Amara Raja Batteries (ARBL)s 2QFY2016 results have come in line with
estimates. The top-line continued to grow in double digits, but the growth was
slightly moderated given the decrease in realization. Realization declined on
account of passing of lower lead prices to consumers and due to slowdown in the
UPS segment. Still, ARBL managed to keep its margins above the 17% mark. The
net profit grew in robust double-digits, and came in line with estimates.
Top-line maintains double-digit growth: ARBL’s revenues grew a healthy 9% yoy
to Rs1,158cr on back of a robust 21% yoy growth in the automotive segment. The
industrial segment was a bit subdued, growing by 5% yoy, due to slowdown in the
UPS segment.
Margin improvement and lower depreciation boosts profitability: For the quarter,
ARBL’s net profit grew a robust 22% yoy to Rs122.6cr. Margin improvement due to
soft lead prices coupled with lower depreciation expenses boosted the profits.
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, given the strengthening distribution network in the Western
and Eastern markets, replacement sales are also expected grow in strong double
digits, going forward. We also expect the industrial segment to recover from
2HFY2016, given the network expansion by telecom players and with ARBL
entering into tubular battery manufacturing. We expect ARBL to record a healthy
top-line CAGR of 19% over FY2015 to FY2017. Also, given the softness in lead
prices, margins are expected to remain at elevated levels. We expect ARBL to
clock 27% earnings CAGR over the next two years. Hence, we have a positive
view on the stock and maintain our Buy rating with a target price of Rs1,039
(based on 28x FY2017 earnings).

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