Saturday, September 5, 2015

Long Lasting Batteries - Amara Raja Batteries Analysis

(How I identified stock for my personal investment)

I was riding my Activa on streets of Mumbai during summer morning. Seeing the signal is about to turn red, I slowed down my speed to halt before stop line. After few minutes halt, the singal turned green, but my Activa refused to start . Switching on power button and pressing accelerator couple of times, it finally began to ride. This was first time in last 3 years, that Activa has started showing its tantrum.

So, I headed to 2-wheeler service station. He checked engine motor, battery and other components. Finally, he said that the problem is on account of non-functioning of battery and suggested that I should replace the battery.

I inquired with the  dealer about range of batteries available for two wheelers

He said Activa had inbuilt Amaron battery and replacing it with other Amaron battery would entitle me to discount on new battery - commonly known as replacement discount (customer retention tactics) and he would offer me warranty. I asked him about terms of warranty. He said that the battery comes with free warranty of 24 months therafter pro-rata warranty for period of further 24 months. I got excited to know about discount and warranty. But, MRP of Amaron batteries was at 20% premium to batteries manufactured by competitors (pricing power)

Initially, I thought he was trying to push his products as he would be entitled to higher commission. I told dealer that I would come next day.

In meantime, I approached friends for their views and searched online for users review of batteries. Friends views and online review suggested that I should buy Amaron batteries as it hassle free and does not require maintenance. Finally, I decided to replace faulted battery with Amaron battery by paying premium and availing discount and warranty offer of 48 months

Coming back home, I decided to analyze Amara Raja batteries Limited (ARBL) the Company that manufactures Amaron Batteries. I read financial statements, Annual report, investor presentation, management interviews and other news articles. .

Major highlights 
Product line: ARBL has large range of batteries. In Automobile segment it manufactures batteries for two wheeler, passenger cars, commercial cars and trucks. Further, the battery make differs according to vehicle model. In industrial segment, it manufactures batteries for telecom, data centers, Indian railways, UPS and power utility sector. Thus, it has wide spectrum of product catering to diverse needs
  • Demand Driver 
  • Automobile - growth in demand for 2 wheeler, passenger cars (high disposable income) commercial cars, trucks (logistics demand and growth in e-commerce business) and replacement market (second hand vehicle) 
  • Telecom - Preference for smartphone, high data usage, GoI initiative of Digital India 
  • IT & ITeS - Growth in IT platform and IT based start-ups, data centers 
  • Banking - Increase in number of ATMs (ATMs supported by power backups) and payment banks 
  • Domestic power demand - rural India relies on UPS for uninterrupted power supply 
  • Solar Applications - tubular batteries to power solar applications (driven by GoI initiative for renewable energy) 
De-risk business model: As Company's product cater to different industries, it is not much affected by slowdown in any particular industry. Normally, slow growth in particular sector is usually offset by high growth in other sector. Moreover, for automobiles segment - it caters to both OEMs demand and replacement market demand. Thus, there is continuous demand for batteries

Fungible production lines: The production facilities are set up in manner that makes it possible to freely shift from the manufacture of one product to another, in accordance with evolving demand

Access to Johnson technology of Lead acid batteries: Its JV partner - Johnson Control is world leader in Lead acid batteries. These batteries are safe and maintenance free. So, demand for such batteries is expected to last for next decade or more.

Distribution Network: It has network of 30,000+ Amaron and PowerZone retailers across India

Current Production Capacity and growth: As of Mar 2015, it has installed capacity of 1000k batteries / month for 2 wheeler, 688k batteries / month for 4 wheeler. In industrial segment, it has manufacturing set up for 11.7 million LVRLA battereis and 10.3 million of MVRLA batteries. Further, its was operating at almost 100% of its installed capacity and faced situation of capacity constraint in light of excess demand. During past few years, the Company has upgraded and expanded its production facilities to meet growing demand for batteries. Further, Capex are planned, LVRLA battery capacity by 30% and expanding production line in automobile segment.

Not much affected by currency fluctuations: Majority of sales is in India. Export is limited to Indian Ocean Rim countries (i.e. Africa, Middle East and South EastAsia). Also, export sales contributes just 6% of total sales as of Mar 2015. Given the India demographic, demand for batteries in each sectors is expected to grow at much faster pace.

Debt / equity: The Company does not have any debt and all recently capex are entirely funded through accruals. Thus, it has insulated itself from increase in interest cost.

Return to shareholders - Earnings per share has increased from Rs. 17.34 in FY11 to Rs. 24.05 in FY15. With its annual dividend payout policy of 15%, dividend per share has increased accordingly in value terms. The number of share outstanding has remained same over FY11-FY15. It has consistently registered high return for its shareholders.
  • Financially, it has registered sales growth of over 20% during FY11-FY15.
  • Its efficient strategy to manage raw material cost has enable it to generate average 5 year gross margin of over 30% 
  • Net profit margin was in range of 8-9% during same period with its effective expense management. 
  • It has generated robust return on capital employed of over 30% for each year during FY11-FY15 
  • It has sufficient liquidity with its average 5 year current ratio of 2.25 and average 5 year quick ratio of 1.56 
  • Gross block has increased from Rs. 5.38 billion in FY11 to Rs. 14.23 billion in FY15, a CAGR of 164%. During the same period, Net working capital has increased from Rs. 3.6 billion to Rs. 7.3 billion, a growth of 15.3%. 
  • Asset turnover ratio (average net fixed asset) has fallen from 6.98 times in FY13 to 4.68 times in FY15, highlighting capex incurred to expand its install capacity and to cater to increasing market demand. 

Peer comparison - Indian battery industry is dominated by two players Exide and Amara Raja. These two companies control around 90% of the organized market. ARBL stock price has increased from Rs.190 in FY10 with P/E 10.9 to Rs.833 at end of FY15 trading at P/E of 34.6. The stock price has consistently maintained its upward trajectory. 
During last few years, Exide Industries has lost its market share to ARBL and that is seen in its stock price. Exide stock was trading at Rs. 140 as of Mar-11 and it managed to rise to Rs.180 by end of FY15. Amara Raja Batteries has genereted good return for its investors in past. 

Now, Amaron battery in Activa is running properly. Based on my product experience and company's financial performance, the stock appears to have good value creation ability in near future. 

Stock valuation is not discussed as this is not a stock recommendation or an investment advice. Please do your research before investing