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Market share gain, replacement demand to buoy Amara Raja

Over FY 2004-16, Amara Raja clocked a CAGR of 34% and 68% in net sales and PAT respectively.

ET Bureau|
Nov 12, 2019, 09.56 AM IST
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In the light of the recent tax rate cut, several analysts have revised upward FY20/21 earnings.
MUMBAI: Amara Raja Batteries reported a good set of numbers in the September quarter amid challenging conditions with both automotive and industry battery businesses recording healthy volume growth.

Analysts are bullish on the stock given an expected improvement in replacement demand and a market share gain from unorganised players after the GST implementation.

The stock, which rallied 10% to ₹718.30 on Monday, currently trades at 18 times its FY20 estimated earnings as against five-year historical multiple of 28. The company is virtually debt free has been maintaining a healthy dividend payout of 18.41% The company posted an in-line small dip of 3% year-on-year in September 2019 quarter sales, led by healthy volume growth of 10-27% in auto replacement, 12% growth in UPS that largely offset a decline of 25% in original equipment manufacturer (OEM) segment. Operating profit margin expanded 373 bps YoY and 180 bps quarter-on-quarter to 17.2% on the back of soft lead prices and a better product mix.

“While challenges continue to persist in the auto OEM segment, Amara Raja has shown strong performance in telecom, UPS, and automotive replacement segments,” said Abhishek Jain, analyst, Dolat Capital. “The company has already initiated capacity expansion plans for its automotive and industrial segments, which is expected to drive the next phase of growth for the company.”

Over FY 2004-16, Amara Raja clocked a CAGR of 34% and 68% in net sales and PAT respectively, far exceeding Exide’s 20% CAGR each in net sales and PAT. This has been driven through a combination of technological innovations, witty advertising and unique distribution model supported with operational efficiency-led competitive pricing.

In the light of the recent tax rate cut, several analysts have revised upward FY20/21 earnings by 10-15%.

“We have upgraded our EPS estimates for FY20 by 13% to factor in for benefit of lower lead price and mix,” said Jinesh Gandhi, re-search analyst, Motilal Oswal Financial Services. “We expect value migration from unorganised to organised players like Exide and Amara Raja in replacement segment driven by tax reforms like GST and lower corporate tax rates.”

The company is establishing a new greenfield automotive battery plant with a capacity of 6.5 million units with a capex of ₹700 crore. This will help the company to expand its four-wheeler capacity by 2-2.5 million to 13.5 million and two-wheeler capacity by 3 million units to 17 million.

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