Stock Pick from Auto Ancillary Sector

Choice Scrip is a Blue Chip stock pick that is expected to give returns within a 6 months-1 year horizon. The recommendation is based on a fundamental analysis of the company.

HERE IS WHY

• Potential growth from automotive replacement and telecom sales 
• Robust performance over the years, both top-line and bottom-line
• Capacity expansion plans, health of balance sheet and valuation

Remember those catchy advertisements promoting a car battery? When they first made it to the screens nobody would have thought that the company would be able to grab customer attention for a seriously commoditised product with them. But Amaron, the brand that Amara Raja Batteries (ARB) promoted through these advertisements got the company a good start and it has never looked back ever since.

Share Holding Pattern as on 31/12/2012
Promoter and Promoter Group	52.06
Indian	20.54
Foreign	31.52
Public	47.94
FII	6.82
DII	17.62
Non Institutions	23.5
GRAND TOTAL	100

ARB manufactures and sells batteries to the automotive and industrial segments. Over the years, it has cut through competition and changed market dynamics through aggressive branding initiatives, technological advancement and attractive warranties and pricing. Even during the ongoing difficult period for the automotive and industrial segments, it continues to perform better than its competitors.

55 per cent of ARB’s revenues are derived from automotive sales. It caters to four-wheelers and two-wheelers, channelling a third of its production through Original Equipment Manufacturers (OEM) and the rest through the replacement market. Lately, automobile sales have been highly subdued with no firm visibility of improvement in the near-term. This has had an obviously direct impact on the growth in sales to OEMs. However, ARB has seen an improvement of 92 basis points in its margins in Q2FY13 on a YoY basis.

	12/Sep	12/Jun	12/Mar	11/Dec	11/Sep
Sales	718.72	693.79	671.08	613.13	560.41
Operating Profit	104.76	106.59	83.2	94.31	76.51
Interest	0.66	0.12	0.16	1.53	1.06
Net Profit	70.1	76.09	58.29	65.93	51.85
Equity Capital	17.08	17.08	17.08	17.08	17.08

Having said this, and considering the fact that automobile sales had been robust in FY09 and FY10, we expect sales to be driven by the replacement market. ARB currently has a market share of 34 per cent and 24 per cent in the replacement market for four-wheelers and two-wheelers respectively. To strengthen its presence in the two-wheeler market, it has been working towards selling to two-wheeler OEMs. This is expected to further boost the performance of ARB.
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On the industrial front, ARB’s revenues are primarily dominated by its presence in the sectors of telecom and UPS wherein it has a market share of 46 per cent and 32 per cent respectively. It has also garnered a share of the market from supplies to other sectors like power utilities and railways. The company has been able to drive growth in the telecom sector through robust partnerships. This has been evident from its partnership with Bharti Airtel through which it has been able to expand its presence in Africa, Sri Lanka and Bangladesh, also strengthening exports, which doubled in FY12. ARB currently manufactures through its plant at Chitoor and has been making continual investments towards capacity augmentation. In the previous quarter it announced that it is making an investment of RS 99.80 crore towards expansion of capacity. At the same time, it is looking forward to setting up a new manufacturing facility at a strategic second location which will provide enough room for automotive and industrial expansion. These investments would be funded through its internal accruals. ARB’s balance sheet stands healthy with a cash of Rs 229 crore and a debt to equity ratio of a mere 0.10x.

The financial performance of ARB has been impeccable over the years with CAGR over the last five years for revenues coming in at 32 per cent. The operating profit and net profit too have grown at the same pace over those five years, thus displaying efficiency in its business operations. Moreover, the stock is trading at a TTM PE of 9.16x as compared to Exide’s 20.64x. This combined with past performance, maintenance of margins and planned capacity expansion leads us to believe that the prospects of ARB are bright.

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