price fluctuations are mostly a pass through.
- Amara Raja or Exide – it’s not an easy answer. Initially Amara Raja being a late entrant was gaining market share from Exide. However, over last few years they have more or less equaled out and consequently price movements also tend to match at least over extended periods. Though, overall Amara Raja continues to outperform Exide over all time periods. However, this is something that needs to be watched closely. One cannot become complacent about it.
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Is there any logical explanation to this? I think there is - checkout if it makes sense.
At first read, the presented arguments may sound counter intuitive. However, think carefully and you might agree.
Disclaimer: The information presented above is no advice/ recommendation. Please do your own independent research before taking any investment related decision.