Amara Raja Batteries
BSE SENSEX
33,315
Bloomberg
Equity Shares (m)
M.Cap.(INRb)/(USDb)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
Avg Val, INRm
Free float (%)
S&P CNX
10,322
AMRJ IN
171
128.3/1.9
1034/665
4/-29/-47
369.0
47.9
9 November 2017
2QFY18 Results Update | Sector: Automobiles
CMP: INR751
TP: INR856 (+14%)
Buy
Financials & Valuations (INR b)
2018E 2019E 2020E
Y/E Mar
Net Sales
59.9
71.1
83.4
EBITDA
9.1
11.0
13.1
PAT
4.8
5.8
7.2
EPS (INR)
28.3
34.2
41.9
Gr. (%)
0.9
20.8
22.7
BV/Sh (INR)
175
203
237
RoE (%)
17.3
18.1
19.1
RoCE (%)
16.5
17.2
18.1
P/E (x)
26.6
22.0
17.9
P/BV (x)
4.3
3.7
3.2
Estimate change
TP change
Rating change
Above est.; Favorable mix, price hikes, manufacturing efficiencies drive margins
Revenue below est. led by decline in telecom segment:
Net sales grew 7.1%
YoY (-4.7% QoQ) to INR14.3b (est. of INR15.4b), driven by growth in auto,
inverters and solar, while industrial segment revenue declined. Auto
performance was driven by double-digit growth in 2W/4Ws. However, a sharp
decline in Telecom led to lower industrial segment revenue.
EBITDA margin at 16.7% led by favorable mix, price hikes and efficiencies:
EBITDA margin expanded 380bp YoY (-50bp QoQ) to 16.7% (est. of 13%), led by
a favorable product mix (higher share of autos, inverter, e-rickshaw, etc.),
optimal utilization and price hikes in replacement market. Lower other income
and higher tax restricted PAT (-6.7% YoY to INR1.3b v/s est. of INR1.1b).
Takeaways from management interactions:
a) Undertaken price hike in
automotive and industrial replacement segments; took 6-7 price hikes in last
12 months, adequately covering cost inflation. b) Intense competition in
telecom led to a loss in market share to ~50% (v/s 65% earlier) and a
contraction on margin. c) Lead cost for 2QFY18 was USD2,170 per ton (v/s
USD2,270 in 1QFY18, USD1,750 in 2QFY17, spot rates of USD2,400-2,500). d)
Capex of INR5b in FY18. AMRJ is adding 2W battery capacity of 4m (to 15m by
Mar-18) and 4W battery capacity of 2.5m by FY19 (to 13m). e) ~80% of e-
rickshaw battery replacement market is unorganized, with total e-rickshaw
population of 0.8m-1m units. f) Lithium Ion technology is a priority area; it is
evaluation option for technology, including Johnson Control. g) Expects lead
acid battery industry CAGR of 8-10% over 2-3 years (steady state), with AMRJ
growing at 13-15% CAGR. Industry EBITDA margin to sustain at 14-16%, with
AMRJ enjoying margins closer to the upper end.
Valuation view:
We upgrade EPS estimates by 11%/4% for FY18/FY19, as we
factor in lower RM cost. We increase our depreciation and tax rate
assumptions. The stock trades at 26.6x/22x FY18E/19E EPS. Maintain
Buy
with
a TP of INR856 (23x Sep-19 EPS).
FY18
FY17 FY18E
2Q
3QE
4QE
14,275 15,405 15,239 53,172 59,893
7.1
16.0
13.3
15.1
12.6
66.0
66.8
66.8
65.6
67.4
5.2
5.2
5.2
4.7
4.2
12.1
12.4
12.2
13.9
11.6
2,381 2,420 2,401 8,499 9,130
16.7
15.7
15.8
16.0
15.2
584
600
664 1,912 2,392
13
12
13
58
51
122
150
166
492
575
1,907 1,958 1,890 7,022 7,262
33.3
33.5
33.5
31.9
33.5
1,272 1,302 1,256 4,785 4,829
-6.7
15.9
26.7
-2.7
0.9
FY18
2QE VAR (%)
15,474
-7.7
15.0
70.0 -400bp
5.2
0bp
11.8
30bp
2,006
18.7
13.0
370bp
550
6.1
14
-10.7
175
-30.1
1,617
17.9
31.5
1,108
14.8
-18.7
Quarterly Performance
Y/E March (INR m)
Net Sales
YoY Change (%)
RM Cost (% of sales)
Staff Cost (% of sales)
Other Exp (% of sales)
EBITDA
Margins (%)
Depreciation
Interest
Other Income
PBT
Rate (%)
Adj PAT
YoY Change (%)
E: MOSL Estimates
1Q
13,081
15.0
65.7
5.0
11.9
2,273
17.4
441
14
90
1,908
31.5
1,307
8.0
FY17
2Q
3Q
4Q
13,331 13,280 13,445
15.8
9.5
17.4
63.9
65.0
68.0
5.2
5.4
5.2
13.7
14.1
13.0
2,297 2,051 1,844
17.2
15.4
13.7
457
480
499
15
14
15
120
133
151
1,945 1,689 1,480
29.9
33.5
33.0
1,363 1,123
992
10.4
-17.9
-9.1
1Q
14,975
14.5
70.0
5.4
11.7
1,929
12.9
544
14
137
1,508
33.7
999
-23.6
Jinesh Gandhi – Research Analyst
(Jinesh@MotilalOswal.com); +91 22 3982 5416
Deep Shah – Research Analyst
(Deep.Shah@MotilalOswal.com) |
Suneeta Kamath – Research Analyst
(Suneeta.Kamath@MotilalOswal.com)
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.

Amara Raja Batteries
Exhibit 1: Net sales growth below estimate at 7.1% YoY
31.4
23.6
20.1
10.5 8.6
13.7
7.3
Net sales (INR m)
Growth YoY (%)
Exhibit 2: Gross margin expands 400bp QoQ (-210bp QoQ)
Gross margin (%)
15.0 15.8
17.4
9.5
14.5
7.1
Source: Company, MOSL
Source: Company, MOSL
Exhibit 3: EBITDA margin recovery led by lower RM cost
EBITDA
EBITDA (%)
Exhibit 4: PAT’s declining trajectory continues
PAT (INR m)
6
8
24
14
23
34
7
8
Growth YoY (%)
10
-18
-7
-9
-24
Source: Company, MOSL
Source: Company, MOSL
Exhibit 5: Spot lead price increasing
172,000
154,000
136,000
118,000
100,000
INR/tonne
Source: Company, MOSL
Valuation and view
Industry structure remains duopoly, but AMRJ is a strong No. 2:
While the
industry structure remains largely duopoly, AMRJ has emerged as a formidable
challenger to leader EXIDE, with market leadership in telecom (48% share) and
UPS (32%) segments, and a fast gaining share in Autos. Over FY04-16, AMRJ
clocked a CAGR of 34% and 68% in net sales and PAT respectively, far exceeding
EXID’s 20% CAGR each in net sales and PAT. This has been driven through a
combination of technological innovations (first to introduce maintenance-free,
factory charged, extended warranty batteries), witty advertising and unique
10 November 2017
2

Amara Raja Batteries
distribution model (franchisee based) supported with operational efficiency-led
competitive pricing.
AMRJ – gearing up to be leader:
AMRJ is gearing up to be a leader through i)
consolidating in existing areas, ii) entering new business opportunities within
battery space, mainly home UPS, Solar and Motive Power and iii) aided by
capacity and network expansion. Company aims to increase its share in the OEM
and replacement segments to 40% (from current 30%) and 30% (from current
24%) respectively over the medium term. In the telecom segment, AMRJ
expects to maintain its market share at current levels (50% currently).
14.4% EPS CAGR over FY17-FY20E, healthy return ratios and FCF; Buy:
We
upgrade EPS estimates by 11%/4% for FY18/FY19 as we factor in lower RM cost
while we increase our depreciation and tax rate assumptions. Stable
competitive environment, recovery in demand and stable margins would drive
14.4% CAGR in EPS over FY17-20E. Significant FCF generation (~INR9.4b over
FY18-20E) and stable RoE of ~18% —coupled with potential shift from
unorganized to organized players due to GST would continue to drive stock re-
rating. The stock trades at 22x/17.9x FY19E/20E EPS. Maintain
Buy
with a TP of
INR856 (22.5x Sep-19 EPS).
Exhibit 6: Revised estimates
(INR m)
Net Sales
EBITDA (%)
Net Profit
EPS (INR)
Rev
59,893
15.2
4,829
28.3
FY18E
Old
61,612
13.0
4,367
25.6
Chg (%)
-2.8
220bp
10.6
10.6
Rev
71,112
15.5
5,836
34.2
FY19E
Old
73,042
13.9
5,627
32.9
Chg (%)
-2.6
160bp
3.7
3.7
Source: MOSL
Exhibit 7: Valuations have moderated considerably from peak and trading in the range of historical average
P/E (x)
Min (x)
40.0
30.0
20.0
10.0
0.0
1.9
26.5
16.1
5.7
22.0
Avg (x)
+1SD
Max (x)
-1SD
36.5
8.0
6.0
4.0
2.0
0.0
0.6
5.3
3.5
1.6
3.7
P/B (x)
Min (x)
Avg (x)
+1SD
Max (x)
-1SD
7.5
Source: MOSL
Source: MOSL
10 November 2017
3

Amara Raja Batteries
Exhibit 8: Comparative valuation
Auto OEM's
Bajaj Auto
Hero MotoCorp
TVS Motor
M&M
Maruti Suzuki
Tata Motors
Ashok Leyland
Eicher Motors
Auto Ancillaries
Bharat Forge
Exide Industries
Amara Raja Batteries
BOSCH
Endurance Tech
CMP
(INR)
3,248
3,606
708
1,393
8,165
423
112
30,479
706
201
751
20,485
1,133
TP
(INR)
Buy
3,753
Neutral 3,819
Neutral
764
Buy
1,607
Buy
9,466
Buy
575
Buy
134
Buy
36,487
Buy
844
Buy
254
Buy
856
Neutral 19,965
Buy
1,334
Rating
P/E (x)
FY18E FY19E
22.4
18.6
19.7
18.6
47.4
27.4
18.6
16.3
28.3
21.4
17.2
6.5
25.0
18.0
36.9
27.2
36.9
25.4
26.6
44.7
41.1
27.1
20.8
22.0
34.0
30.9
EV/EBITDA (x)
FY18E FY19E
16.9
13.4
12.4
11.8
29.8
18.0
13.8
12.4
17.5
13.7
4.7
2.8
12.2
9.0
28.1
22.7
20.2
15.0
13.8
27.6
18.3
16.2
12.5
11.1
21.0
15.0
RoE (%)
FY18E FY19E
23.3
25.3
33.7
31.1
26.5
35.6
14.5
14.6
20.5
23.0
13.4
28.3
20.4
25.2
36.1
36.4
20.1
12.5
17.3
15.2
20.5
23.2
13.7
18.1
18.1
22.8
Div Yield (%) EPS CAGR (%)
FY18E FY19E
FY17-19E
2.0
2.5
15.0
2.5
2.5
7.1
0.4
0.6
48.3
1.4
1.4
25.6
1.0
1.2
23.8
0.1
0.1
80.8
1.8
2.0
16.9
0.5
0.6
35.2
0.6
1.1
0.6
0.8
0.3
0.7
1.1
0.7
1.0
0.6
41.0
9.1
10.4
12.9
25.0
Source: MOSL
10 November 2017
4

Amara Raja Batteries
Amara Raja| Story in charts: Healthy 14.4% EPS CAGR over FY17-20E
Exhibit 9: 2W battery capacity to increase more than 2x by
FY22E
4W (mn units)
2W (mn units)
Exhibit 10: Expect net sales to register a CAGR of 16.2% over
FY17-20E
25.2
16.0
9.7
Net sales (INR m)
Growth (%)
Linear (Net sales (INR m))
18.7
15.1
12.6
17.3
22.5
FY12
FY13
FY14
FY15
FY16
FY17
FY18E FY22E
FY13
FY14
FY15
FY16
FY17 FY18E FY19E FY20E
Source: Company, MOSL
Source: Company, MOSL
Exhibit 11: Expect margins to sustain above 15% by FY20E
EBITDA (INR m)
17.8
16.3
15.2
16.7
16.0
15.2
15.5
15.8
EBITDA margins (%)
Exhibit 12: Strong EPS growth of 14.4% over FY17-20E
36.2
26.3
10.4
(2.7)
17.2
21.7
FY14
23.9
FY15
28.8
FY16
28.0
FY17
0.9
EPS
20.4
Growth (%)
20.8
22.7
28.3
34.2
41.9
FY13
FY14
FY15
FY16
FY17
FY18E FY19E FY20E
Source: Company, MOSL
FY13
FY18E FY19E FY20E
Source: Company, MOSL
Exhibit 13: FCF to grow gradually by FY20E
CFO
Capex
FCF
Exhibit 14: Return ratios to remain strong
31.1
28.0
30.6
28.0
24.2
RoCE (%)
26.0
25.2
23.9
20.3
19.4
17.3
16.5
18.1
17.2
19.1
18.1
RoE (%)
-1,463
-3,731 -4,062
-4,904 -4,305 -5,000 -5,000 -5,000
FY16
FY17
FY18E FY19E FY20E
Source: Company, MOSL
FY13
FY14
FY15
FY16
FY13
FY14
FY15
FY17
FY18E FY19E FY20E
Source: Company, MOSL
10 November 2017
5

Amara Raja Batteries
Financials and Valuations
Standalone - Income Statement
Y/E March
Gross Revenues
Less: Excise Duty
Net Sales
Change (%)
Gross operating income
Total Expenditure
EBITDA
Margin (%)
Depreciation
EBIT
Int. and Finance Charges
Other Income - Rec.
PBT bef. EO Exp.
EO Expense/(Income)
PBT after EO Exp.
Tax Rate (%)
Reported PAT
PAT Adj for EO items
Change (%)
Margin (%)
FY13
33,110
3,496
29,614
25.2
33,110
25,099
4515
15.2
661
3,854
10
466
4,310
92
4,218
32.0
2,867
2,929
36.2
9.9
FY14
38,372
4,005
34,367
16.0
38,372
28,764
5603
16.3
646
4,957
7
455
5,405
39
5,367
31.5
3,674
3,701
26.3
10.8
FY15
46,372
4,258
42,113
22.5
46,372
35,095
7018
16.7
1,340
5,678
2
423
6,099
73
6,026
33.0
4,036
4,084
10.4
9.7
FY16
51,843
5,666
46,178
9.7
51,843
37,948
8,230
17.8
1,407
6,823
55
459
7,226
0
7,226
32.0
4,916
4,916
20.4
10.6
FY17
59,814
6,642
53,172
15.1
59,814
44,672
8,499
16.0
1,912
6,587
58
492
7,022
0
7,022
31.9
4,785
4,785
-2.7
9.0
FY18E
67,081
7,187
59,893
12.6
67,081
50,763
9,130
15.2
2,392
6,738
51
575
7,262
0
7,262
33.5
4,829
4,829
0.9
8.1
FY19E
79,646
8,533
71,112
18.7
79,646
60,090
11,022
15.5
3,031
7,992
46
700
8,645
0
8,645
32.5
5,836
5,836
20.8
8.2
(INR m)
FY20E
93,424
10,010
83,415
17.3
93,424
70,274
13,140
15.8
3,591
9,550
46
950
10,453
0
10,453
31.5
7,161
7,161
22.7
8.6
Standalone - Balance Sheet
Y/E March
Equity Share Capital
Total Reserves
Net Worth
Deferred Liabilities
Total Loans
Capital Employed
Gross Block
Less: Accum. Deprn.
Net Fixed Assets
Capital WIP
Total Investments
Curr. Assets, Loans&Adv.
Inventory
Account Receivables
Cash and Bank Balance
Loans and Advances
Curr. Liability & Prov.
Account Payables
Other Current Liabilities
Provisions
Net Current Assets
Appl. of Funds
FY13
171
10,427
10,598
195
881
11,674
6,803
3,214
3,589
1,030
161
12,925
2,929
3,807
4,108
2,082
6,030
1,577
1,960
2,493
6,895
11,674
FY14
171
13,456
13,627
301
843
14,772
9,955
3,860
6,096
1,447
161
13,691
3,350
4,528
2,946
2,867
6,623
1,577
1,858
3,188
7,068
14,771
FY15
171
17,674
17,845
368
741
18,954
12,434
2,989
9,444
863
189
13,394
4,181
5,541
2,222
1,450
4,935
2,660
1,458
817
8,459
18,955
FY16
171
20,988
21,159
538
725
22,421
14,851
1,330
13,520
1,229
200
14,559
6,016
5,922
1,503
1,119
7,087
3,493
2,665
929
7,472
22,421
FY17
171
25,760
25,931
815
690
27,436
18,156
3,257
14,899
2,403
1,467
17,077
8,170
5,705
1,709
1,494
8,410
4,184
3,285
941
8,667
27,436
FY18E
171
29,701
29,871
1,069
725
31,665
24,558
5,649
18,910
1,000
1,467
19,781
8,205
6,426
3,468
1,682
9,492
4,713
3,700
1,079
10,289
31,665
FY19E
171
34,462
34,633
1,372
725
36,730
29,558
8,679
20,879
1,000
1,467
24,568
7,793
7,630
7,148
1,998
11,184
5,596
4,393
1,195
13,384
36,730
(INR m)
FY20E
171
40,305
40,476
1,738
725
42,939
34,558
12,270
22,289
1,000
1,467
31,282
9,141
8,950
10,848
2,343
13,098
6,564
5,153
1,381
18,184
42,939
10 November 2017
6

Amara Raja Batteries
Financials and Valuations
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
BV/Share
DPS
Payout (%)
Valuation (x)
P/E
Cash P/E
P/BV
EV/Sales
EV/EBITDA
Dividend Yield (%)
Return Ratios (%)
RoE
RoCE
RoIC
Working Capital Ratios
Gross Fixed Asset Turnover (x)
Inventory (Days)
Debtor (Days)
Creditor (Days)
Working Capital Turnover (Days)
Leverage Ratio (x)
Current Ratio
Debt/Equity
FY13
17.2
21.0
62.0
2.5
17.6
FY14
21.7
25.4
79.8
3.6
19.3
FY15
23.9
31.8
104.5
3.6
18.4
31.4
23.7
7.2
3.0
18.1
0.5
31.1
28.0
40.6
4.4
36.1
42
19
34
2.1
0.1
30.6
28.0
40.9
3.5
35.6
43
17
44
2.1
0.1
26.0
24.2
29.4
3.4
36.2
44
23
54
2.7
0.0
FY16
28.8
37.0
123.9
4.3
17.7
26.1
20.3
6.1
2.8
15.5
0.6
25.2
23.9
26.4
3.1
47.6
42
28
47
2.1
0.0
FY17
28.0
39.2
151.8
4.25
18.2
26.8
19.2
4.9
2.4
15.0
0.6
20.3
19.4
21.7
2.9
56.1
35
29
48
2.0
0.0
FY18E
28.3
42.3
174.9
4.33
18.4
26.6
17.8
4.3
2.1
13.8
0.6
17.3
16.5
18.8
2.4
50.0
35
29
42
2.1
0.0
FY19E
34.2
51.9
202.8
5.2
18.4
22.0
14.5
3.7
1.7
11.1
0.7
18.1
17.2
20.4
2.4
40.0
35
29
32
2.2
0.0
FY20E
41.9
62.9
237.0
6.4
18.4
17.9
11.9
3.2
1.4
9.0
0.9
19.1
18.1
23.1
2.4
40.0
35
29
32
2.4
0.0
Standalone - Cash Flow Statement (INR m)
Y/E March
Net P/L Before Tax and E/O Items
Depreciation
Interest & Finance Charges
Direct Taxes Paid
(Inc)/Dec in WC
CF from Operations
(inc)/dec in FA
Free Cash Flow
Others
CF from Investments
(Inc)/Dec in Debt
Interest Paid
Dividend Paid
CF from Fin. Activity
Inc/Dec of Cash
Add: Beginning Balance
Closing Balance
FY13
4,218
577
-110
1,366
-94
3,225
-1,463
1,892
269
-1,194
3
-17
-323
-336
1,825
2,283
4,108
FY14
5,366
637
-808
1,606
-1,315
2,273
-3,731
-943
294
-3,437
-99
-14
-430
-543
-1,192
4,138
2,946
FY15
6,099
1,245
-29
1,922
-1,475
3,917
-4,062
-180
176
-3,886
-36
-84
-552
-672
-675
2,897
2,222
FY16
7,226
1,407
-43
2,181
-738
5,672
-4,904
637
24,156
-3,938
772
-5
-1,614
-847
757
746
1,503
FY17
7,022
1,912
-3
2,024
-1,137
5,771
-4,305
1,224
27,395
-5,294
748
-3
0
745
981
784
1,765
FY18E
7,262
2,392
-524
2,433
137
6,834
-5,000
1,834
575
-4,425
289
-51
-889
-651
1,758
1,709
3,467
FY19E
8,645
3,031
-654
2,810
585
8,797
-5,000
3,797
700
-4,300
303
-46
-1,074
-817
3,680
3,467
7,147
FY20E
10,453
3,591
-904
3,293
-1,099
8,748
-5,000
3,748
950
-4,050
366
-46
-1,318
-998
3,700
7,147
10,847
10 November 2017
7

Amara Raja Batteries
Corporate profile
Company description
Commencing operations in 1992, AMRJ has become
India’s second-largest lead-acid battery
manufacturer (next to market leader EXID), with
market leadership in telecom and UPS segments. It
is reckoned as one of the pioneers in VRLA (valve
regulated lead acid) batteries. Johnson Control USA
(JC) is an equal partner and acquired 26% equity in
AMRJ in 1997.
Source: MOSL/Bloomberg
Exhibit 1: Sensex rebased
Exhibit 2: Shareholding pattern (%)
Sep-17
Promoter
DII
FII
Others
52.1
12.1
17.9
17.9
Jun-17
52.1
10.9
19.0
18.0
Sep-16
52.1
7.8
21.5
18.6
Source: Capitaline
Exhibit 3: Top holders
Holder Name
Icici Prudential Value Discovery Fund
Smallcap World Fund, Inc
% Holding
2.4
1.1
Note: FII Includes depository receipts
Source: Capitaline
Exhibit 4: Top management
Name
Ramachandra N Galla
Jayadev Galla
M R Rajaram
Designation
Chairman
Vice Chairman & M.D.
Company Secretary
Exhibit 5: Directors
Name
N Sri Vishnu Raju*
Raymond J Brown*
T R Narayanaswamy*
Raphael John Shemanski
Name
Nagarjun Valluripalli*
Shu Qing Yang
Bhairavi Tushar Jain
Source: Capitaline
*Independent
Exhibit 6: Auditors
Name
Brahmayya & Co
Deloitte Haskins & Sells LLP
Sagar & Associates
Type
Statutory
Statutory
Cost Auditor
Source: Capitaline
Exhibit 7: MOSL forecast v/s consensus
EPS
(INR)
FY18
FY19
FY20
MOSL
forecast
28.3
34.2
41.9
Consensus
forecast
29.6
35.9
41.9
Variation
(%)
-4.4
-4.8
0.0
Source: Bloomberg
10 November 2017
8

Amara Raja Batteries
NOTES
10 November 2017
9

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Amara Raja Batteries
Disclosure of Interest Statement
Analyst ownership of the stock
Amara Raja Batteries
No
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www.nseindia.com, www.bseindia.com.
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Registration details of group entities.: MOSL: NSE (Cash): INB231041238; NSE (F&O): INF231041238; NSE (CD): INE231041238; BSE (Cash): INB011041257; BSE(F&O): INF011041257; BSE(CD); MSE(Cash): INB261041231;
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10 November 2017
10