3QFY2016 Result Update | Auto Ancillary

February 4, 2016

Amara Raja Batteries

BUY

CMP

`863

Performance Highlights

Target Price

`1,039

Y/E March (` cr)

3QFY16 3QFY15

% chg (yoy) 2QFY16

% chg (qoq)

Investment Period

12 Months

Net Sales

1,225

1,060

15.6

1,158

5.8

EBITDA

229

173

32.0

199

15.1

Stock Info

EBITDA Margin (%)

18.7

16.3

240 bp

17.2

150 bp

Sector

Auto Ancillary

Adj. PAT

136

102

33.1

123

11.1

Source: Company, Angel Research

Market Cap (` cr)

14,732

Net Debt (` cr)

(148)

Results ahead of estimates: Amara Raja Batteries Ltd (ARBL)’s 3QFY2016 results

Beta

0.9

have come in ahead of our estimates, driven by a strong operating performance.

52 Week High / Low

1,132/773

On the expected lines, the company’s top-line grew by a healthy 16% yoy to

`1,225cr. The Automotive segment, forming about 55% of revenues, grew in

Avg. Daily Volume

35,585

double digits on back of market share gains in both the OEM as well as the

Face Value (`)

replacement segment. The Industrial segment also reported a double-digit

BSE Sensex

24,223

growth, led by the telecom sub-segment (telecom forms about 50% of the overall

Nifty

7,362

Industrial segment’s revenues). Given soft lead prices and a better product mix,

Reuters Code

AMAR.BO

the company’s margins improved by 240bp yoy to 18.7%, coming in higher than

Bloomberg Code

AMRJ@IN

our estimate of 17.4%. The margins for the quarter are the highest ever in the last

six years. Given the robust operating performance, the net profit at `136cr, came

in ahead of our estimate of `126cr.

Shareholding Pattern (%)

Promoters

52.1

Outlook and Valuation: ARBL is likely to continue gaining market share in the

MF / Banks / Indian Fls

21.3

automotive battery segment. The strategy followed by automotive OEMs of

FII / NRIs / OCBs

12.1

sourcing from multiple vendors as against having a single vendor is likely to

Indian Public / Others

14.5

benefit ARBL. Further, with the company’s strengthening distribution network in

the Western and Eastern markets, we expect replacement sales to grow in strong

double digits, going forward. We also expect the Industrial segment growth to be

Abs. (%)

3m 1yr

3yr

in healthy double digits over FY2017-2018, given that the telecom players are

Sensex

(8.9)

(16.5)

22.5

resorting to aggressive network expansion, and also with ARBL entering tubular

Amara Raja

(1.5)

(5.3)

186.5

battery manufacturing. We expect ARBL to record a healthy top-line CAGR of 17%

over FY2015 to FY2017. Also, given the softness in lead prices, margins are

expected to remain at elevated levels. We expect ARBL to clock 24% earnings

3-year price chart

CAGR over the next two years. We maintain our positive view on the stock and

1,200

reiterate our Buy rating on the stock with a target price of `1,039 (based on 28x

1,000

FY2017 earnings).

800

600

Key financials (Standalone)

400

Y/E March (` cr)

FY2014

FY2015

FY2016E

FY2017E

200

Net Sales

3,452

4,230

4,790

5,748

% chg

16.7

22.5

13.2

20.0

Net Profit

371

418

516

634

% chg

25.5

12.6

23.4

22.9

Source: Company, Angel Research

EBITDA (%)

16.7

17.2

18.0

17.7

EPS (`)

21.7

24.5

30.2

37.1

P/E (x)

39.7

35.3

28.6

23.2

P/BV (x)

10.8

8.7

6.9

5.6

RoE (%)

27.2

24.6

24.2

23.9

RoCE (%)

36.6

34.1

34.3

33.6

Bharat Gianani

EV/Sales (x)

4.2

3.4

3.1

2.5

022-3935 7800 Ext: 6817

EV/EBITDA (x)

25.2

20.0

17.0

14.1

[email protected]

Source: Company, Angel Research; Note: CMP as of February 3, 2016

Please refer to important disclosures at the end of this report

Amara Raja Batteries | 3QFY2016 Result Update

Exhibit 1: Quarterly financial performance (Standalone)

Y/E March (` cr)

3QFY16

3QFY15

% chg (yoy)

2QFY16

% chg (qoq)

9MFY16

9MFY15

% chg (yoy)

Net Sales

1,225

1,060

15.6

1,158

5.8

3,521

3,149

11.8

Consumption of RM

754

696

8.4

742

1.7

2,231

2,086

7.0

(% of Sales)

61.6

65.7

64.0

63.4

66.2

Staff Costs

24.8

6.5

176

145

21.5

(% of Sales)

5.0

4.7

5.0

4.6

Other Expenses

180

141

27.7

160

12.9

488

390

25.2

(% of Sales)

14.7

13.3

13.8

13.9

12.4

Total Expenditure

997

886

12.4

960

3.8

2,895

2,620

10.5

Operating Profit

229

173

32.0

199

15.1

626

529

18.4

OPM (%)

18.7

16.3

17.2

17.8

16.8

Interest

466.7

750.0

266.7

Depreciation

23.4

3.6

103

6.5

Other Income

(2.5)

(2.8)

26.5

PBT (incl. Extr. Items)

204

156

30.9

176

15.9

559

461

21.4

(% of Sales)

16.7

14.7

15.2

15.9

14.6

Provision for Taxation

26.8

27.0

178

152

26.5

(% of PBT)

33.3

34.4

30.4

31.9

33.0

Exceptional items

Reported PAT

136

102

33.1

123

11.1

381

309

23.4

Adj PAT

136

102

33.1

123

11.1

381

309

23.4

Adj. PATM

11.1

9.7

10.6

10.8

9.8

Equity capital (cr)

17.1

Reported EPS (`)

8.0

6.0

33.1

7.2

11.1

22.3

18.1

23.4

Source: Company, Angel Research

Exhibit 2: 3QFY2016 - Actual vs Angel estimates

Y/E March (` cr)

Actual

Estimates

Variation (%)

Net Sales

1,225

1,216

0.8

EBITDA

229

212

7.9

EBITDA margin (%)

18.7

17.4

130 bp

Adj. PAT

136

126

8.4

Source: Company, Angel Research

Top-line maintains double-digit growth: ARBL maintained its healthy double-digit

revenue growth momentum, reporting a 16% yoy growth in 3QFY2016. The

company continued to gain market share in the automotive segment which

contributes by ~55% of the top-line. Increased supplies to OEM customers and

increased penetration in the after-market space enabled the company to gain

market share in both the OEM and the replacement segments. The Industrial

segment (contributing ~45% of revenues) also grew in double digits led by the

telecom sub-segment (telecom forms 50% of the company’s Industrial division’s

revenues). In 9MFY2016, the company’s revenues have grown by 12% yoy to

`3,521cr.

February 4, 2016

Amara Raja Batteries | 3QFY2016 Result Update

Exhibit 3: Double digit top-line growth continues

1,400

1,200

1,000

800

600

400

200

Net sales (` cr)

% yoy growth

Source: Company, Angel Research

Soft lead prices and a better product mix boost operating performance: In

3QFY2016, ARBL posted a record margin of 18.7%. The margins are the highest

in a quarter in the last six years. The operating margins improved 240bp yoy and

150bp on a sequential basis. Soft lead prices coupled with a better product mix

(higher sales in automotive after-market segment) boosted the operating margins.

Raw material cost as a percentage of sales dipped 410bp yoy to 61.6%, given the

softness in the price of lead, which is its key raw material.

Exhibit 4: Average lead price trend

Exhibit 5: Soft lead prices boost EBITDA margin

2,300

250

EBIDTA (` cr)

Margin (%)

200

2,100

150

1,900

100

1,700

1,500

Source: Company, Angel Research

Net profit grows strongly on back of healthy top-line growth and margin

improvement: ARBL’s adjusted net profit for the quarter was ahead of our estimate

given the strong operating performance. The net profit grew strongly by 33% yoy

to `136cr, beating our estimate of `126cr.

February 4, 2016

Amara Raja Batteries | 3QFY2016 Result Update

Investment arguments

 Demand scenario for automotive and industrial batteries to remain positive in

the long run: We expect growth traction in the automotive battery segment to

continue over the next two years. The automotive OEM segment is likely to

witness strong growth over the next two years on back of higher income levels,

subdued fuel prices and further easing of interest rates. Also, robust

automotive replacement demand is likely to maintain growth momentum.

Further, given the economic recovery, the industrial segment (railways, UPS

and telecom) is also poised to register double-digit growth over the next two

years.

 Likely to outpace industry growth on increased sourcing by automotive OEM

segment: ARBL has outpaced the battery industry over the last four to five

years. Penetration into the new automotive OEM segment has led to market

share gains for ARBL. OEM customers both in the 4W and 2W segments have

strategically opted to source from ARBL in order to follow multiple sourcing

and reduce dependence on a single supplier. Also, by strengthening its

distribution reach in the Eastern and Western markets, ARBL is likely to gain

market share in the automotive replacement segment as well. We believe

ARBL would continue to gain market share in the near term and expect it to

post a top-line CAGR of 17% over FY2015-2017.

Outlook and valuation

ARBL is likely to continue gaining market share in the automotive battery segment.

The strategy followed by automotive OEMs of sourcing from multiple vendors as

against having a single vendor is likely to benefit ARBL. Further, with the

company’s strengthening distribution network in the Western and Eastern markets,

we expect replacement sales to grow in strong double digits, going forward. We

also expect the Industrial segment growth to be in healthy double digits over

FY2017-2018, given that the telecom players are resorting to aggressive network

expansion, and also with ARBL entering tubular battery manufacturing. We expect

ARBL to record a healthy top-line CAGR of 17% over FY2015 to FY2017. Also,

given the softness in lead prices, margins are expected to remain at elevated

levels. We expect ARBL to clock 24% earnings CAGR over the next two years. We

maintain our positive view on the stock and reiterate our Buy rating on the stock

with a target price of `1,039 (based on 28x FY2017 earnings).

Company background

Amara Raja Batteries Ltd (ARBL) is a leading automobile and industrial battery

manufacturer in India. It is the second largest lead acid battery manufacturer

having a market share of about 35% in the organized battery industry. ARBL has a

technological tie-up with US based Johnson Controls, which also holds 26% stake

in it. The Automotive and Industrial battery segments each accounted for ~50% of

the company's total revenue in FY2015.

February 4, 2016

Amara Raja Batteries | 3QFY2016 Result Update

Profit and loss statement (Standalone)

Y/E March (` cr)

FY2012

FY2013

FY2014

FY2015

FY2016E

FY2017E

Total operating income

2,375

2,959

3,452

4,230

4,790

5,748

% chg

34.4

24.6

16.7

22.5

13.2

20.0

Total expenditure

2,017

2,508

2,876

3,502

3,928

4,732

Net raw material costs

1,598

1,991

2,283

2,776

3,042

3,696

Employee expenses

100

126

158

195

238

278

Other expenses

319

390

435

531

648

758

EBITDA

357

451

575

728

862

1,016

% chg

38.4

26.1

27.6

26.5

18.5

17.7

(% of total op. income)

15.1

15.2

16.7

17.2

18.0

17.7

Depreciation & amort.

134

153

176

EBIT

323

431

541

617

759

920

% chg

45.4

33.7

25.5

14.1

23.0

21.1

(% of total op. income)

13.6

14.6

15.7

14.6

15.9

16.0

Interest and other charges

Other income

Recurring PBT

319

431

541

617

759

919

% chg

44.5

35.3

25.4

14.2

22.9

21.1

Extraordinary items

(9)

(4)

(7)

PBT (reported)

319

422

537

610

759

919

Tax

104

135

169

199

243

285

(% of PBT)

32.5

31.4

31.3

32.2

32.0

31.0

PAT (reported)

215

287

367

411

516

634

ADJ. PAT

215

296

371

418

516

634

% chg

45.7

37.6

25.5

12.6

23.4

22.9

(% of total op. income)

9.1

10.0

10.8

9.9

10.8

11.0

Adj. EPS (`)

12.6

17.3

21.7

24.5

30.2

37.1

% chg

45.7

37.6

25.5

12.6

23.4

22.9

February 4, 2016

Amara Raja Batteries | 3QFY2016 Result Update

Balance sheet statement (Standalone)

Y/E March (` cr)

FY2012 FY2013 FY2014 FY2015 FY2016E FY2017E

SOURCES OF FUNDS

Equity share capital

Reserves & surplus

806

1,043

1,346

1,682

2,111

2,637

Shareholders’ Funds

823

1,060

1,363

1,700

2,128

2,654

Total loans

Deferred tax liability

Other long term liabilities

Total Liabilities

930

1,166

1,477

1,811

2,215

2,741

APPLICATION OF FUNDS

Gross block

621

680

996

1,441

2,041

2,341

Less: Acc. depreciation

267

321

372

497

650

826

Net Block

355

359

623

944

1,391

1,516

Capital work-in-progress

103

145

100

Investments

Other noncurrent assets

Current assets

949

1,292

1,199

1,341

1,376

1,910

Cash

229

411

295

222

139

419

Loans & advances

131

201

113

140

157

188

Other

589

680

792

980

1,080

1,302

Current liabilities

422

604

506

578

674

809

Net current assets

527

688

693

764

701

1,100

Total Assets

930

1,166

1,477

1,811

2,215

2,741

February 4, 2016

Amara Raja Batteries | 3QFY2016 Result Update

Cash flow statement (Standalone)

Y/E March (` cr)

FY2012 FY2013 FY2014 FY2015 FY2016E FY2017E

Profit before tax

319

422

537

610

759

919

Depreciation

125

153

176

Change in working capital

(121)

(143)

(20)

(119)

Others

(2)

Direct taxes paid

(104)

(135)

(169)

(199)

(243)

(285)

Cash Flow from Operations

314

360

308

397

649

691

(Inc.)/Dec. in fixed assets

(76)

(130)

(357)

(388)

(614)

(300)

(Inc.)/Dec. in investments

(0)

(6)

(3)

Cash Flow from Investing

(76)

(130)

(357)

(388)

(620)

(303)

Issue of equity

Inc./(Dec.) in loans

(11)

(3)

(10)

(24)

Dividend paid (Incl. Tax)

(38)

(50)

(65)

(72)

(88)

(108)

Others

(0)

Cash Flow from Financing

(48)

(47)

(68)

(82)

(112)

(108)

Inc./(Dec.) in cash

189

182

(117)

(72)

(83)

280

Opening Cash balances

229

412

295

222

140

Closing Cash balances

229

412

295

222

140

419

February 4, 2016

Amara Raja Batteries | 3QFY2016 Result Update

Key ratios

Y/E March

FY2012

FY2013

FY2014

FY2015

FY2016E

FY2017E

Valuation Ratio (x)

P/E (on FDEPS)

68.6

49.8

39.7

35.3

28.6

23.2

P/CEPS

56.4

40.7

33.8

26.7

22.0

18.2

P/BV

17.9

13.9

10.8

8.7

6.9

5.6

Dividend yield (%)

0.2

0.3

0.4

0.6

0.7

EV/Sales

6.1

4.9

4.2

3.4

3.1

2.5

EV/EBITDA

40.8

31.9

25.2

20.0

17.0

14.1

EV / Total Assets

15.7

12.3

9.8

8.1

6.6

5.2

Per Share Data (`)

EPS (Basic)

12.6

17.3

21.7

24.5

30.2

37.1

EPS (fully diluted)

12.6

17.3

21.7

24.5

30.2

37.1

Cash EPS

15.3

21.2

25.5

32.3

39.2

47.4

DPS

1.9

2.5

3.2

3.6

5.1

6.3

Book Value

48.2

62.0

79.8

99.5

124.6

155.4

Returns (%)

ROCE (Pre-tax)

34.7

37.0

36.6

34.1

34.3

33.6

Angel ROIC (Pre-tax)

46.1

57.1

45.8

38.9

36.6

39.6

ROE

26.1

27.9

27.2

24.6

24.2

23.9

Turnover ratios (x)

Asset Turnover (Gross Block)

3.8

4.3

3.5

2.9

2.3

2.5

Inventory / Sales (days)

41.0

36.1

35.4

36.1

34.9

35.4

Receivables (days)

49.1

47.0

47.9

47.8

46.8

Payables (days)

64.9

74.5

53.5

49.8

51.4

WC cycle (ex-cash) (days)

45.8

34.2

42.1

46.7

42.8

43.2

Solvency ratios (x)

Net debt to equity

(0.2)

(0.3)

(0.2)

(0.1)

(0.0)

(0.1)

Net debt to EBITDA

(0.4)

(0.7)

(0.4)

(0.2)

(0.1)

(0.4)

Interest Coverage (EBIT / Int.)

80.5

1603.1

753.9

2572.4

949.2

920.0

February 4, 2016

Amara Raja Batteries | 3QFY2016 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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Angel Broking Private Limited (hereinafter referred to as “Angel”) is a registered Member of National Stock Exchange of India Limited,

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a registered entity with SEBI for Research Analyst in terms of SEBI (Research Analyst) Regulations, 2014 vide registration number

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/dealing in securities Market. Angel or its associates including its relatives/analyst do not hold any financial interest/beneficial

ownership of more than 1% in the company covered by Analyst. Angel or its associates/analyst has not received any compensation /

managed or co-managed public offering of securities of the company covered by Analyst during the past twelve months. Angel/analyst

has not served as an officer, director or employee of company covered by Analyst and has not been engaged in market making activity

of the company covered by Analyst.

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decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should

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Disclosure of Interest Statement

Amara Raja Batteries

1. Analyst ownership of the stock

2. Angel and its Group companies ownership of the stock

3. Angel and its Group companies' Directors ownership of the stock

4. Broking relationship with company covered

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Based on expected returns

Buy (> 15%)

Accumulate (5% to 15%)

Neutral (-5 to 5%)

over 12 months investment period):

Reduce (-5% to -15%)

Sell (< -15)

February 4, 2016