BackAmara Raja’s growth stumps market, but can it get better?
Dec quarter performance of Amara Raja Batteries is a stark contrast to that of market leader Exide
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The December quarter performance of Amara Raja Batteries Ltd, the second largest manufacturer of lead acid batteries in the country, was a stark contrast to that of market leader Exide Industries Ltd. The latter disappointed on all fronts while the former delivered good growth in net sales and profitability, beating Street expectations.
Driven by replacement demand in the automotive segment, which comprises a little over half its total revenue and a favourable product mix in the industrial battery segment and inflation, net revenue rose by 13.7% to ₹ 862.9 crore. Quite unexpectedly, the telecom segment, accounting for about one-fourth the revenue, too fared well.
Meanwhile, operating leverage aided profitability. Amara Raja’s operating margin at 17.4% was 137 basis points above the year-ago period (one basis point is one-hundredth of a percentage point). Operating profit grew 23.4% to ₹ 150.3 crore, beating investor estimates, as costs were lower than expectations. Compare this with a 10.9% drop in revenue and 11% operating margin at Exide.
Amara’s catch-up game with the leader began about two years ago, when Exide was stumped by the scorching growth in the country’s auto segment and it was faced with capacity constraints. An Emkay Global Financial Services Ltd report says that Amara has steadily outperformed Exide in the recent past, both in terms of product mix and market share.
The December quarter’s net profit was 17% higher than in the year before and in line with expectations on the Street at ₹ 95 crore. Competitor Exide, in comparison, put up a pathetic show with a 25.5% decline in net profit.
Valuations of Amara Raja have nearly doubled in the last two to three years. At the prevailing market price of ₹ 338.7, the price-to-earnings multiple is at about 15 times estimated earnings for fiscal 2015. Although upsides cannot be ruled out, triggers would come from consistent volume growth. However, the management seems to have alerted investors in its media release that there are signs of a slowdown in the four-wheeler batteries replacement market.
Moreover, Surjit Arora, analyst, Prabhudas Lilladher Pvt. Ltd, says that capacity expansion would result in higher depreciation in the coming quarters. The management had also cut prices in December. Some analysts expect demand in the uninterrupted power supply (UPS) systems also to moderate in the coming quarters. And, there’s not much headroom for improvement in profit margin from current levels, unless lead prices turn south.
These factors could slow down the profit momentum to single-digit growth in fiscal 2015, from 20% plus growth in fiscal 2014.
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