Amara Raja Batteries Equity Research

Date of Research – 12 January 2016

Price – Rs. 841.45

About the Company

Founded in 1985, Amara Raja Batteries Limited (“Amara Raja” or the “Company”) is in the business of industrial and automotive batteries and power systems. ARBL is the largest manufacturer of Standby Valve Regulated Lead Acid (“VRLA”) batteries in the Indian Ocean region encompassing Africa, Middle East and South East Asia regions and its distribution network encompasses 18,000 retailers and 200 franchises in 2300 towns. ARBL has a joint venture agreement with the Johnson Controls Inc, USA, which owns 26% equity in ARBL, for the import of technology for the manufacture of Automotive (SLI) batteries.

Amara Raja’s manufacturing facilities are based in Tirupati in Andhra Pradesh and its key brands are ‘Amaron’ batteries and ‘Powerzone’. ARBL’s total market share in the telecom space is 46% and in the UPS space is 32%. Some of its prestigious clients on the industrial side are Indus Towers, Viom Networks, ATC, Bharti Infratel, Bharti Airtel, Vodafone, Aircel, BSNL, Indian Railways, APC, Emerson, Numeric, Delta and DB Power.

In the automotive space Amara Raja manufactures VRLA batteries for all light and heavy commercial vehicles. The Company supplies automotive batteries to almost all Original Equipment Manufacturers (“OEM”) in India including Ashok Leyland, Fiat, General Motors,Hindustan Motors, Honda, Hyundai, Mahindra & Mahindra, Maruti and Tata Motors. The Company is an exclusive supplier to Daimler Chrysler, Ford and Maruti-Swift platform. In the organised four wheeler market space, Amara Raja commands 26% market share in the OEM business and 34% in the aftermarket space. In the organised two wheeler market space, Amara Raja’s share in the aftermarket space is 24%.

Key Financial Figures

Standalone (Rs. Cr)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations 2,981.08 3,451.75 4,230.07 4,690.67  5,981.39
Expenses 2,509.88 2,876.33 3,502.26 3,873.81 5,131.48
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit) 471.20 575.42 727.81 816.86  849.91
Depreciation 66.09 64.57 133.99 139.87  191.17
Finance Costs 1.00 0.72 0.24 0.49  5.77
Other income 26.87 30.42 23.56 45.69  49.24
Exceptional items 9.16 3.88 7.28 – 
PBT 421.82 536.67 609.86 722.19  702.21
Tax 135.11 169.23 199.00 232.75  223.72
PAT (before Minority Interest and share of Associates) 286.70 367.44 410.86 489.44  478.49

Profitability Analysis

Standalone (%)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Operating Profit Margin Ratio 15.81 16.67 17.21 17.41  14.21
Net Profit Margin Ratio 9.62 10.65 9.71 10.43  8.00

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Share Capital 17.08 17.08 17.08 17.08 17.08 
Reserves & Surplus 806.39 1,042.73 1,345.62 1,682.49 2,084.56
Net worth (shareholders funds) 823.47 1,059.81 1,362.70 1,699.57 2,101.64
Long term borrowings 78.47 87.17 75.95 74.14 72.47
Current liabilities 413.00 336.52 633.70 533.22 629.36
Other long term liabilities and provisions 36.58 286.96 36.96 44.31 46.02
Deferred tax liabilities 58.84
Total Liabilities 1,351.52 1,770.48 2,139.44 2,388.08 2,908.33


Application of Funds / Assets (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Fixed Assets 386.10 461.85 767.86 1,030.58 1,436.24
Noncurrent Investments 16.08 16.08 16.08 16.08 16.08
Current assets 936.95 1,084.33 1,298.61 1,275.89 1,408.08
Long term advances and other noncurrent assets 12.39 208.22 56.89 65.54 47.93
Total assets 1,351.52 1,770.48 2,139.44 2,388.08 2,908.33

Efficiency Analysis

Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
ROCE 39.65 41.08 40.00 41.03 38.87 
ROE / RONW 26.12 27.05 26.96 24.17 23.29 

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations (Rs. Cr.) 2,981.08 3,451.75 4,230.07 4,690.67  5,981.39 
Growth (%) 25.73 % 15.79 % 22.55 % 10.89 %  27.52 % 
PAT (Rs. Cr.) 286.70 367.44 410.86 489.44  478.49  
Growth (%) 33.31 % 28.16 % 11.82 % 19.13 %  (2.24 %) 
Earnings Per Share – Basic (Rs. ) 16.78 21.51 24.05 28.65  28.01 
Earning Per Share – Diluted (Rs. ) 16.78 21.51 24.05 28.65  28.01 
Price to Earnings 16.31 18.90 36.03 30.70  30.21 

Dividend History

The Company has maintained an average dividend yield of 1.24 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. Amara Raja’s average current ratio over the last 5 financial years has been 2.01 times which indicates that the Company is comfortably placed to pay for its short term obligations.

Long Term Debt to Equity Ratio

Companies operating with high long term debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

Amara Raja’s average long term debt to equity ratio over the last 5 financial years has been 0.12 times which indicates that the Company operates with low level of debt and is placed well to withstand economic slowdowns.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

Since the Company operates with very low levels of debt, its average interest coverage ratio over the last 5 financial years has been 80.06 times which indicates that the Company can meet its debt obligations without any difficulty.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, Amara Raja reported a promoter holding of 52.06 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 28.96 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.