Rama Krishna Vadlamudi MUMBAI September 18th, 2009
PROMOTER SHAREHOLDING: The total promoter shareholding in Amara Raja Batteries Limited is 52 per cent as at the end of th June 30 , 2009. Indian promoters, Galla family, hold 26 per cent and another 26 per cent is by a foreign promoter company, Johnson Controls. Johnson Controls is a leading US player in the world with superior technology in batteries. FII & MUTUAL FUND HOLDING: FII holding is around three per cent and Mutual funds hold 13.75 per cent stake in the co as on 30.6.09. Out of the MF holdings, Franklin Templeton MF sold 1.55 lakh shares in the first week of September 2009. EQUITY SHARES: The total outstanding shares are at 8.54 crore, with paid-up equity being Rs 17.08 crore (face value of share is Rs 2 per share). Compared to its main rival, Exide Industries’ paid-up equity of Rs 80 crore, this is quite low.

BUSINESS MODEL: The co gets its business from two segments, viz, industrial and automotive battery divisions. The Indian storage batteries market is estimated at Rs. 9,000 crore. Of this, industrial batteries account for Rs. 3,700 crore and automotive batteries for Rs. 5,300 crore. The domestic organised sector in the storage battery market is estimated at about Rs. 6,800 crore, with industrial batteries accounting for Rs. 3,500 crore. The unorganised sector accounts for a large proportion of the automotive battery segment. INDUSTRIAL BATTERY DIVISION (IBD): IBD is powered by telecom and UPS segments. Other user segments are Indian Railways (for its AC coaches) and power utilities. During 2008-09, the co doubled its large VRLA (Valve Regulated Lead Acid) battery capacity (Powerstack) to 90 crore. The co is expanding its capacity in Medium VRLA battery by 50 per cent currently. It supplies industrial batteries to major cellular service providers, multinational telecom and power companies. The co’s two industrial brands are Power Stack (TM) and Quanta TM for UPS purposes. AUTOMOTIVE BATTERY DIVISION (ABD): The co has got the support of its JV partner, Johnson Controls Inc., USA, the largest global automotive batteries manufacturer. The company introduced maintenance-free automotive batteries and pioneered the VRLA technology in India's automotive battery segment. It offers a range of automotive batteries to OEMs and the aftermarket with warranties ranging from 12 to 60 months. ABD is an OEM supplier to several automobile companies. The co is placed in the replacement market also. Maruti Suzuki is also a customer of the co. The co is supplying its ‘Amaronr’ batteries to South Africa also. The co is expanding its ABD capacity by 30 per cent during this year. Amaron (R) is a well-known brand. CASH FLOW: Net cash flow of the co is good, with Rs 224 crore of net cash flow from operating activities during 2008-09. TOTAL CASH HOLDING: Cash & cash equivalents, as on March 31, 2009, are at Rs. 100 crore. EXPANSION: The co will be investing another Rs 56 crore during FY 2009-10 for augmenting its capacity. The funding will be through internal accruals. RETAIL NETWORK: The company has got a network of 190 franchisees and 18,000 retailers and 600-strong PowerZone (TM) retail network for rural and semi-urban areas. GROWTH DRIVERS: Spreading network of telecom service providers Entry of new players and introduction of new services (3G) in the telecom sector Increasing computerisation, especially among government agencies Growing IT and ITeS sectors and rural tele-density Widening BFSI network and ATM expansion

Rama Krishna Vadlamudi, MUMBAI. Sep. 18, 2009

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Mounting power deficit, enhancing the need for back-up batteries in critical equipment and processes India has emerged as a hub for automobile manufacturers, like, Ford, JLR, Honda, Toyota, Nissan, etc Household sector’s usage of batteries is also going up due to severe power outtages Replacement market, which is around 20 per cent, is expected to drive the auto segment Hybrid vehicles are becoming popular worldwide following a growing concern over price volatility and depleting fossil-fuel reserves. These cars can be powered with multiple energy sources (gasoline, diesel, LPG and bio fuels); and E-Bikes are not popular yet; but, the e-bike segment is expected to grow over the next two years PLDEGE OF SHARES BY PROMOTERS: The promoters have not pledged any of their shares. RISKS ASSOCIATED WITH THE COMPANY: Raw material procurement: The key input and major cost element – around 55 to 65 per cent – in battery manufacture is lead and lead alloys. Any rise in lead prices will adversely impact the company’s profitability. Around 60% of the Company's lead requirement is sourced from Australia and Korea. The strength of Australian Dollar against rupee will be a concern depending on the cross-currency hedges. The company enjoys reliable supply arrangements with major lead suppliers linked to the LME average monthly price. Forex losses on account of net forex outgo: Net foreign exchange outgo during 2008-09 was Rs 362 crore. Rupee depreciation against USD will have adverse impact on the landed input cost of lead and lead alloys. The co suffered forex losses to the tune of Rs 32.2 crore during 2008-09 (previous year gain of Rs 3.35 crore) due to rupee depreciation against USD on ECBs and buyers’ credit foreign currency loans for import of lead and lead alloys. The co did not opt for leeway given by the Government for forex accounting losses under AS-11 with respect to foreign currency borrowing. Net foreign exchange exposure, as of March 31, 2009, was around USD 30 million. Margin contraction: The co’s profitability margin suffered during FY 2008-09 on account of forex loss, volatility in lead prices, slowdown in automotive business and surge in expenses. Rising interest rate scenario: Interest rates till now have been benign due to the emphasis on GDP growth given by RBI and Government of India. Any hardening of monetary policy stance by RBI will have adverse implications for the automobile industry and the company. PLANT: The co’s manufacturing facility is located in Tirupati, Andhra Pradesh, India. COMPETITOR: Exide Industries is the leading player in batteries market in India. The co with second highest market share is Amara Raja Batteries. Exide is a fully integrated player with some backward integration into smelters. Exide enjoys better brand power compared to Amara Raja Batteries.

Rama Krishna Vadlamudi, MUMBAI. Sep. 18, 2009

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RAW MATERIAL: The main raw material for any battery company is lead, which is a commodity susceptible to world demand and commodity cycles. THREE-MONTH STOCK RETURN: In the last three months, the co’s stock has given a return of around 55 per cent. Its current m-cap is Rs 1,200 crore. Now, it’s at its 52-week high. Its 52-week low was Rs 31 on 9.3.09, which means it has grown by 4.5 times since its 52-week low. QUARTERLY RESULTS: The co made a good net profit of Rs 43 crore during Jun.09 qtr, almost three times the net profit of Jun.08 quarter, primarily due to steep decrease in raw material cost (lead, etc). However, sales during the last four to five quarters have been sluggish, with a dip of around 5 to 10 per cent. By the way, this has been the trend of several companies in the latest Jun.09 quarter – with sales showing sluggishness, but net profits jumping steeply due to severe contraction in raw material costs, like, falling commodity prices. And many cos have managed their working capital cycle well during Jun.09, by lowering their inventories to bare minimum. These benefits may not continue in Sep.09 qtr or in the next few quarters. However, as the economy appears to be recovering, particularly automobile sector in India, the future profitability growth will be driven by volumes. Already, many auto companies have been showing good growth in monthly numbers. Even interest rates have been benign so far. But, it is not clear how long the accommodative policy of RBI and GOI will continue. Overall, auto sector is doing well at this point of time, though all indications point to a surge in interest rates in the next few quarters. CRISIL rating for the company’s bank facilities as on 25th May 2009: 1. Facility : Cash Credit, domestic Long Term Loans and Foreign Current Term Loans - Prior Rating : AA-/Stable - Revised Rating : AA-/Stable - Rating Action : Reaffirmed 2. Facility : Bank Guarantee and Letter of Credit - Prior Rating : P1+ - Revised Rating : P1+ - Rating Action : Reaffirmed

The PE (TTM) ratio is 12.50, P/BV is 2.95 and dividend yield is 0.57%. Debt-equity ratio is 0.82. Long-term DER is 0.50. Interest coverage ratio is 7.10 for 2008-09. OPM is historically between 12% to 15%. As the co issued bonus of 1:2 during 2008-09, ROCE and RONW for 2008-09 have come down from 31/32 level in 2007-08 to 20/21 level in 2008-09, which is not unusual. If we look at the historical valuations, the current market price of Rs 140 (close price on 17th Sep.09) seems to be fully priced. If the broader market goes up further from the present Sensex level of 16,700 (September 17, 2009); the stock too may give further upside depending on the performance of the mid-cap companies. Overall, the balance sheet of the company appears to be strong and the company has got a sound business model which will keep the company in good stead going forward. As mentioned above, the company has got good growth drivers going forward; even though the net sales have been somewhat sluggish in the last three to four quarters. The company seems to have managed the business environment during the tough times of last year quite well. Further prospects will largely hinge on future volume growth. Overall, it is a company to watch and may be considered at lower prices if there is any market correction; subject to being fully aware of the risk factors mentioned above .
Sources: NSE, BSE, company’s annual report, etc. Picture Courtesy: Toyota Inc.

Rama Krishna Vadlamudi, MUMBAI. Sep. 18, 2009

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