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3QFY2012 Result Update | Auto Ancillary

February 13, 2012

Amara Raja Batteries


Performance Highlights
Y/E March (` cr) Net sales EBITDA EBITDA margin (%) Reported PAT
Source: Company, Angel Research

ACCUMULATE
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Auto Ancillary 1,862 0.3 262/158 21,187 2 16,372 4,906 AMAR.BO AMRJ@IN
426 68 44.1 55.8 130bp 59.8 562 88 15.7 52 9.1 20.6 165bp 27.1

`277 `299
12 Months

3QFY12 3QFY11 % chg (yoy) 2QFY12 % chg (qoq) 613 106 17.3 66

16.0 41

Amara Raja Batteries (AMRJ) reported a strong performance for 3QFY2012, driven by double-digit volume growth in the industrial (telecom and UPS) and automotive (led by replacement demand) battery segments. We revise our earnings estimates upwards for FY2012/13E by 17.5%/14.2% due to upward revision in the top line and operating margin. Due to the recent run-up in the stock price (~35% in the past month), we recommend Accumulate on the stock. Strong operating performance despite increased competitive activity: AMRJ posted robust 44.1% yoy (9.1% qoq) growth in its top line to `613cr, led by double-digit volume growth in the industrial and automotive battery segments. EBITDA margin witnessed a 130bp yoy (165bp qoq) expansion to 17.3%, led by a 240bp and 110bp yoy contraction in other expenditure and staff cost as a percentage of sales, respectively. Raw-material cost as a percentage of sales, however, increased by 220bp yoy despite a decline in lead prices. Net profit jumped by 66.3% yoy (27.1% qoq) to `66cr, driven by better-than-expected operating performance and a significant increase in other income (`5cr as against `2cr and `1cr in 3QFY2011 and 2QFY2012, respectively). Meanwhile, the company has approved a `190cr capacity expansion plan for setting up a new facility. Outlook and valuation: We estimate AMRJs top line to witness a CAGR of ~24% over FY201113E, leading to a ~25% CAGR in its net profit, largely aided by sustained growth in auto and industrial battery volumes. We believe AMRJ is well placed to tap the rising demand from the auto and industrial segments, with its innovative products, competitive pricing, increased capacity and widening reach. AMRJ is trading at 10.2x FY2013E earnings. We recommend Accumulate on AMRJ with a target price of `299.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 52.1 24.5 9.9 13.5

Abs. (%) Sensex AMRJ

3m (2.3) (6.9)

1yr (17.9) 22.1

3yr 83.2 374.5

Key financials
Y/E March ( ` cr) Net sales % chg Net profit % chg EBITDA (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

FY2010 1,464 11.5 159 97.7 19.7 19.6 14.2 4.4 33.5 35.9 1.6 8.2

FY2011 1,761 20.3 148 (7.1) 14.5 17.3 16.0 3.7 24.8 30.2 1.4 9.4

FY2012E 2,314 31.4 210 42.3 15.1 24.6 11.3 2.8 28.5 35.1 1.0 6.7

FY2013E 2,698 16.6 232 10.5 14.5 27.2 10.2 2.3 24.9 31.6 0.8 5.8

Yaresh Kothari
022-3935 7800 Ext: 6844 yareshb.kothari@angelbroking.com

Please refer to important disclosures at the end of this report

Amara Raja Batteries | 3QFY2012 Result Update

Exhibit 1: Quarterly performance


3QFY12 Net sales Consumption of RM (% of sales) Purchases of goods (% of sales) Staff cost (% of sales) Other expenses (% of sales) Total expenditure Operating Profit OPM (%) Interest expense Depreciation Other Income Profit before tax Extraordinary income/(expense) PBT after extraordinary items (% of sales) Provision for taxation (% of PBT) Reported PAT Adjusted PAT PATM (%) Equity capital (cr) Reported EPS (`) Adjusted EPS (`)
Source: Company, Angel Research

3QFY11 426 271 63.6 2 0.5 20 4.6 65 15.2 357 68 16.0 0 10 2 59 2 61 14.2 19 31.9 41 40 9.3 17.1 4.8 4.6

% chg yoy 44.1 44.7 559.6 9.9 21.5 41.8 55.8 250.6 14.3 222.4 66.3 61.9 66.4 59.8 66.3

2QFY12 562 371 66.1 5 0.8 22 3.8 76 13.6 474 88 15.7 1 12 1 77 77 13.7 25 32.5 52 52 9.2 17.1

% chg qoq 9.1 5.5 (3.3) 222.6 195.8 (0.1) (8.5) 3.0 (5.6) 7.0 20.6 10.5 44.0 2.7 274.5 27.5 27.5 16.9 28.4 0.6 27.1 27.1 16.6 (0.0) 27.2 27.2

9MFY12 1,701 1,111 65.3 41 2.4 63 3.7 224 13.2 1,438 262 15.4 3 34 8 233 233 13.7 76 32.7 157 157 9.2 17.1 18.4 18.4

9MFY11 1,265 815 64.4 7 0.5 59 4.7 198 15.7 1,079 186 14.7 0 31 4 158 3 161 12.7 53 32.6 109 106 8.4 17.1 12.7 12.4

% chg yoy 34.5 36.3 503.9 6.5 13.0 33.3 41.1 858.6 9.6 84.5 47.0 44.5 44.8 44.4 48.0

613 392 63.9 15 2.4 21 3.5 79 12.8 507 106 17.3 2 12 5 98 98 16.0 32 32.7 66 66 10.8 17.1 7.7 7.7

59.8 66.3

6.1 6.1

44.4 48.0

Better-than-expectd top-line growth of 44.1% yoy: AMRJ posted robust 44.1% yoy (9.1% qoq) growth in its top line to `613cr. Top-line growth was led by double-digit volume growth in the industrial and automotive battery segments. While the industrial battery segment benefitted from healthy demand in the UPS and telecom segments, the automotive battery segment grew on the back of buoyant aftermarket demand for two-wheeler and four-wheeler batteries.

February 13, 2012

Amara Raja Batteries | 3QFY2012 Result Update

Exhibit 2: Better-than-expected top-line growth of 44.1% yoy


(` cr) 700 600 500 400 300 200 100 0 10.3 8.7 15.8 15.9 17.6 30.9 Net sales (LHS) 45.7 yoy growth (RHS) 43.2 44.1 (%) 50.0 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

2QFY12

Source: Company, Angel Research

EBITDA margin surprised positively and stood at 17.3%: For 3QFY2012, the companys EBITDA margin witnessed a 130bp yoy (165bp qoq) expansion to 17.3%, led by a 240bp and 110bp yoy contraction in other expenditure and staff cost as a percentage of sales, respectively. Raw-material cost as a percentage of sales, however, increased by 220bp yoy despite a decline in lead prices. As a result, operating profit witnessed better-than-expected 55.8% yoy (20.6% qoq) growth to `106cr.

Exhibit 3: Average lead prices down 16.5% yoy


(US $/tonne) 5,000 4,000 3,000 2,000 1,000 0 Lead inventory (RHS) Lead prices (LHS) (tonne) 450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0

Exhibit 4: EBITDA margin surprised positively


(%) 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 18.8 14.6 13.9 14.2 16.0 14.5 12.9 15.7 17.3 60.1 EBITDA margin 66.1 66.6 63.9 64.1 Raw-material cost/sales 67.1 70.1 66.9 66.3

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

2QFY12

3QFY12
3QFY12

Dec-03

Mar-02

Aug-06

Nov-04

Source: Company, Bloomberg, Angel Research

May-08

Mar-10

Dec-11

Jan-03

Sep-05

Apr-09

Jan-11

Jul-07

Source: Company, Angel Research

Strong net profit growth of 66.3% yoy: AMRJ reported a 66.3% yoy (27.1% qoq) increase in its net profit to `66cr, driven by better-than-expected operating performance and a significant increase in other income (`5cr as against `2cr and `1cr in 3QFY2011 and 2QFY2012, respectively).

February 13, 2012

Amara Raja Batteries | 3QFY2012 Result Update

Exhibit 5: Net profit grows strongly by 66.3% yoy


(`cr) 70 60 50 40 30 20 10 Net profit (LHS) 10.8 9.7 8.5 8.0 8.1 8.2 7.4 9.2 Net profit margin (RHS) 10.8 (%) 12.0 10.0 8.0 6.0 4.0 2.0

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

2QFY12

Source: Company, Angel Research

February 13, 2012

3QFY12

0.0

Amara Raja Batteries | 3QFY2012 Result Update

Investment arguments
AMRJ is Indias second-largest manufacturer of lead batteries, with a market share of ~27%. U.S.-based Johnson Controls is a joint venture partner of AMRJ and holds a 26% equity stake in the company. The automotive and industrial battery segments contributed ~53% and ~47%, respectively, to AMRJs overall revenue in FY2011. We expect the automotive battery market to post a ~13% CAGR in sales over FY201113E, led by healthy growth in replacement demand, a ~10% CAGR in new vehicle sales and shrinking market share of unorganized players. Thus, during FY201113E, we expect AMRJs automotive battery segment to post a ~27% revenue CAGR. Also, with a strong focus on strengthening its distribution network, we expect AMRJ to increase its market share to ~30% by FY2013E. AMRJ pioneered the use of maintenance-free batteries with a presence in the railway signaling, telecom power and supply solutions segments. Going forward, we expect the power backup (UPS/inverter) segment to drive demand for industrial batteries, leading to a ~21% revenue CAGR in AMRJs industrial battery segment over FY201113E.

Outlook and valuation


We estimate AMRJs top line to witness a CAGR of ~24% over FY201113E, leading to a ~25% CAGR in its net profit, largely aided by sustained growth in auto and industrial battery volumes. Due to strong 3QFY2012 performance, we revise our earnings estimates upwards for FY2012/13E by 17.5%/14.2%, led by upward revision in the companys top line and operating margin. On the valuation front, AMRJ is trading at 11.3x and 10.2x FY2012E and FY2013E earnings, respectively. At present, AMRJ is trading at a ~37% discount to Exide (adjusted for insurance business). Although AMRJ has always traded at a discount to Exide (due to Exides leadership position, scale of operations, superior margins and return ratios), AMRJ is well placed to tap the rising demand from the automobile and industrial segments with its innovative products, competitive pricing, increased capacity and widening reach. We believe, going forward, the discount commanded by AMRJ compared to Exide would reduce with a) increasing scale of operations, b) sustainable revenue and earnings visibility and c) improving return ratios. We recommend Accumulate on the stock with a target price of `299 valuing the stock at 11x FY2013E earnings.

February 13, 2012

Amara Raja Batteries | 3QFY2012 Result Update

Exhibit 6: One-year forward P/E band


(`) 400 350 300 250 200 150 100 50 0 Share price (`) 5x 8x 11x 14x

Exhibit 7: ARBL P/E Premium/Discount to Exide


(%) 0 (10) (20) (30) (40) (50) (60) (70) (80) (90) prem./ disc. to Exide Five-yr average Prem/Disc

Feb-07

May-06

Dec-01

Dec-09

Jun-03

Jan-07

Jun-08

Nov-04

Mar-09

Aug-05

Aug-10

Apr-01

Apr-06

Oct-07

Feb-04

Sep-02

Source: Company, Bloomberg, Angel Research

May-11

Feb-12

Source: Company, Bloomberg, Angel Research

Exhibit 8: Auto Ancillary - Recommendation summary


Company Amara Raja Automotive Axle Bharat Forge* Bosch India# Exide Industries FAG Bearings# Motherson Sumi* Subros
^

Reco. Accumulate Neutral Accumulate Neutral Neutral Accumulate Under review Accumulate

CMP Tgt. price Upside (`) (`) (%) 277 490 305 7,682 136 1,341 174 27 299 332 1,457 28 8.0 8.9 8.7 5.0

P/E (x) FY12E 11.3 10.0 17.0 22.5 25.6 11.3 19.2 9.2 FY13E 10.2 8.8 13.8 20.4 17.4 10.1 14.5 5.7

EV/EBITDA (x) FY12E 6.7 5.5 7.9 14.0 14.7 6.4 9.2 4.7 FY13E 5.8 4.6 6.5 12.2 10.2 5.3 7.6 3.7

RoE (%) FY12E 28.5 27.6 19.7 21.3 15.6 23.9 20.3 7.4 FY13E 24.9 26.2 20.6 19.5 20.3 21.6 23.0 11.5

FY1113E EPS CAGR (%) 25.4 20.7 33.3 17.2 2.4 11.9 10.0 (0.9)

Source: Company, Angel Research; Note: * Consolidated results; # December year end; ^ September year end

February 13, 2012

May-11

Dec-04

Dec-09

Feb-12

Sep-05

Sep-10

Apr-04

Jul-08

Oct-07

Apr-09

Amara Raja Batteries | 3QFY2012 Result Update

Profit & Loss Statement


Y/E March (` cr) Gross sales Less: Excise duty Net Sales Total operating income % chg Total Expenditure Net Raw Materials Other Mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation & Amortization EBIT % chg (% of Net Sales) Interest & other Charges Other Income (% of PBT) Recurring PBT Extraordinary expense PBT (reported) Tax (% of PBT) PAT (reported) Adj. PAT % chg (% of Net Sales) Reported EPS (`) Adjusted EPS (`) % chg FY2008 FY2009 FY2010 1,350 267 1,083 1,083 82.3 904 705 41 41 117 179 115.5 16.5 24 155 133.9 14.3 14 6 3.9 146 (0) 146 52 35.3 94 94 100.6 8.7 16.6 16.6 100.6 1,579 266 1,313 1,313 21.2 1,144 869 48 52 175 169 (5.5) 12.9 35 135 (12.9) 10.3 20 8 6.6 123 (0) 123 42 34.4 80 81 (14.7) 6.1 9.4 9.4 (43.1) 1,690 226 1,464 1,464 11.5 1,176 880 61 62 173 288 70.4 19.7 43 246 82.3 16.8 8 17 6.7 255 8 255 88 34.4 167 159 97.7 10.9 19.6 18.6 97.7 FY2011 FY2012E FY2013E 2,076 315 1,761 1,761 20.3 1,506 1,160 85 77 183 256 (11.4) 14.5 42 214 (12.9) 12.1 2 10 4.3 221 221 73 33.0 148 148 (7.1) 8.4 17.3 17.3 (7.1) 2,728 414 2,314 2,314 31.4 1,964 1,534 107 98 226 350 37.1 15.1 47 303 41.8 13.1 4 14 4.3 313 313 102 32.8 210 210 42.3 9.1 24.6 24.6 42.3 3,182 483 2,698 2,698 16.6 2,308 1,791 130 119 268 390 11.3 14.5 55 335 10.6 12.4 4 15 4.3 347 347 114 33.0 232 232 10.5 8.6 27.2 27.2 10.5

February 13, 2012

Amara Raja Batteries | 3QFY2012 Result Update

Balance Sheet
Y/E March (` cr) SOURCES OF FUNDS Equity Share Capital Reserves & Surplus Shareholders Funds Total Loans Deferred Tax Liability Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Mis. Exp. not written off Total Assets 311 122 189 66 16 575 51 103 421 179 396 666 427 146 281 40 47 526 70 87 369 184 342 710 491 185 306 23 16 631 62 109 460 319 312 656 539 224 315 38 16 742 40 111 590 349 393 761 629 271 358 38 29 981 99 150 732 439 542 967 720 326 394 43 46 1,167 138 175 854 496 671 1,154 11 322 333 316 17 666 17 389 406 286 18 710 17 527 544 91 22 656 17 629 646 95 20 761 17 814 831 115 20 967 17 1,021 1,039 95 20 1,154 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E

February 13, 2012

Amara Raja Batteries | 3QFY2012 Result Update

Cash Flow Statement


Y/E March (` cr) Profit before tax Depreciation Change in Working Capital Less: Others Other income Direct taxes paid Cash Flow from Operations (Inc.)/Dec. in Fixed Assets (Inc.)/Dec. in Investments Other income Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY2008 FY2009 FY2010 146 24 142 (272) (6) (52) (17) (112) (0) 6 (107) 176 5 (31) 149 26 26 51 123 35 (65) 194 (8) (42) 236 (90) (31) 8 (113) 6 (30) 5 (84) (104) 19 51 70 255 43 (91) 112 (17) (88) 214 (47) 31 17 1 (195) 8 (36) (223) (8) 70 62 FY2011 FY2012E FY2013E 221 42 (97) 2 (10) (73) 86 (63) 0 10 (53) 4 29 (88) (55) (22) 62 40 313 47 (91) (14) (102) 153 (90) (13) 14 (90) 20 25 (5) 59 40 99 347 55 (90) (15) (114) 182 (96) (17) 15 (98) (20) 25 (45) 39 99 138

February 13, 2012

Amara Raja Batteries | 3QFY2012 Result Update

Key Ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value DuPont Analysis EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage (EBIT/Int.) 0.7 1.4 10.7 0.4 1.0 6.7 0.0 0.0 31.0 0.1 0.2 89.5 (0.0) (0.0) 75.3 (0.1) (0.2) 95.4 3.8 48 63 30 91 3.6 49 60 30 86 3.2 47 56 35 65 3.4 52 57 37 62 4.0 52 56 35 63 4.0 55 56 38 66 29.1 25.8 32.7 19.6 22.7 21.8 35.9 42.5 33.5 30.2 30.3 24.8 35.1 36.1 28.5 31.6 34.6 24.9 14.3 0.6 2.3 20.9 4.1 20.9 10.3 0.7 2.2 14.8 4.4 14.8 16.8 0.7 2.5 27.5 2.8 27.5 12.1 0.7 2.7 22.3 1.7 22.3 13.1 0.7 3.0 26.4 2.6 26.4 12.4 0.7 3.0 24.8 2.2 24.8 16.6 16.6 20.9 0.7 58.5 9.4 9.4 13.5 0.8 47.5 19.6 18.6 23.7 2.9 63.7 17.3 17.3 22.2 4.6 75.6 24.6 24.6 30.1 2.5 97.3 27.2 27.2 33.6 2.5 121.6 16.7 13.3 4.7 0.3 2.4 14.6 3.9 29.4 20.6 5.8 0.3 1.9 15.0 3.6 14.2 11.7 4.4 1.0 1.6 8.2 3.6 16.0 12.5 3.7 1.7 1.4 9.4 3.2 11.3 9.2 2.8 0.9 1.0 6.7 2.4 10.2 8.2 2.3 0.9 0.8 5.8 2.0 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E

February 13, 2012

10

Amara Raja Batteries | 3QFY2012 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Amara Raja Batteries No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

February 13, 2012

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