Bulls Eye Stocks – A Medium Term Investment Package

Amara Raja batteries, EXIDE (BUY) – Bulls Eye Call Maximum Allocation :- 6-8 %

Entry : Buying Strategy

1st Phase (Now) of Accumulation :- 65% of Allocation.

These Calls needs to be accumulated slowly and if we are seeing small dips, Investors can add more. The Second phase of buying will be suggested later.

Exit : Selling Strategy

We would intend to exit around the end of CY-14 (or) at around 35% profits from current Buy Levels. We believe that the Returns can be even Higher with a slightly longer Time frame considering the Quality.

Classification Type : Trigger based Positioning Call

One Liner on Call :- Considering that there are several Triggers in place and also these are High Quality Businesses, there is very little Risk involved with these Stocks even in a choppy Market. At the same time, these Stocks would benefit from a Rising Market.

Sub – Allocations : Amara Raja Batteries :- 3-4 % EXIDE Industries :- 3-4 %

Accumulation Range : Amara Raja Batteries = 250-270 EXIDE Industries = 115-125

Significant Triggers – • Lead Prices – Downward Bias. • Replacement Demand Pick up. • Inverter Sales Growth. • Lower Competitive Intensity.

Strategy – Use the Current Correction, to build Positions in these High Quality Stocks.

Target Price/ Stop Loss – Amara Raja Batteries = 320 / 210 EXIDE Industries = 155 / 80 Time Frame – 6 to 9 Months (See : Exit)

Core Investment Thesis Tactical Triggers :-

Macro Event :- Auto sector revival, Interest Rates reduction.

Cyclical Factors :- Strong Pick-Up in Replacement Demand, Lead Price correction.

Entry Triggers :- Current Mid-Cap correction. Average Prices at >30% discount.

Two Stocks has been selected to play the Industry Sub-segment as such and not Bet on a Single Stock :

Lower Expectations – Exide Industries.

Higher Expectations – Amararaja Batteries

Amararaja & Exide continue to Quote at similar valuations

Amararaja Batteries – Has good Stock Momentum & Strong Technical Chart.

Exide Industries – Can surprise with better Results leading to a Re-Rating.

Conclusion : Entire Markets have been in significant Corrective Phase, with the Small & Mid-Caps being

beaten down hard. This allows us to pick two Quality Mid-Cap stocks at good prices with Fundamental

triggers to move the share price up over the next few Months. While even if the Stocks don’t get Re-rated

substantially, we believe that going forward - Stock Picks would definitely Outperform the Market strongly.

Also, considering the Quality of the Business – there is little serious downside risk possible. So Investors can

continue to hold it for longer to get better returns. This in itself reduces the Risk substantially and allows our

Clients to build Positions at the current Prices.

Investment Analysis & Rationale

Lead Prices – Raw Material Impact • Major Raw Material in case of Battery Manufacturers is Lead. There is good Earnings sensitivity based on Lead prices. • Hence the Price of Lead has a serious Financial Impact on the companies in the short run of 2-3 Quarters. • While the companies have decent Pricing power in the Business to pass on the Costs, it has a lag when the Prices move sharply. • Over the past 4- Quarters – Lead Prices had a very sharp up move leading to lower Margins and Pricing pressures. • Recently, Lead Prices have started to correct significantly and thereby providing strong Operating Leverage for the Battery Manufacturers to improve their Margins and Profitability.

Replacement Demand

• One of the most Stable and Visible growth trigger for these companies in the short term is the Replacement demand. Batteries usually have a life span of about 3-years and hence, we can visualize the Replacement demand by looking at the historical Sales Nos. As shown in the Top, the Industry had very strong Growth rates 3-Years back, leading to substantial Replacement demand over the next few Quarters. Management confirms that the Replacement demand has started to Kick in. The main advantage of Replacement is the Higher Margins which the segment provides to these Manufacturers.

Lower Competitive Intensity + Inverter Opportunity

• Exide had a Capacity crunch which led to its lower focus on Replacement market as they had fixed commitments to OEM’s leading to lower Margins. But currently, both the companies have good Capacity Utilizations and hence lower competitive Intensity. This can be validated by the recent Price Hikes taken by Exide Industries.

• Exide Industries has been the dominant Market leader in the Battery business for several decades. In the Organized space, it had very little competition and its Brand is well established. • But over the last few Quarters, with Capacity constraints and Market share issues – the company had lost a lot of Margins leading to sub-par performance compared to its Peer. • Traditionally Exide Industries used to be the Trend setter in this Industry with the company taking Price Hikes before its Peers and we believe that, the company has got back some of its Pricing power as seen in the recent price Hike. • There was a lot of uncertainty concerning the Insurance investment which the company has in ING Vysya. While the main partner has sold its stake, Exide is in search for new Partners and any improvement here would certainly give a Boost.

Exide Industries – Snapshot (India’s No:1 Battery Company)

Amararaja Batteries – Snapshot (Strong Performance for last 2 Years )

• Amararaja Batteries has made strong inroads into the Battery markets in a very short span of time. The company has been consistently improving its Market share for several years. • The best part is the consistently higher Operating Margins than Exide Industries, in spite of not being the Market leader. • Amararaja Batteries biggest strength is its Technological tie-up with Johnson Controls which is one of the Biggest Battery manufacturer globally. • The company also has a good dominant Position in the Telecom battery sector and also in the Replacement market with its brand “Amaron”. • Amararaja Batteries is also expanding its Capacities to meet the additional demand and position itself for Future growth. Company continues to be aggressive to improve its Market share in the Battery segment.

Overall View on Bets

• We are providing these Medium Term Investment calls and considering the fact that there are Multiple Triggers, Investors can start building positions.

• Since, we are bullish on the Sub-Category on the whole – we are going ahead with 2-Stock Bets which compromise the entire sector.

• Also, both these Stocks counterbalance each other to an extent and hence lowers our Risk. Only when there is some serious uncertainty over the Auto sector, the stocks would have some downside left.

• Exide continues to provide Value and with near term uncertainty of the Insurance business behind them, they can certainly surprise on the Upside.

• Amaraja Batteries on the other hand continues to perform well and with Momentum on its side, it can certainly attract a lot of FII Interest on every dip.

• These stocks would ultimately provide Strong Returns to Investors buying at current prices.

Technical View (Two Exactly Opposite Technical Charts)

Exide Industries - “Charts clearly shows the weakness in the Stock prices over the last several months and this is mainly due to the disappointing Results which the stock has been posting. While we believe that levels of 105 Rs would continue to act as Strong Support for the Stock”.

Amararaja Batteries – “The stock has a very Strong Technical chart with – Higher Tops and Higher Bottom which shows the counter’s strength. We believe that this would continue, at least for the next 2 Quarters”.

Fundamental Earnings View Amararaja Batteries

Exide Industries

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