03 September 2020 Initiating Coverage Amara Raja Batteries · Amara Raja currently has ~20% market...

03 September 2020 Initiating Coverage

Amara Raja Batteries

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Towards a 'charged' future

We initiate on Amara Raja Batteries with an ADD rating. Currently, the

company has a ~20% market share in the USD 5bn lead-acid battery (LAB)

segment. We expect it to gain further share as revenues are forecasted to grow

in double digits over the next 3-5 years (vs. mid-single-digit for the industry).

While Amara Raja would benefit from the shift towards the organised

segment in the near term, we believe that the advent of new technologies such

as lithium-ion will change industry dynamics; though the pace of adoption is

expected to be very gradual. Amara Raja’s future technology partnerships

(after the exit of Johnson Controls) and its ability to foray into alternative

battery chemistries will determine its growth opportunities in the long term.

Organised segment to gain share: The share of unorganised players is high

at 30-40%, particularly in the replacement market. We believe that larger

players will continue to gain a share of the LAB market, driven by (1) steady

formalisation of the economy (post introduction of GST), (2) advanced and

more efficient production techniques introduced by organised companies

(punched grid technology), (3) launch of entry-level brands/batteries with

shorter warranty cycles to compete with the unorganised segment. Amara

Raja currently is ~20% of the overall market.

Amara Raja's revenues to grow in double digits: While industry growth is

expected to moderate from the 10-12% levels earlier to mid-single digits in

the next 3-5 years, we believe that Amara Raja's revenue will grow in double

digits, led by (1) sustained market share gains by the organised segment (as

highlighted above), (2) focus on exports (10% of revenues), and (3)

opportunities in the e-rickshaw/motive power category (new categories).

Lithium–opportunity or threat? The lead-acid battery segment is expected

to witness a substitution threat from lithium-ion batteries, with the

technology shift being driven by both the government and private sector.

The FAME-II scheme for automobiles envisages usage of 2.3 GWh/p.a. of

battery capacity that will be required, based on the proposed subsidy

amount. However, post the COVID outbreak, we believe the adoption of

EVs will be delayed. Within the telecom segment (~10% of revenue), Jio is

operating 100% of its towers with lithium batteries.

Prospective technology partnerships: After the exit of Johnson Controls, we

await the new technology partnerships that Amara Raja will forge, including

those on alternative battery chemistries.

Initiate with an ADD: We initiate coverage on Amara Raja with an ADD

rating and set a target price of Rs 780, at 19x Jun-22E EPS, which is in line

with its long-term P/E average. Key risks: Higher-than-expected market

share gains on the upside and a sudden shift in technology on the downside.

Financial Summary (Standalone)

YE Mar (Rs mn) FY19 FY20 FY21E FY22E FY23E

Net Sales 67,931 68,395 60,243 69,836 80,256

EBITDA 9,508 10,986 9,097 11,272 13,106

APAT 4,835 6,608 4,918 6,648 8,021

Adj. EPS (Rs) 28.3 38.7 28.8 38.9 47.0

Adj. EPS Growth (%) 2.6 36.7 (25.6) 35.2 20.7

P/E (x) 26.4 19.3 25.9 19.2 15.9

RoE (%) 15.4 18.9 12.8 15.4 16.3

Source: Company, HSIE Research

ADD

CMP (as on 02 Sep 2020) Rs 745

Target Price Rs 780

NIFTY 11,535

KEY

CHANGES OLD NEW

Rating - ADD

Price Target - Rs 780

EPS % FY21E FY22E

- -

KEY STOCK DATA

Bloomberg code AMRJ IN

No. of Shares (mn) 171

MCap (Rs bn) / ($ mn) 127/1,739

6m avg traded value (Rs mn) 765

52 Week high / low Rs 814/349

STOCK PERFORMANCE (%)

3M 6M 12M

Absolute (%) 12.0 19.3 20.2

Relative (%) (3.5) 16.9 15.5

SHAREHOLDING PATTERN (%)

Mar-20 Jun-20

Promoters 28.1 28.1

FIs & Local MFs 11.6 13.8

FPIs 20.9 19.0

Public & Others 39.4 39.2

Pledged Shares 1.7 -

Source : BSE

Aditya Makharia

[email protected]

+91-22-6171-7316

Mansi Lall

[email protected]

+91-22-6171-7357

Page | 2

Amara Raja Batteries: Initiating Coverage

Focus charts

Industry composition of the battery segment – more

room for the organised segment to gain share

Amara Raja's market share in the replacement segment

has risen to ~one-third of the market

Source: Company, HSIE Research Source: Company, HSIE Research

Automotive volumes have now recovered to 85-90% of

pre-COVID levels

Shareholding has changed as Johnson Controls has

exited the business globally

Source: SIAM, Company, HSIE Research Source: BSE, Company, HSIE Research

Li-ion battery potential in India for the automotive

segment (in GWh/p.a.), a medium-term technology risk

P/E multiple has rerated from March lows

Source: Industry, HSIE Research Source: Bloomberg, Company, HSIE Research

Organised

59%

SME

33%

Unorganised

8%

15%

20%

25%

30%

35%

2W replacement 4W replacement

FY15 FY20

-

100

200

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1,500

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y-1

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-19

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g-1

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Sep

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-19

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-20

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r-2

0

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r-2

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y-2

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Jun

-20

Jul-

20

2W 4W - RHS

2.3

25.0

0

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25

30

FAME Longer term potential

26.1 28.1

26.0 24.0

0

10

20

30

40

50

60

Jun-18 Jun-20

Galla

FamilyGalla

Family

GallaFamily

Johnson

Controls

Brookfield

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P/E Mean +1 SD -1 SD

Page | 3


Organised segment to gain share

The industry market size is USD5bn–the LAB market was growing at 10-12%

before FY20, driven by a combination of replacement demand, encouraging OEM

sales in the auto segment as well as UPS sales/exports. The organised players

have grown ahead of the market over this period.

Lead-acid battery market size (in USD bn) Top two companies have grown ahead of the market

(Rs bn)


Although the unorganised share has been reducing over the years, it remains

high at 30-40%, particularly in the replacement market. While the organised

players dominate the PV and 2W segments with a 70-80% share, the share of the

unorganised players is elevated at 50-60% levels in the CV, tractors, and home

inverter segment.

Battery segment industry composition


Larger players to continue to gain share: We believe that larger players will

continue to gain share, driven by (1) formalisation of the economy with the

introduction of GST as well as consolidation post-COVID, (2) new production

techniques introduced by organised companies, (3) companies launching entry-

level brands/batteries with shorter warranty cycles to compete with the

unorganised segment

Although the unorganised

share has been reducing

over the years, it remains

high at 30-40%,

particularly in the

replacement market

3.0

3.5

4.0

4.5

5.0

2016 2020

100

120

140

160

180

2016 2020

Organised

59%

SME

33%

Unorganised

8%

Page | 4


With the introduction of GST, the larger companies have rationalised their

distribution networks while the unorganised segment is contending with higher

compliance costs.

New technology introduction to lower production costs: Organised players are

introducing new technologies, including punched grid/stamped grid technology,

which have improved production processes. For instance, the new stamped grid

technology introduced by Amara Raja is a much cleaner operation

environmentally and more efficient operation (production rates are higher than

the earlier technology of cast grids). Further, the process flexibility is higher,

which enables the creation of multiple product variants and leads to material cost

savings.

Launching entry-level brands: To compete with the unorganised sector, the

companies are launching entry-level brands with lower warranty periods,

besides expanding their distribution networks in the rural and semi-urban

markets.

The new stamped grid

technology introduced by

Amara Raja is a much

cleaner operation

environmentally and

more efficient

Page | 5


Amara Raja's growth strategy

Amara Raja has consistently been gaining market share across 2W and 4W

segments. The battery manufacturer has doubled capacity over FY14-20 and

currently has an installed capacity of 12mn in 4Ws and 17mn in 2Ws.

Capacity (in mn units)

FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E

4W 6.0 8.3 8.3 8.3 10.5 11.0 12.0 14.0 14.0

% YoY

38% 0% 0% 27% 5% 9% 17% 0%

2W 8.4 8.4 11.0 11.0 11.0 15.0 17.0 20.0 20.0

% YoY

0% 31% 0% 0% 36% 13% 18% 0%

Total 14.4 16.7 19.3 19.3 21.5 26.0 29.0 34.0 34.0

% YoY

16% 16% 0% 12% 21% 12% 17% 0%


Increased capacity in the automotive segment


Amara Raja currently has ~20% market share of the lead-acid battery market in

India; it has risen sharply across the 2W and 4W replacement segments, and the

company now accounts for almost a third of the replacement segment. Within the

telecom segment, the company is the market leader with a share of ~60%.

Amara raja market share in the replacement market has risen to ~one third


0

5

10

15

20

FY14 FY20

4W 2W

15%

20%

25%

30%

35%

2W replacement 4W replacement

FY15 FY20

Page | 6


In the OEM segment, Amara Raja has a ~35% market share in 4W OEMs and a

~15% share in 2W OEMs. The company is focusing on gaining market share in

the 2W segment and has recently won orders from Hero and TVS Motors.

Growth initiatives by Amara Raja

The industry growth is expected to be in mid-single digits for the next five years

(as compared to 10-12% earlier) due to the moderation in automotive volumes

over FY18-21 (which will impact replacement sales). However, we believe Amara

Raja will continue to grow in double digits, led by (1) sustained market share

gains by the organised segment (2) focus on exports (3) and opportunities in the

e-rickshaw/motive power category.

Amara Raja's growth strategy


Exports account for 10% of sales and are a focus area: Exports have been

growing for the company and now account for ~10% of overall sales. Rising

shipments to the markets in the Indian Ocean Rim–Africa, Middle East and

South-East Asia is leading to the above. The company will continue to expand

into new markets to consolidate its overseas presence.

Exports as % of sales


The industry growth is

expected to be in mid-

single digits for the next

five years. However, we

believe Amara Raja will

continue to outperform

the industry and grow in

double digits

The company will

continue to expand into

new markets to

consolidate its overseas

presence

0%

3%

6%

9%

12%

15%

FY16 FY17 FY18 FY19 FY20

Exports

Geographic expansion

•Strengthen and expand operation in identified markets in the Indian Ocean Rim

•Move towards internationalisation of the export business

•Forge International tie-ups to expand and hedge existing business operations

Leverage new technologies

•Use of advanced plate making technologies, in terms of punched grids, across product categories

•Cater to the growing demand for energy storage solution from the renewble energy sector.

Expand product offering

•To meet various emission and Cafe’ norms, vehicle manufacturers are using unique technologies, that necessitates advanced battery technologies

•Emerging applications in e-space; E-Rickshaws & E-Autos.

Continue to grow in India

•Build leadership

across categories

and markets

•Strengthen brand

equity, as a

vehicle for future

growth

Page | 7


E-rickshaw and motive power opportunity

Amara Raja has started supplies to the e-rickshaw battery segment with the

proliferation of these vehicles across several micro-markets, particularly in north/

east India. The segment has witnessed significant growth owing to government

incentives and rising environmental awareness. Most of these rickshaws are

powered by lead-acid batteries, and they provide last-mile connectivity in Tier II

and III cities. The e-rickshaw sales are expected to rise to 1mn units in the

medium term.

Annual EV sales in India (in units)

Segment FY19

e-2 wheelers 1,26,000

e-3 wheelers 6,30,000

e-4 wheelers 3,600

TOTAL 7,59,000

Source: Industry, HSIE Research

Amara Raja is expanding capacity: The company has plans to expand its tubular

battery capacity from 1.3m to about 1.7m batteries. The additional capacity will

be for the e-rickshaws products–the field trials for the products are ongoing, and

Amara Raja will reach the additional battery capacity by end FY21. The sales are

expected to expand as the market evolves.

Each e-rickshaw has a pack of 4 large lead-acid batteries, which provide a driving

range of 80km per charge. However, due to the high drain, battery life is short at

6-9 months. With the life of the e-rick at ~2 years, it requires 3-4 replacement

cycles. Currently, the regional and unorganised players dominate the segment.

However, with the organised players getting into this segment (including

manufacturing), the formal sector will gain share.

Batteries for motive power

The motive power segment offers long-term growth potential. Currently, the

market for forklifts/pallet trucks in India has been limited due to the availability

of manual labour. The adoption of lift trucks in India is limited at 10 lift trucks

per million as against 273 in China.

However, with rising mechanisation, higher labour costs, conversion of diesel

vehicles to electric ones, and the advent of e-commerce, the adoption of electric

vehicles for forklifts will increase. This will create an additional requirement for

batteries.

The e-rickshaw segment

has witnessed significant

growth owing to

government incentives

and rising demand for

last mile connectivity

The company has plans

to expand its tubular

battery capacity from

1.3m to about 1.7m

batteries to address this

segment

Page | 8


Demand is recovering to pre-COVID levels

The management of Amara Raja has highlighted that demand is now reviving

post the COVID lows in 1QFY21. Sales are now back up to 85% of pre-COVID

levels, and demand is expected to pick up further as OEM sales are benefitting

from the move towards personal mobility. This will also aid replacement demand

as consumers will be utilising their existing vehicles for a longer duration.

Domestic 2W sales (in '000 units) Domestic 4W sales (in '000 units)

Source: SIAM, Company, HSIE Research Source: SIAM, Company, HSIE Research

We expect automotive industry sales to revive over 2HFY21/22 as the economy

picks up.

2W and 4W sales volume forecast

Source: SIAM, HSIE Research

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PV 2W

Page | 9


Changing landscape: alternative battery chemistries

The industry is witnessing demand for batteries with higher rate discharge

capabilities and those which require a more demanding cycle life (such as in

commercial applications). This is leading to nascent demand for the lithium-ion

batteries.

The lead-acid battery segment is expected to witness the threat of substitution

from the next-generation lithium-ion batteries. This threat is being driven from

both—the government as well as the private sector. Thus, under the FAME II

scheme, the government is promoting the migration towards electric mobility,

while private telecom operators such as Reliance Jio are adopting the usage of Li-

ion batteries for their towers.

FAME-II is promoting lithium batteries, which provides a more extended range:

Under FAME-I, the incentives were provided to all EVs, including those that run

on lead-acid batteries, irrespective of the battery capacity. This has been

discontinued under the new scheme. Considering that the cost of batteries is a

significant factor in the price of an EV, the demand incentives are based on

battery capacity under FAME-II. Currently, the initial proposal for such

incentives is Rs 10,000 per kWh for all vehicles except buses (Rs 20,000 per kWh).

Segment-wise incentives under the FAME-II

Sr. No. Vehicle segment

Max no. of

vehicles to be

supported

~size of the

battery (kWh)

Total

approximate

incentive per

kWh

Maximum ex-

factory price to

avail incentive

(Rs)

Total fund

supported by

DHI (Rs bn)

1 Registered e-2 wheelers 1,000,000 2 20,000 150,000 20.00

2 Registered e-3 wheelers 500,000 5 50,000 500,000 25.00

3 Registered e-4 wheelers 35,000 15 150,000 1,500,000 5.25

4 4W strong hybrid

vehicle 20,000 1.3 13,000 1,500,000 0.26

5 e-Bus 7,090 250 5,000,000 20,000,000 35.45

Total Demand

Incentive 85.96

Source: GoI, HSIE Research

The central government has announced a subsidy of Rs 100bn under the FAME II

scheme for automobiles. The scheme envisages the usage of 2.3 GWh/p.a. of

battery capacity that will be required, based on the proposed subsidy amount.

This is expected to scale up over the medium term, subject to the broader

adoption of EV vehicles as well as the price fall in lithium batteries.

Li-ion battery potential (in GWh/p.a.)


The lead-acid battery

segment is expected to

witness threat of

substitution from the

next generation lithium-

ion batteries...

...though the transition to

alternate battery

chemistries will be long-

drawn, in our view

2.3

25.0

0

5

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FAME Longer term potential

Page | 10


However, post the COVID outbreak, the adoption of EVs will be delayed, in our

view. In our EV report the 'S' Curve, we believe the adoption of electric mobility

will be gradual in India (refer Where are we on the 'S' curve?). We believe that

EVs are at the start-up stage of the S-Curve, and the ecosystem will take time to

get established in India. The route to profitability yet remains long-drawn, in our

view.

S-Curve for alternate technology applications in the automotive segment


Also, contrary to perceptions, the electric cars have a 12v lead-acid battery as an

auxiliary battery for Starter, Lightning and Ignition (SLI) applications. Thus, the

LAB will continue to be relevant even in an EV world.

However, the telecom segment, which accounts for ~10% of Amara Raja's

revenues, has witnessed a migration towards lithium-ion batteries. The market

leader Reliance Jio has adopted the usage of Li-Ion batteries in its towers. The

other telecom operators may gradually migrate towards the same in the medium

term. Currently, Amara Raja is the dominant battery supplier to this segment,

with a share of 60%.

Setting up a lithium-ion facility is an expensive proposition and requires high

Capex. As per industry estimates, a minimum scale of 5 GWh (over time) is

critical to be competitive in cell manufacturing. Bosch India's management, for

instance, has highlighted that it will not get into cell manufacturing operations.

Further, the industry in India will require government support in the form of

subsidies and tax breaks to set up these facilities.

Estimated global Li-ion battery production capacity (in GWh)


START

GROWTH

SCALE

MATURITY

GR

OW

TH

TIME

Electric vehicles in India

Ride sharing & mobilityservices

Achieveing profitabilty is important to ensure scalabilty of these alternate business

Strategic growth inflection point

Path of sustainedmomentum

Path of obsolescence

Path of plateau

The potential for lithium

ion batteries is 2.3

GWh/p.a. currently

Post the COVID

outbreak, the adoption of

EVs will be delayed in

our view

Setting up a lithium-ion

facility is capital

intensive

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https://www.hdfcsec.com/hsl.docs/Auto%20-%20Where%20are%20we%20on%20the%20%E2%80%98S%E2%80%99%20curve%20-%20HDFC%20sec-202004081346280788000.pdf

Page | 11


Amara Raja is investing in alternative battery chemistries, i.e. lead batteries

with silicon at the core, in collaboration with US-based Gridtential Energy, to

enhance battery performance. The batteries will use the patented silicon joule

bipolar technology, which comes with a wider temperature range and are 40%

lighter in weight than the conventional batteries.

Gridtential Energy facilitates its partners to adapt their manufacturing operations

to provide high performing 24V and 48V batteries for hybrid automotive, low-

speed electric vehicles, energy storage systems and home backup markets with

the usage of bipolar battery technology.

Besides, Amara Raja has set up an assembly facility for delivering lithium-ion

packs to the 2 and 3-wheeler segment in FY19.

Amara Raja is investing

in lead batteries with

silicon at the core in

collaboration with US-

based Gridtential Energy

These 24V and 48V

batteries will provide

power for hybrids, low

speed EVs and energy

storage systems

Page | 12


Technology tie-ups: what next after Johnson Control?

In Nov 2018, Johnson Controls announced the sale of its Power Solution business

globally to Brookfield Business Partners. Thus, from Apr 2019, the agreement in

India was terminated. Over the years, since the initial agreement in 1997, Amara

Raja has been fully absorbing all critical technologies from Johnson. The recent

technological know-how for the advanced stamped grid plate making

technologies, signed in Sep 2018, is being completely absorbed as well.

Shareholding pattern Jun-18 Shareholding pattern Jun-20

Source: BSE, Company, HSIE Research Source: BSE, Company, HSIE Research

While the company is equipped with the requisite technology from Johnson

Controls in the near to medium term, we believe that the management should

seek a new business partner for the long term as the technology landscape is fast

evolving, especially with the emergence of alternate battery chemistries.

Galla

Family,

26.1

Johnson

Controls,

26.0

MI/FIIs,

10.3

FPIs, 20.3

Others,

17.4 Galla

Family,

28.1

Brookfield,

24.0 MI/FIIs,

13.8

FPIs, 19.0

Others,

15.2

Page | 13


Financials

Revenue to grow in double digits: The company has delivered revenue growth

of 13% CAGR over FY15-19. However, the industry growth has moderated over

FY20-21, owing to COVID and other industry-led factors (2W sales down ~18%).

While we expect FY21 revenue to decline, sales would revive in FY22, in our

view, led by the expected economic recovery. In the medium term, we expect

Amara Raja's revenues to grow in double digits, driven by market share gains

and expansion into new segments.

Amara Raja revenue mix


EBITDA–expect encouraging performance to sustain: Despite a challenging

FY20, the company's EBITDA margin expanded to 16.1%, owing to good growth

in the replacement segment and a fall in lead prices (-9% YoY in US dollar terms).

As margins have sustained in the 14-18% band over the past five years,

management continues to guide for profitability to sustain in this range (of 14-

16%) in the near term.

Lead price and Amara Raja's EBITDA margin

Source: Bloomberg, Company, HSIE Research

4W & inverters,

45%

2W, 22%

Telecom, 9%

UPS, 13%

Other industrial,

11%

12%

14%

16%

18%

20%

1,500

1,700

1,900

2,100

2,300

2,500

FY

10

FY

11

FY

12

FY

13

FY

14

FY

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FY

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FY

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FY

18

FY

19

FY

20

Lead price price ($/tonne) EBITDA margin (%) - RHS

Page | 14


-20%

-10%

0%

10%

20%

30%

30,000

40,000

50,000

60,000

70,000

80,000

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21E

FY

22E

FY

23E

Revenue (Rs mn) % YoY

Revenue expected to grow in double digits over FY22-

23E after a weak FY20-21E

EBITDA margins should sustain in the current band


PAT Return ratios – RoEs are at healthy mid-teens level


12%

14%

16%

18%

5,000

7,000

9,000

11,000

13,000

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21E

FY

22E

FY

23E

EBITDA (Rs mn) EBITDA Margin % - RHS

-30%

-20%

-10%

0%

10%

20%

30%

40%

3,000

4,000

5,000

6,000

7,000

8,000

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21E

FY

22E

FY

23E

APAT (Rs mn) % YoY - RHS

10

15

20

25

30F

Y15

FY

16

FY

17

FY

18

FY

19

FY

20

FY

21E

FY

22E

FY

22E

RoE (%) RoCE (%)

Page | 15


Target price, valuation, and risks

We initiate coverage on Amara Raja with an ADD rating and set a target price of

Rs 780 at 19x Jun-22E EPS, which is in line with its long-term P/E average. While

Amara Raja will benefit from a pick-up in growth in the near term, the advent of

new technologies such as lithium-ion presents an opportunity and a threat.

Amara Raja's future technology partnerships (after the exit of Johnson Controls)

and the ability to foray into future technologies will determine its growth

opportunities in the long term.

Key risks: Higher-than-expected market share gains on the upside and a sudden

shift in technology away from lead-acid on the downside.

One year forward P/E band chart


One year forward EV/EBITDA band chart


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-19

Mar

-20

Sep

-20

P/E Mean +1 SD -1 SD

0

5

10

15

20

25

Mar

-09

Sep

-09

Mar

-10

Sep

-10

Mar

-11

Sep

-11

Mar

-12

Sep

-12

Mar

-13

Sep

-13

Mar

-14

Sep

-14

Mar

-15

Sep

-15

Mar

-16

Sep

-16

Mar

-17

Sep

-17

Mar

-18

Sep

-18

Mar

-19

Sep

-19

Mar

-20

Sep

-20

EV/EBITDA

Page | 16


Key assumptions

Capacity (in mn units) FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

4W 8.3 8.3 10.5 11.0 12.0 14.0 14.0 14.0

% YoY 0% 0% 27% 5% 9% 17% 0% 0%

2W 11.0 11.0 11.0 15.0 17.0 20.0 20.0 20.0

% YoY 31% 0% 0% 36% 13% 18% 0% 0%

Total 19.3 19.3 21.5 26.0 29.0 34.0 34.0 34.0

% YoY 16% 0% 12% 21% 12% 17% 0% 0%

Industrial capacity (in bn AH) 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0

Tubular battery capacity (in mn units) 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3

Rs bn FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

Revenue from:

Automotive 28 32 36 41 46 41 48 55

Industrial 18 21 24 27 23 19 22 25

Total revenue 46 53 61 68 68 60 70 80

% YoY 10% 15% 14% 12% 1% -12% 16% 15%

EBITDA 8.2 8.5 8.8 9.5 11.0 9.1 11.3 13.1

EBITDA margin (%) 17.8% 16.0% 14.6% 14.0% 16.1% 15.1% 16.1% 16.3%


Peer set comparison

Company Mcap

(Rs bn)

CMP

(Rs/sh) Reco

Adj EPS (Rs/sh) P/E (x) RoE (%)

FY21E FY22E FY23E FY21E FY22E FY23E FY21E FY22E FY23E

Amara Raja 127 745 ADD 28.8 38.9 47.0 25.9 19.2 15.9 12.8 15.4 16.3

Balkrishna Industries* 255 1,320 NR 48.3 59.5 67.2 27.3 22.2 19.7 17.1 18.2 17.7

Bharat Forge* 232 498 NR 4.3 14.8 22.0 116.7 33.6 22.7 4.4 11.7 16.2

Bosch* 381 12,929 NR 332.5 456.5 460.3 38.9 28.3 28.1 10.7 13.1 11.9

Endurance 153 1,087 BUY 26.9 39.5 48.5 40.4 27.5 22.4 12.0 15.8 16.9

Exide Industries* 142 167 NR 8.0 10.1 11.8 20.8 16.5 14.2 10.4 12.1 13.1

Subros 17 255 ADD 2.8 10.6 14.4 90.8 24.0 17.7 2.4 8.7 10.8

Source: HSIE Research, *Bloomberg consensus, NR = Not rated

Page | 17


Financials Standalone Income Statement

(Rs mn) FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

Net Revenues 46,178 53,172 60,592 67,931 68,395 60,243 69,836 80,256

Growth (%) 9.7 15.1 14.0 12.1 0.7 (11.9) 15.9 14.9

Material Expenses 29,105 34,885 41,163 46,441 44,471 40,243 46,301 53,330

Employee Expenses 2,429 2,778 3,090 3,452 3,852 3,916 4,330 4,575

Other Operating Expenses 6,418 7,017 7,507 8,530 9,086 6,988 7,933 9,245

Total Expenses 37,952 44,679 51,760 58,423 57,409 51,147 58,564 67,150

EBITDA 8,225 8,493 8,832 9,508 10,986 9,097 11,272 13,106

EBITDA Margin (%) 17.8 16.0 14.6 14.0 16.1 15.1 16.1 16.3

EBITDA Growth (%) 17.2 3.2 4.0 7.7 15.5 (17.2) 23.9 16.3

Depreciation 1,407 1,912 2,303 2,612 3,007 3,091 3,338 3,672

EBIT 6,818 6,581 6,528 6,896 7,978 6,006 7,933 9,434

Other Income (Including EO Items) 463 499 664 477 551 601 896 1,194

Interest 55 58 51 70 122 127 128 130

PBT 7,226 7,022 7,142 7,304 8,407 6,480 8,701 10,498

Tax (Incl Deferred) 2,310 2,237 2,429 2,469 1,799 1,562 2,053 2,478

RPAT 4,916 4,785 4,713 4,835 6,608 4,918 6,648 8,021

EO (Loss) / Profit (Net of Tax) - - - - - - - -

APAT 4,916 4,785 4,713 4,835 6,608 4,918 6,648 8,021

APAT Growth (%) 19.7 (2.7) (1.5) 2.6 36.7 (25.6) 35.2 20.7

Adjusted EPS (Rs) 28.8 28.0 27.6 28.3 38.7 28.8 38.9 47.0

EPS Growth (%) 19.7 (2.7) (1.5) 2.6 36.7 (25.6) 35.2 20.7


Standalone Balance Sheet

(Rs mn) FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

SOURCES OF FUNDS

Share Capital - Equity 171 171 171 171 171 171 171 171

Reserves 20,988 25,760 29,203 33,182 36,385 40,324 45,747 52,299

Total Shareholders’ Funds 21,159 25,931 29,374 33,353 36,556 40,495 45,918 52,469

Long Term Debt - - - - - - - -

Short Term Debt 725 690 584 468 343 105 198 198

Total Debt 725 690 584 468 343 105 198 198

Net Deferred Taxes 538 815 878 959 441 308 343 343

Other Non-current Liabilities & Provns 709 814 919 1,154 1,646 1,810 1,991 2,190

TOTAL SOURCES OF FUNDS 23,130 28,250 31,756 35,935 38,986 42,718 48,450 55,200

APPLICATION OF FUNDS

Net Block 13,520 14,921 17,033 18,128 18,292 20,206 20,089 19,279

CWIP 1,229 2,403 2,264 3,147 8,270 5,522 5,842 5,990

Investments 200 189 198 202 139 146 153 161

Other Non-current Assets 478 747 668 1,442 1,075 1,183 1,301 1,431

Total Non-current Assets 15,426 18,260 20,163 22,919 27,777 27,057 27,385 26,861

Cash & Equivalents 1,503 2,987 1,266 721 2,268 8,232 12,851 19,179

Inventories 6,016 8,170 10,497 10,614 11,427 10,068 11,480 12,753

Debtors 5,922 5,705 7,825 7,686 6,363 5,942 6,697 7,696

Other Current Assets 641 725 1,935 3,020 2,172 2,389 2,628 2,891

Total Current Assets 14,081 17,586 21,523 22,041 22,229 26,630 33,655 42,518

Creditors 3,493 4,184 5,923 5,104 6,149 5,612 6,697 7,696

Other Current Liabilities & Provns 2,885 3,412 4,007 3,920 4,871 5,358 5,894 6,483

Total Current Liabilities 6,378 7,596 9,930 9,025 11,020 10,969 12,590 14,179

Net Current Assets 7,703 9,990 11,593 13,016 11,209 15,661 21,065 28,340

TOTAL APPLICATION OF FUNDS 23,130 28,250 31,756 35,935 38,987 42,718 48,450 55,200


Page | 18


Standalone Cash Flow (Rs mn) FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

Reported PBT 7,226 7,022 7,142 7,304 8,407 6,480 8,701 10,498

Non-operating & EO Items (463) (499) (664) (477) (551) (601) (896) (1,194)

Interest Expenses 55 58 51 70 122 127 128 130

Depreciation 1,407 1,912 2,303 2,612 3,007 3,091 3,338 3,672

Working Capital Change (1,042) (802) (3,324) (1,968) 3,354 1,513 (785) (947)

Tax Paid (2,141) (1,960) (2,366) (2,388) (2,316) (1,695) (2,018) (2,478)

OPERATING CASH FLOW ( a ) 5,042 5,731 3,142 5,152 12,023 8,914 8,468 9,682

Capex (5,850) (4,487) (4,276) (4,591) (8,295) (2,256) (3,541) (3,010)

Free Cash Flow (FCF) (808) 1,244 (1,134) 561 3,728 6,658 4,927 6,672

Investments 451 (153) 175 (543) 920 50 55 61

Non-operating Income 463 499 664 477 551 601 896 1,194

INVESTING CASH FLOW ( b ) (4,936) (4,141) (3,436) (4,656) (6,824) (1,605) (2,590) (1,755)

Debt Issuance/(Repaid) (17) (35) (106) (116) (125) (238) 93 -

Interest Expenses (55) (58) (51) (70) (122) (127) (128) (130)

FCFE (880) 1,152 (1,290) 375 3,481 6,293 4,892 6,542

Share Capital Issuance (314) 426 (823) (93) (2,221) - - -

Dividend (439) (439) (447) (762) (1,184) (979) (1,224) (1,469)

FINANCING CASH FLOW ( c ) (825) (105) (1,426) (1,041) (3,652) (1,345) (1,260) (1,599)

NET CASH FLOW (a+b+c) (719) 1,485 (1,721) (546) 1,547 5,964 4,619 6,328

Closing Cash & Equivalents 1,502 2,987 1,266 720 2,267 8,231 12,850 19,179

Key Ratios

FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

PROFITABILITY (%)

GPM 37.0 34.4 32.1 31.6 35.0 33.2 33.7 33.6

EBITDA Margin 17.8 16.0 14.6 14.0 16.1 15.1 16.1 16.3

EBIT Margin 14.8 12.4 10.8 10.2 11.7 10.0 11.4 11.8

APAT Margin 10.6 9.0 7.8 7.1 9.7 8.2 9.5 10.0

RoE 25.8 20.3 17.0 15.4 18.9 12.8 15.4 16.3

RoIC (or Core RoCE) 24.4 19.1 15.5 13.9 17.4 12.8 17.3 20.1

RoCE 23.8 18.8 15.8 14.4 17.9 12.3 14.8 15.7

EFFICIENCY

Tax Rate (%) 32.0 31.9 34.0 33.8 21.4 24.1 23.6 23.6

Fixed Asset Turnover (x) 3.4 3.6 3.6 3.7 3.7 3.0 3.5 4.2

Inventory (days) 47.6 56.1 63.2 57.0 61.0 61.0 60.0 58.0

Debtors (days) 46.8 39.2 47.1 41.3 34.0 36.0 35.0 35.0

Other Current Assets (days) 5.1 5.0 11.7 16.2 11.6 14.5 13.7 13.1

Payables (days) 27.6 28.7 35.7 27.4 32.8 34.0 35.0 35.0

Other Current Liab & Provns (days) 22.8 23.4 24.1 21.1 26.0 32.5 30.8 29.5

Cash Conversion Cycle (days) 49.0 48.1 62.2 66.1 47.7 45.0 42.9 41.7

Debt/EBITDA (x) (0.1) (0.3) (0.1) (0.0) (0.2) (0.9) (1.1) (1.4)

Net D/E (x) (0.0) (0.1) (0.0) (0.0) (0.1) (0.2) (0.3) (0.4)

Interest Coverage (x) 123.3 114.1 129.0 99.2 65.4 47.3 61.8 72.8

PER SHARE DATA (Rs)

Adj. EPS 28.8 28.0 27.6 28.3 38.7 28.8 38.9 47.0

Adj. CEPS 37.0 39.2 41.1 43.6 56.3 46.9 58.5 68.5

Dividend 4.3 4.3 4.2 7.1 11.0 8.0 10.0 12.0

Adj. Book Value 124 152 172 195 214 237 269 307

VALUATION

P/E (x) 25.9 26.6 27.0 26.4 19.3 25.9 19.2 15.9

P/BV (x) 6.0 4.9 4.3 3.8 3.5 3.1 2.8 2.4

EV/EBITDA (x) 15.4 14.7 14.4 13.4 11.4 13.1 10.2 8.3

EV/Revenues (x) 2.7 2.4 2.1 1.9 1.8 2.0 1.6 1.4

OCF/EV (%) 4.0 4.6 2.5 4.0 9.6 7.5 7.4 8.9

FCF/EV (%) (0.6) 1.0 (0.9) 0.4 3.0 5.6 4.3 6.2

FCFE/Mkt Cap (%) (0.7) 0.9 (1.0) 0.3 2.7 4.9 3.8 5.1

Dividend Yield (%) 0.6 0.6 0.6 0.9 1.5 1.1 1.3 1.6


Page | 19


Rating Criteria

BUY: >+15% return potential

ADD: +5% to +15% return potential

REDUCE: -10% to +5% return potential

SELL: >10% Downside return potential

Date CMP Reco Target

03-Sep-20 745 ADD 780

RECOMMENDATION HISTORY

200

300

400

500

600

700

800

900

Sep

-19

Oct

-19

No

v-1

9

Dec

-19

Jan

-20

Feb

-20

Mar

-20

Ap

r-20

May

-20

Jun

-20

Jul-

20

Au

g-2

0

Amara Raja TP

Page | 20


HDFC securities

Institutional Equities

Unit No. 1602, 16th Floor, Tower A, Peninsula Business Park,

Senapati Bapat Marg, Lower Parel, Mumbai - 400 013

Board: +91-22-6171-7330 www.hdfcsec.com

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03 September 2020 Initiating Coverage Amara Raja Batteries · Amara Raja currently has ~20% market...

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