Amara Raja Batteries: Consolidating existing turfs, entering new ones

Amara Raja Batteries

Initiating Coverage | Sector: Automobiles

Amara Raja Batteries

BSE Sensex

25,020

S&P CNX

7,474

CMP: INR413

TP: INR515

Buy

Revving up to lead

Consolidating existing turfs, entering new ones



Stock Info

Bloomberg

Equity Shares (m)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

M.Cap. (INR b)

M.Cap. (USD b)

AMRJ IN

170.8

460/208

-9/1/34

70.5

1.2



Financial Snapshot (INR Million)

Y/E March

2015E 2016E 2017E

Net Sales

41,127 49,914 58,332

EBITDA

Adj PAT

EPS (INR)

Growth (%)

BV/Share (INR)

RoE (%)

RoCE (%)

P/E (x)

P/BV (x)

6,778 8,282 9,812

4,113 5,149 6,184

24.1

11.9

27.1

37.9

17.2

4.2

30.1

25.2

27.5

38.9

13.7

3.4

36.2

20.1

27.5

38.3

11.4

2.8



Amara Raja Batteries (AMRJ) has emerged as a formidable challenger to leader

Exide Industries (EXID), with leadership in telecom (46% share) and UPS (32%

share) segments.

AMRJ is gearing up to be a leader through a combination of 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.

Over FY14-17E, we expect earnings CAGR of 18.7% driven by net sales CAGR of

19.3% and steady margins at ~16.5%. Key drivers in our view are a) demand

recovery in auto OEMs, industrial segment with b) continued share gains in auto

OEMs, 4W replacement and c) ramp-up in 2W business.

Considering superior earnings growth prospects, strong FCF generation (INR8.4b),

return ratios (average 38.4% RoCE) over FY14-17E and debt free status, we initiate

coverage with a Buy and target price of INR515 (17x FY16E EPS), 25% upside.

Industry structure remains duopoly, but AMRJ is a strong No. 2

98.1 121.0 148.5



Shareholding pattern (% )

As on

Promoter

Dom. Inst

Foreign

Others

Mar-14 Dec-13 Mar-13

52.1

11.6

20.6

15.8

52.1

12.8

19.0

16.2

52.1

15.3

15.8

16.9

While the industry structure remains largely duopoly, AMRJ has emerged as

a formidable challenger to leader EXID, with market leadership in telecom

(46% share) and UPS (32%) segments, and a fast gaining share in Autos.

Over FY04-14, AMRJ clocked a CAGR of 35% and 75% 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 distribution model (franchisee-

based) supported with operational efficiency-led competitive pricing.

AMRJ is gearing up to be a leader through a combination of 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 further

consolidate its leadership with 52-53% share from the current 46%.

Over FY14-17E, we expect earnings CAGR of 18.7% driven by net sales CAGR

of 19.3% and steady profitability. Key drivers in our view are a) demand

recovery in Auto OEMs, industrial segment with b) continued share gains in

Auto OEMs, 4W replacement and c) ramp-up in 2W business.

Considering superior earnings growth prospects, strong FCF generation

(INR8.4b), return ratios (average 38.4% RoCE) over FY14-17E and debt free

status, we initiate coverage with a

Buy

and target price of INR515.

AMRJ - gearing up to be leader



Stock Performance (1-year)



Expect 18.7% EPS CAGR over FY14-17E; initiate coverage with Buy



6 June 2014

Amara Raja Batteries

Emerged as formidable challenger to EXID

Innovation, differentiation, aggression were the mantras

AMRJ with the aid of its JV

partner, JC, introduced zero

maintenance 4W batteries.

Similarly, company was the

first to introduce VRLA 2W

batteries in India with the

highest power and longest

warranty (60 months)



Within 25 years of operation, AMRJ has become India’s second-largest lead-acid

battery player with market leadership in telecom and UPS segments.

Post entering the automotive segment in year 2000, AMRJ successfully challenged the

dominance of incumbent and market leader Exide Industries.

AMRJ has garnered 30% and 37% share in the OEM and organized 4W after-market,

respectively, mainly through technological innovations, witty advertising, and unique

franchisee-based distribution model supported with competitive pricing.

Strong growth in a short span of time



Within 25 years of operation, AMRJ has become India’s second-largest lead-acid



battery manufacturer with market leadership in telecom and UPS segments.

Johnson Controls, the global leader in lead acid batteries, owns 26% of AMRJ.

The association has made AMRJ technologically advanced and thus enabled it to

maintain and increase its market share.

Strong outperformance v/s EXID on revenue growth

Exide

45.5

51.1

25.0

34.4

29.6

21.2

9.4

11.9

60.759.6

Amara Raja

Exide

34.6

AMRJ, EXID revenue (INR b)

Amara Raja

28.4

11.8 13.9

7.6 7.7 7.9 8.8 9.8

18.7

33.9

37.9

19.8

10.8 13.1

1.7 1.8 2.4 3.6 5.9

1.1 1.3 1.6

14.6 17.6

23.6

FY11-14 CAGR (%)

FY09-14 CAGR (%)

FY04-14E CAGR (%)

Source: Company, MOSL

AMRJ, EXID PAT (INR b)

Amara Raja

Exide

5.4

2.5 2.8

1.5 1.6

0.5

0.2

0.2 0.5

0.9 0.8 1.7 1.5

2.2

2.9

6.3

5.2 4.9

4.6

Significant outperformance in profits

Amara Raja

Exide

34.6

25.0

21.2

9.4

11.9

19.8

3.7

FY11-14 CAGR (%)

FY09-14 CAGR (%)

FY04-14E CAGR (%)

Source: Company, MOSL

6 June 2014

Amara Raja Batteries

Successfully challenged EXID’s dominance

AMRJ pioneered a unique

complement of product,

technology, network and

branding – West based

AMRJ franchisee

AMRJ has successfully challenged the dominance of incumbent and market leader

EXID through a combination of

technological innovations, witty advertising and

unique franchisee-based distribution model aided by competitive pricing.

Market share rising across product categories

FY08

28 29

23 24

46 46 48

32 32 32 32

28 30

12 13 14

FY09

FY10

FY11

FY12

FY13

FY14

23 24 24 25

22 24

Telecom

UPS

4W (OEM)

4W (After-market)

Source: Company, MOSL

Most of the major

innovations in the battery

industry over the last 10-15

years were introduced by

AMRJ – South based AMRJ

franchisee

1. Innovative product/technology introductions to create differentiation



Limited product differentiation before AMRJ’s entry:

AMRJ realized there was

limited product differentiation between the organized and unorganized

segment (which was 60% of the market), before its entry in the automotive

batteries segment.



Technology gap high compared to international products:

Batteries available in

India in the past lagged significantly in technology compared to international

markets. AMRJ with the aid of its JV partner, JC, introduced zero maintenance

4W batteries. Similarly, company was the first to introduce VRLA 2W batteries in

India with the highest power and longest warranty (60 months).

The biggest differentiator

was introduction of VRLA

automotive batteries in

January 2000, which were

maintenance free and

factory-charged ready-to-

use (conventional batteries

needed to be charged at

dealerships before use)

Technological

prowess from JC’s association



Johnson Control USA (JC) is an equal partner (26% equity) in AMRJ. Founded in

1885 and headquartered in Milwaukee, Wisconsin, JC recorded revenue of

USD43b in CY13, with ~15% coming from the automotive battery business. It is a

global leader in automotive batteries, with a market share of ~36% as of CY12.

AMRJ has earned the reputation of being technologically superior to market

leader Exide due to lots of innovative product introduction driven by the

technology support from its close association with JC.

Moreover, AMRJ and JC are working closely on the outsourcing possibilities for

JC’s global requirements, which could be a significant revenue churner for AMRJ.

Car battery is a grudge

purchase. No one even

thinks about it, till it fails

some day – West India-

based Exide dealer

2. Differentiated advertising to arouse consumer interest in batteries



Batteries are low-interest slow moving consumer goods:

Automotive batteries

are low-involvement category (even globally), with customers buying only when

their vehicles fail. Thus, the first challenge was not promoting their brand

Amaron, but getting people to start thinking about batteries. In other words,

prompting customers to start comparing between various brands and realize

that Amaron product is superior.

6 June 2014

Amara Raja Batteries



Amaron’s claymation TV

campaigns ensured quick

brand recall, as did the

distinctive green signage

and consumer products-

style retail outlets (the

Amaron Pit Stops) – North

based AMRJ franchisee

Witty advertisements to increase consumer interest in batteries:

For the first

time in India, ‘Claymation’ i.e. using clay models and animation was used for

advertising (refer link

http://www.youtube.com/watch?v=oBQk90PKH6c).

Amaron ads were classic examples of “Clutter busting” done as a route to

increase consumer interest. The aim was to create an alternate brand and force

customers to take cognizance of AMRJ’s existence and draw product

comparisons.

Couple of unique Amaron prints advertisements

AMRJ (AMARON) won

Creative Advertiser of the

Year Award by Abby

(Advertisers Club Bombay

Awards) in 2002

In 2002, AMRJ actually gave away 0.35m mineral water bottles at major

traffic junctions with the message, "In this heat you need water, not the

Amaron battery under your hood" – West based AMRJ franchisee.

3. Unique franchisee-based distribution model



Several players entered but failed in distribution against EXID:

Before AMRJ,

many players entered with better technology but still could not succeed against

Exide as they failed in distribution -- basically collections from channel partners.

Exide used to give huge credits to distributors, who would demand the same

from new entrants, who were unable to match.



To overcome this challenge, AMRJ adopted two-layered franchise-based

model:

While EXID had over 3,000 direct dealers in FY00, AMRJ followed a

franchisee-based distribution network, where they had limited franchisee

partners (currently around 300), who in turn have over 20,000 retailers. The

franchisee model helped AMRJ in the following ways:



Strategic long term relationship with franchisee:

AMRJ dealt with only 300

franchisees and thus it helped them to develop a long term and strategic

partnership amongst each other, implying focus, dedication and high

investment.



Retail credit given by franchisee:

While AMRJ sell to franchisee largely on

cash basis, the franchisee in turn sell to various multi-brand retailers on

credit in the retail market.

Over 80% of the franchisees appointed were new entrepreneurs without

any background of battery business.

6 June 2014

Amara Raja Batteries

AMRJ redefined the scope

of battery dealers from

selling, filling acid and

charging to only selling as

Amaron batteries emerged

as fully charged, ‘fit and

forget’ when they were

dispatched

4. Appealing aesthetics, convenient product features



Superior ‘look & feel’ of the product:

AMRJ batteries would come in the black-

and-green look on the surface (unlike complete black color for batteries then).

Superior looks helped in giving a better perception about the quality etc.



Batteries were designed for consumer convenience in every way.

For instance,

the polycarbonate handle bars that make it possible for one to lift and keep it in

place.

AMRJ batteries came with a unique barcode that made it possible to track

every product movement at each stage. If a consumer has a problem, that

bar code could tell the entire history of the product and corrective action

could be taken immediately – North based AMRJ franchisee.

5. Superior value proposition for customers



Technologically advanced product at competitive prices:

Not only AMRJ

offered technologically better product but also offered a compelling value

proposition -- a product that is distinctly superior in terms of life, maintenance

and service.



Cost efficient operations enabled competitive margins:

A continuous focus on

operational efficiency enabled by process technologies, which AMRJ leverages

from its Johnson Control relationship, has helped it to maintain healthy margins

despite being priced lower than Exide in automotive batteries.

AMRJ enjoys higher EBITDA margins despite low gross

margins (%)

AMRJ

32.6

33.5

5.8

0.5

Emp. Cost

Gross Margins

EBITDA Margins

1.2

1.9

3.2

Exide

FY13 (%)

AMRJ efficient in various cost items despite relatively lower

scale of operations (%)

AMRJ

Exide

FY13 (%)

15.2

12.9

4.3

Ad Spends

Frieght &

Transportation

Source: Company, MOSL

AMRJ faced few product

quality related challenges

during its early phase of

foray into 2W batteries.

However, company was

liberal in accepting

warranty and replacement

claims, which boosted

retailers and customer

confidence

While AMRJ’s product prices were lower than EXID by ~8-10% until two to

three years ago, the gap has narrowed to 4-5%.

6. Ease of doing business with channel partners



Our industry interactions indicate that AMRJ’s products are superior to market

leader EXID. Superior quality and thus relatively less warranty issues/claims

helps retailers (who also deal in several other auto parts components) to

conduct business in a hassle free manner and also build goodwill with

customers.

6 June 2014

Amara Raja Batteries

Challenger gearing to be leader

Consolidating existing areas, entering new business opportunities



AMRJ is gearing up to be a leader through a combination of 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 segment to 40%

(from current 30%) and 30% (from current 24%) respectively over the medium term. In

the telecom segment, it expects to further consolidate its leadership with 52-53%

share from the current 46%.

Each business will grow

over the next few years,

Jayadev Galla, Vice-

Chairman and MD,

quoted in media

Building blocks in place



Strengthen presence in existing areas



Enter new business areas



Expand capacity and distribution channel to support growth

1. Strengthen presence in existing business areas

A. Targets to increase OEM share from 30% to 40% over the medium term

Over the medium term, AMRJ plans to increase its share in the 4W OEMs from 30%

to 40% levels through the following key drivers:



Superior product performance:

Company believes its product performance is

superior compared to competitors. Despite offering higher warranty than

competition, warranty costs are lower.



Higher order wins from OEMs:

With capacity expansion plans coupled with

superior quality and competitive prices, AMRJ aims to increase its share of sales

to OEMs by securing approvals for new platforms of passenger cars.



Increasing focus on 2W OEMs:

AMRJ has started supplies to Honda’s 2Ws

beginning FY14. It is expected to supply ~90% of requirements for Honda’s 2Ws

at its new Karnataka facility having a capacity of 1.8m units. Supplies to Hero

AMRJ supplies 100% of Ford

India and Daimler Benz’s

requirements

6 June 2014

Amara Raja Batteries

Moto, Bajaj Auto and M&M 2Ws are also expected to start with the

commencement of new capacity in 4QFY14. Honda, Hero Moto and Bajaj Auto

together comprise ~80% of 2W market.

AMRJ believes its product performance is superior compared to competitors.

While cranking currents to start a vehicle in tropical weather condition does not

strain the battery, the test comes in cold weather conditions. Company believes

the fact that Hyundai and Suzuki use Amaron batteries for 100% of their Europe

exports, which is a testimony for product performance.

B. Plans to gain market share in the replacement market on the back of

expanding distribution reach and increased marketing activities



Increasing distribution strength in West & East region:

AMRJ has a strong

presence in South and North region, while it is ramping up its focus on West and

East region (40% of the market, Exide’s stronghold market), with plans to beef

up distribution in these regions.

Higher market share in diesel OEM segment to help in replacement demand:

Company has a significantly higher market share in the diesel OEM segment.

Strong demand for diesel vehicles over FY12-13 will help boost its replacement

market share over FY15-16.

Increased ground level activities:

With additional capacity coming on stream in

3QFY15, AMRJ plans to increase ground level marketing activities significantly

PAN India to widen brand penetration in the replacement market.

Increasing preference for VRLA batteries to benefit in 2W replacement

demand:

Based on growing OEM presence, VRLA technology would also help

AMRJ boost its 2W replacement battery volumes as high capex requirement

makes producing VRLA batteries economically unviable for unorganized players.

AMRJ targets 40% 4W OEM market share over next 3-4 years AMRJ targets 30% 4W replacement -market share

4W (OEM)

4W (After-market)

FY08

FY13

FY14

FY18 (Target)

FY08

FY13

FY14

FY18 (Target)

Source: Company, MOSL

6 June 2014

Amara Raja Batteries

OEM demand recovery with share gains to drive 4W volumes New capacity, replacement demand to drive 2W growth

4W volumes (m units)

21.7

17.1

12.4

14.0

12.6

11.4

50.0

Growth (%)

2W volumes (m units)

56.8

55.0

40.0

26.3

30.0

Growth (%)

FY11

FY12

FY13

FY14

FY15E

FY16E

FY11

FY12

FY13

FY14

FY15E

FY16E

Source: Company, MOSL

C. Aims to consolidate share to 52-53% in telecom from 46% currently

“The key advantage with

Amara Raja is high safety

standards, a modern

manufacturing facility and

the ability to work to tight

deadlines since our

business has unexpected

peaks,” says Mandeep J

Sachdeva, Chief Supply

Chain Management Officer,

Indus Tower quoted

in media



Preferred supplier of telecom batteries driving market leadership:

AMRJ has

been the preferred supplier of telecom batteries for more than two decades,

with a market share of 46% currently in telecom batteries.

Customized and innovative product offerings to boost share:

Company has

been continuously upgrading its telecom battery portfolio and customizing

products to suit the needs of telecom players. Its Quick Recharge battery, for

instance, has been highly appreciated by Tower companies as it is designed to

weather the harsh operating environment (longer and frequent power outages).

Shift from product vendor to solution provider beneficial to AMRJ:

Company’s

capabilities, spanning batteries and installation maintenance/disposal, have

enabled it to forge alliances with leading tower companies and operators (Indus

Towers and Viom Networks). AMRJ with its strategic supply partnership with

leading telecom tower companies and operators coupled with its

transformation from a product vendor to a solution provider is expected to

further drive its market share.

AMARON VOLT

D. UPS – superior technology, broader product range and network

expansion to drive market share



Preferred brand in commercial UPS segment: AMRJ’s

Quanta

brand has

emerged as a preferred one in the commercial UPS segment, commanding a

market share of 32%. Despite capacity constraints, company has achieved this

by maximizing throughput, improving product quality and widening distribution

(AQuA channel partner network doubled over five years to 100 outlets). Seeing

the tremendous potential, AMRJ is doubling the capacity for MVRLA batteries

3.6m units annually.

Enhancing product range and expanding network to drive share:

Company is in

the process of expanding opportunity pockets across India by broad-basing the

produce range, expanding channel partner base and providing extensive training

to channel partners.

Threat from imports is expected to reduce:

Imports account for 1/3

of UPS

market in India. With increase in casualties from lead pollution, China decided to

closely regulate this large and unorganized sector. It forced closure of some

domestic production units and curbed overall output.

6 June 2014

Amara Raja Batteries

Quanta channel partners increased significantly

Quanta Channel Partners

100

13.3

23.6

29.6

32.0

UPS segment to recover driven by economic recovery

UPS

Growth (%)

FY07

FY08

FY09

FY12

FY13

FY14

FY15E

FY16E

Source: Company, MOSL

2. Enter new business areas



Home UPS



Solar and Motive Power



Exports

A. Plans to enter the large home UPS segment in FY16 through own product



AMRJ estimates India’s home UPS market at INR16b. The size of battery market

for home UPS is INR60b, with estimated average battery life of 2.5-3 years,

providing significant replacement potential.

Over the years, market has shifted towards organized players who currently

dominate 90% of the market. Superior product quality, widening reach and a

diminishing price gap between the organized and unorganized players are

increasing the preference for branded products. Our industry interaction

indicates that Microtek enjoys 29% share followed by Luminous with 23% and

Sukam at 15%.

Though the market demand for home UPS was subdued in FY14 on unfavorable

climate and extended monsoon, over the medium term, the segment could

deliver healthy growth due to steady demand from the domestic, small office,

home office, SMEs, commercial and other sectors.

North India comprises the largest market for home UPS (%)

Regional demand mix (%)

West, 10

Micro-

tek, 29

East, 15

North, 45

Microtek and Luminous are the largest players in home UPS

Private

labels

(Whirlpool

etc), 12

Exide, 4

AMRJ, 7

Market share (%)

Su-kam, 15

Luminous,

South, 30

Source: Company, MOSL



AMRJ is currently seeding the home UPS market through trading, contributing

less than 5% to its revenue and earning a trading margin of ~5%.

6 June 2014

Amara Raja Batteries



There is a huge market

here, for instance, for

material handling

equipment such as forklift

batteries and pallet

stackers

Given the huge market size, AMRJ plans to enter the home UPS space in FY16,

with niche products and innovative solutions. With captive manufacturing of

inverters, the revenue contribution and margins are expected to increase

significantly.

While company’s product development team is working to create a novel

solution for this market, its marketing team seeded the market with outsourced

products through its channel partners in select pockets for following strategic

reasons:



It enhanced footfalls as it provided channel partners with the entire range of

power solutions offerings.



It provided valuable insights into this business space, which gives a strong

reference for product development.



AMRJ’s presence deterred regional players from making a strong presence

in this market.



It created a ready market for company’s own products.

We have factored 33% CAGR in trading business over FY14-17E to INR2b.

B. Solar and Motive Power



Solar Power:

Batteries are used in solar power industry (i) to store energy

produced from photovoltaic cells and permit operations at times of limited

availability of sunlight and (ii) in inverters used to convert solar energy to certain

desired voltages based on application. Industry estimates suggest that Indian

solar power industry grew from 18mw in early 2010 to ~1,045mw in 2013 and is

projected to grow to 2,500mw in the next two years. Each mw of off-grid power

is likely to generate 2m Ah potential with a periodic replacement opportunity.

Thus, with increasing diesel prices and power shortage, dependence on

alternative sources (battery and solar power which again would need the use of

batteries) would only increase in future.

Motive Power:

The battery usage of motive power is miniscule in India

compared to the global average of motive power constituting ~1/3

of industrial

battery supplies. Pan India industrialization, preference for the hub-and-spoke

logistic model, growth of organized retail and Government thrust on

warehousing are the key growth drivers for motive power for warehousing.

AMRJ has plans to enter this segment.

Solar power industry projected to grow to 2,500mw in the next two years

2,500

1,045

2010

2013

2015

Source: Company, MOSL

6 June 2014

Amara Raja Batteries

C. Export to Indian Ocean Rim



Following the weakening of China’s competitive edge, rising wages, lead price

parity and focus on environmental damages by the Government, huge export

opportunity lies in the Indian Ocean Rim.

AMRJ has been considering exports in an opportunistic manner thus far.

Considering the huge opportunity, exports are now a strategic priority, going

forward. Company has identified some markets in the Indian Ocean Rim such as

West and South East Asia and Africa.

AMRJ already addresses markets in Malaysia, Singapore, Indonesia, the

Philippines, Australia and Sri Lanka. In Singapore, company has a key customer,

Comfort DelGro Corporation taxi fleet (100% share), which operates 16,000 of

Singapore’s 27,000 taxis.

Export opportunities with

JC:

Johnson Control has no manufacturing facility in

ASEAN countries and Japan. While they have a presence in China, it is not a

significant player in the truck market.

“We want to be a global

industrial battery player.

The target for the next five

years is to become a

INR100b company by

2018,” Jayadev Galla, Vice-

Chairman and Managing

Director quoted in media

3. Expand manufacturing and distribution capacity

A. Building capacity to benefit from economic recovery



AMRJ is investing ~INR7.5b over FY13-15 to increase capacity significantly across

all segments.

In 4W batteries, it is expanding capacity from 5.60m units to 8.25m units, while

in 2W battery, it is raising capacity from 4.80m units to 8.40m units through

green and brown field projects.

In Industrial batteries, it is investing on capacity expansion in the medium and

large VRLA batteries.

In medium VRLA batteries, it is setting up green field capacity to increase

capacity from 1.80m units to 3.60m units, while in large VRLA batteries it is

expanding at its current plant from 750m Ah to 900m Ah.

Significant capacity expansion across product segments

Segment

4Ws

2Ws

UPS (MVRLA)

Telecom (LVRLA, mAhmp)

Total

Current Capacity Expanded Capacity

(mn units)

5.6

4.8

1.8

760

8.25

8.4

3.6

1000

Commencement

3QFY15

Feb-14

Jan-14

Feb-14

Capex

(INR b)

4.05

1.9

0.5

7.45

Potential Revenue

(INR b)

7.5

1.75

2.5

16.75

Source: Company, MOSL

B. Aggressive plans to expand distribution network



AMRJ has one of the widest networks with over 21,000 multi-brand outlets.

Over the next five years, company plans to increase the franchisee partners

from 295 in FY14 to 400.

6 June 2014

Amara Raja Batteries

Around 20% of AMRJ

volumes coming from rural

Franchisee distributors too

will increase from 295 to

400 during the same period.



AMRJ has also been deliberately making inroads into rural India, starting in 2007

with the launch of Power Zone stores. These are small retail establishments that

act as a one-stop shop for all types of batteries. Currently, there are ~1,100 such

outlets spread across India, with ~20% of AMRJ volumes coming from rural

India. The idea is to tackle the unorganized sector in smaller towns.

Trend in franchisees and retailers network

Franchise partners (nos.)

18,000

14,000

295

152

200

Retailers (nos.)

21,000

Power Zone outlets

Power Zone (nos.)

1,100

700

400

FY07

FY10

FY14

Source: Company, MOSL

FY08

FY10

FY14

Source: Company, MOSL

6 June 2014

Amara Raja Batteries

Strong 19% EPS CAGR, robust return ratios and FCF

Initiate coverage with Buy and target price of INR515



Driven by acceleration in economic recovery, we expect healthy rebound in demand,

particularly from Auto OEMs and UPS segment. Expect AMRJ to continue to

outperform 4W replacement segment, though demand is expected to moderate

(reflecting weak Auto OEM demand over FY11-14).

Over FY14-17E, we expect earnings CAGR of 18.7% driven by net sales CAGR of 19.3%

and steady margins at ~16.5%. Key drivers in our view are a) demand recovery in auto

OEMs, industrial segment with b) continued share gains in auto OEMs, 4W

replacement and c) ramp-up in 2W business.

Considering superior earnings growth prospects, strong FCF generation (INR8.4b),

return ratios (average 38.4% RoCE) over FY14-17E and debt free status, we initiate

coverage with a Buy and target price of INR515 (17x FY16E EPS), 25% upside.

Expect margins to sustain and improve to 17% by FY17E

EBITDA (INR m)

EBITDA margins (%)

16.8

Expect net sales to register

a CAGR of 19.3%

over FY14-17E

Net sales (INR m)

34.3

25.2

16.0

19.7

21.4

Growth (%)

16.3

16.9

14.4

15.2

16.5

16.8

FY12

FY13

FY14

FY15E

FY16E

FY17E

FY12

FY13

FY14

FY15E

FY16E

FY17E

Source: Company, MOSL

Depreciation increase in FY14 on higher capex spends

Depreciation (INR m)

58.1

42.2

22.5

11.4

(2.3)

FY12

FY13

FY14

FY15E

FY16E

8.6

FY17E

Growth (%)

Strong EPS growth of 18.7% over FY14-17E

45.2

36.2

26.3

11.1

12.6

FY12

17.2

FY13

21.7

FY14

24.1

FY15E

30.1

FY16E

36.2

FY17E

25.2

20.1

EPS

Growth (%)

Source: Company, MOSL

6 June 2014

Amara Raja Batteries

FCF to turn positive in FY16E/17E

CFO

Capex

FCF

Return ratios to remain strong

RoCE (%)

38.8

29.3

42.0

31.1

41.7

30.6

RoE (%)

37.9

27.1

38.9

27.5

38.3

26.9

-809

-1,463

-3,706

-4,470

FY15E

-1,250

-1,450

FY12

FY13

FY14

FY16E

FY17E

FY12

FY13

FY14

FY15E

FY16E

FY17E

Source: Company, MOSL

PB ratio

PE ratio

Source: Company, MOSL

AMRJ valuation at a discount to EXID despite strong earnings growth prospects, robust

return ratios (%)

Source: Company, MOSL

6 June 2014

Amara Raja Batteries

Annexure: Industry fundamentals remain strong

Indian battery industry size estimated at INR13b for FY14

[Industrial]

Home UPS, 12

[Industrial]

Others, 6

[Auto] OEM, 16

[Industrial]

UPS, 10

[Auto] Organized

replacement, 27

[Auto]

Unorganized

replacement, 19

[Industrial]

Telecom, 11

Source: Company, MOSL

Auto replacement battery

Auto OEM battery



With replacement cycle of 3-3.5

years, market size estimated at

INR64b.

Unorganized: Organized share

stands at 40:60, primarily in CVs,

tractors and commercial taxis.

Exide and Amara Raja together

constitute ~60% of the organized

market, which is increasing.

Offers highest margins in the

range of 15-20%.

Largely insulted from current

weakness in OEM demand



Amara Raja and Exide have over

95% share.

Pricing power and consequent

margins are lower (single digit).

Provides platform to improve

quality and efficiency.

Drives

future

replacement

demand due to customer

stickiness to the same brand.

Industrial battery



Comprises

telecom,

UPS

(Commercial), home UPS, solar,

railway batteries.

Enjoys double

margins.

digit

EBITDA

Solar and Motive power are

relatively newer opportunities.

6 June 2014

Amara Raja Batteries

Interesting proxy on rising automobile penetration in India…



Short term demand concerns notwithstanding, we remain positive on the long

term demand potential for auto industry driven by expected improvement in

economic growth supported with favorable demographic factors.

Considering the omnipresent application of batteries in automobiles, the battery

segment is a direct play on increasing automobile penetration in India and

India's evolution as an export hub for automobiles.

With an average replacement cycle of three years, replacement demand growth

typically tracks OEM demand growth of past years, translating into linear

replacement demand.

Replacement demand is not only less cyclical but also enjoys higher profitability

than OEM supplies.

Reduction in battery life due to premiumization (higher end features) and

dieselization would further enhance the attractiveness of the market.

The unorganized sector, which comprises almost half the replacement battery

market, offers organized players a big opportunity due to increasing quality

consciousness and environmental restrictions

Huge unorganized market, particularly CVs and tractors:

The organized

segment accounts for ~60% of replacement battery market, with rest of the

market (unorganized) being highly fragmented and consist of several regional

players and small manufacturers, especially for CVs and tractors.

Unorganized segment competes on price:

The unorganized sector, often

unbranded, competes by selling products at a discount as it uses raw material

procured through open market purchases of exhausted batteries and avoid

taxes (through cash transactions).

Increasing brand awareness, consumer up-trading driving shift towards

organized players:

Increasing brand awareness, consumer up-trading,

narrowing of price gap (due to scale and operating efficiency) have resulted in

the share of unorganized segment of the battery market consistently shrinking

from ~60% to ~40% at present.

Share of unorganized segment to shrink further:

Over time, we expect the shift

towards organized segment to continue, which will benefit players like Exide

and AMRJ, which are strongly positioned in the organized after-market.

Share of unorganized segment high in CVs, tractors

60%

40%

60%

...and on huge, stable and lucrative replacement demand



Secular shift towards organized beneficial for organized players like AMRJ



Unorganized segment reduced but still remains high

64%

15%

FY00

FY14E

Source: Company, Industry, MOSL

CVs

Tractors

Passenger Vehicles

Source: Company, Industry, MOSL

6 June 2014

Amara Raja Batteries

2W batteries: an emerging opportunity with rising penetration of electric

start 2Ws



Over the past few years, electric start has been slowly becoming a standard

feature across product categories in the 2W industry. This is an important

development for battery companies, as traditionally, 100-125cc motorcycles

have been kick-start, while gearless scooters and high-end motorcycles used

electric start. We understand that over 60% of all two-wheelers are electric-start

vs 10% in FY08.

Due to the shift towards electric start two-wheelers, we expect strong growth in

two-wheeler replacement demand on the following reasons:



Shorter replacement cycle of electric start two-wheeler battery:

Replacement cycle for electric start two-wheelers is shorter at ~2.5 years,

compared to 6-8 years for a kick-start two-wheeler.



Critical in an electric start two-wheeler:

Battery becomes indispensible in

an electric start motorcycle as it used for cranking apart from traditional

lightening requirements.



Electric start requires a higher Ah VRLA v/s traditional batteries:

Electric

start vehicles require a higher Ah battery at 5Ah v/s the traditional 2.5Ah

battery, as the battery in electric start vehicle also handles the engine

cracking application (previously only lighting). In addition, OEMs prefer VRLA

batteries v/s traditional batteries, as VRLA provide more deep cycle

recharge and are maintenance free. We note that the price differential

between the two battery types is >50%, benefiting realizations of battery

companies.

Imports from China reducing on environmental concerns, adverse currency



Imports from China largely dominate the small VRLA batteries (1kVA used in

small UPS and emergency lamps). Chinese imports have a smaller share in other

product segments.

The competitiveness of Chinese imports has been declining

in the last few

years, driven mainly by the crackdown on unauthorized battery manufacturers

due to environmental concerns.

Imports from China are not very viable

with INR depreciation and domestic

manufacturing by players.

Industrial segment supplements auto segment

Industrial batteries are made up of two sub segments -- UPS/inverters (low

realization) and telecom/railway/solar power (high realization). This segment lowers

a battery player’s dependence on auto sector and helps diversify the revenue

stream. Margins in this segment typically range between 10-15% higher than the 5-

10% for auto OEM segment.

Higher diesel costs, continued power deficit to drive telecom battery demand



Launch of contemporary technologies, increasing data transfer consuming larger

bandwidth and diminishing signal carrying capacity will necessitate increasing

tower density – increasing the demand for telecom batteries. For instance,

6 June 2014

Amara Raja Batteries



urban 3G roll-out will need to leverage growing use of passive infrastructure –

increasing the need for tower density by ~40-50%.

Moreover, with telecom operators looking for alternative sources of energy due

to the increase in diesel prices and batteries being the preferred option, the

segment would continue to see strong traction.

Another emerging trend is that with increasing dependence on batteries, tower

companies are moving from product vendors to solution providers. This, we

believe, provides an edge to large organized players like AMRJ.

UPS battery growth to be driven by demand from BFSI, IT/ ITeS



While the current demand environment is muted, with expected pick-up in

economic activity post elections, the long term outlook remains strong. This

would be driven by continued power deficit scenario and rising computerization

across industries like IT, BFSI, retail, ATMs, e-governance projects and e-

commerce institutions.



40% of UPS battery demand is contributed by OEM segment and 60% comes

from replacement market.

Duopoly structure to remain, similar to global competitive landscape



The Indian battery industry is duopoly in nature with top players, Exide and

AMRJ, controlling ~90% of the organized market.

Globally too the industry has been a 2-3 player market mostly dominated by

North American companies. Most of the global manufacturers have been in

India in some form but have not gained traction yet.

Brand, technology, scale and wide distribution network are the key entry

barriers. Technology (maintenance-free batteries and VRLA technology) acts as a

key entry barriers in the battery market. Also, VRLA batteries are increasingly

being used in the 2W and industrial segments. It is economically unviable for

unorganized players to produce VRLA batteries, which gives organized players

an edge over smaller counterparts.

6 June 2014

Amara Raja Batteries

Company background

Commencing operations in 1992, AMRJ has become India’s second-largest lead-acid

battery manufacturer (next to market leader EXID), with market leadership

telecom and UPS segments. It is reckoned as one of the pioneers in VRLA (valve-

regulated lead acid) batteries.

Starting with a facility near Tirupati (Andhra Pradesh), its initial foray was into

industrial batteries and thereon the company steadily scaled up operations.

Johnson Control USA (JC) is an equal partner and acquired 26% equity in AMRJ in

1997. Founded in 1885 and headquartered in Milwaukee, Wisconsin, JC recorded

revenue of USD43b in CY13, with ~15% coming from the automotive battery

business. It is a global leader in automotive batteries, with a market share of ~36%

as of CY13.

Name

Dr Ramachandra Galla

Profile

Born in 1938, Dr Galla is an Electrical Engineer from S.V. University,

Tirupati and has to his credit Masters degrees in Applied

Electronics, Roorkee, India and Systems Sciences, Michigan State

University, USA.

He started his career as an Electrical Engineer in US Steel

Corporation, USA moved on to Sargent & Lundy, USA as a

Consulting Engineer for the Designing of Nuclear & Coal Fired

Power Plant.

Dr Galla laid AMRJ’s foundation in 1985 in Chittoor.

Vice-chairman and Managing Director Holds a bachelors’ degree in Political Science and Economics from

the University of Illinois at Urbana Champaign, USA. Though the

Galla family has several businesses, AMRJ is the largest of all.

Designation

Chairman

Mr Jayadev Galla

AMRJ’s board has nine directors, including two from the Galla family and two from

JC. Remaining five are independent directors.

Auto replacement followed by industrial drives revenue

FY14E revenue contribution (%)

Auto

OEM, 9.5

Industrial,

41.3

replacemen

t, 41.3

2W , 7.9

Leader in telecom, UPS; market share on rising trend (%)

FY08

32 32

23 25

FY11

FY14E

Telecom

UPS

4W (OEM)

4W (After-

market)

Source: Company, MOSL

6 June 2014

Amara Raja Batteries

Financials and valuations

Income statement

Y/E March

Net Sales

Change (%)

EBITDA

EBITDA Margin (%)

Depreciation

EBIT

Interest

Other Income

Extraordinary items

PBT

Tax

Tax Rate (%)

PAT

Change (%)

2012

23,645

34.3

3,396

14.4

465

2,931

280

3,186

1,036

32.5

2,151

45.2

2013

29,614

25.2

4,515

15.2

661

3,854

466

4,218

1,351

32.0

2,867

36.2

2014

34,367

16.0

5,603

16.3

646

4,958

455

5,367

1,692

31.5

3,674

26.3

2015E

41,127

19.7

6,778

16.5

1,021

5,757

300

6,048

1,949

32.0

4,113

11.9

(INR Million)

2016E

49,914

21.4

8,382

16.8

1,251

7,131

450

7,572

2,391

32.0

5,149

25.2

2017E

58,332

16.9

9,812

16.8

1,359

8,453

650

9,094

2,873

32.0

6,184

20.1

Balance sheet

Y/E March

Share Capital

Reserves

Net Worth

Debt

Deferred Tax

Total Capital Employed

Gross Fixed Assets

Less: Acc Depreciation

Net Fixed Assets

Capital WIP

Investments

Current Assets

Inventory

Debtors

Cash & Bank

Loans & Adv, Others

Curr Liabs & Provns

Curr. Liabilities

Provisions

Net Current Assets

Total Assets

2012

171

8,064

8,235

855

220

9,310

6,213

2,667

3,546

315

161

9,493

2,666

3,197

2,292

1,339

4,206

2,145

2,061

5,288

9,310

2013

171

10,427

10,598

881

195

11,674

6,803

3,214

3,589

1,030

161

12,925

2,929

3,807

4,108

2,082

6,030

3,537

2,493

6,895

11,674

2014

171

13,456

13,627

843

301

14,772

10,508

3,860

6,649

1,030

161

13,555

3,350

4,528

2,946

2,731

6,623

3,435

3,188

6,932

14,772

2015E

171

16,601

16,772

773

301

17,846

15,008

4,880

10,128

1,000

161

14,465

3,954

5,419

1,824

3,269

7,908

4,232

3,676

6,557

17,846

(INR Million)

2016E

2017E

171

20,460

25,097

20,631

25,267

773

301

21,705

26,342

16,258

17,708

6,131

7,490

10,127

10,219

1,000

161

20,223

26,671

4,798

5,604

6,576

7,685

4,882

8,745

3,967

4,636

9,805

11,708

5,315

6,314

4,491

5,394

10,417

14,962

21,705

26,342

E: MOSL Estimates

6 June 2014

Amara Raja Batteries

Financials and valuations

Ratios

Y/E March

Basic (INR)

EPS

Cash EPS

Book Value

DPS

Payout (incl. Div. Tax.)

Valuation(x)

P/E

Cash P/E

Price / Book Value

EV/Sales

EV/EBITDA

Dividend Yield (%)

Profitability Ratios (%)

RoE

RoCE

Turnover Ratios (%)

Asset Turnover (x)

Debtors (No. of Days)

Inventory (No. of Days)

Creditors (No. of Days)

Leverage Ratios (%)

Net Debt/Equity (x)

2012

12.6

15.3

48.2

1.9

17.4

32.3

26.6

8.4

2.9

20.4

0.5

29.3

38.8

2.5

44.8

41.2

17.1

0.1

2013

17.2

21.0

62.0

2.5

17.6

23.7

19.3

6.6

2.3

15.0

0.6

31.1

42.0

2.5

42.0

36.1

22.9

0.1

2014

21.7

25.4

79.8

3.2

17.6

18.8

16.0

5.1

2.0

12.3

0.8

30.6

41.7

2.3

43.0

35.6

20.0

0.1

2015E

24.1

30.1

98.1

4.9

24.0

17.2

13.8

4.2

1.7

10.3

1.2

27.1

37.9

2.3

43.0

35.1

21.4

0.0

2016E

30.1

37.5

121.0

6.2

24.0

13.7

11.1

3.4

1.3

7.9

1.5

27.5

38.9

2.3

43.0

35.1

22.9

0.0

2017E

36.2

44.2

148.5

7.4

24.0

11.4

9.4

2.8

1.1

6.4

1.8

26.9

38.3

2.2

43.0

35.1

23.7

0.0

Cash flow statement

Y/E March

OP/(Loss) before Tax

Depreciation

Others

Interest

Direct Taxes Paid

(Inc)/Dec in Wkg Cap

CF from Op. Activity

(Inc)/Dec in FA & CWIP

(Pur)/Sale of Invt

Others

CF from Inv. Activity

Inc/(Dec) in Net Worth

Inc / (Dec) in Debt

Interest Paid

Divd Paid (incl Tax)

CF from Fin. Activity

Inc/(Dec) in Cash

Add: Opening Balance

Closing Balance

2012

3,187

470

-28

1,026

120

2,985

-809

-727

-271

-222

-409

1,848

444

2,292

2013

4,218

577

-110

1,366

-94

3,355

-1,463

269

-1,194

-17

-323

-336

1,825

2,283

4,108

2014

5,406

646

-448

1,692

-1,199

2,712

-3,706

455

-3,251

-38

-7

-645

-690

-1,230

4,108

2,878

2015E

6,089

1,021

-291

1,949

-747

4,124

-4,470

300

-4,170

-70

-9

-996

-1,075

-1,122

2,878

1,757

(INR Million)

2016E

2017E

7,472

8,977

1,251

1,359

-441

-641

2,391

2,873

-802

-682

5,089

6,141

-1,250

-1,450

450

650

-800

-9

-1,222

-1,468

-1,231

-1,477

3,058

3,863

1,757

4,814

8,677

E: MOSL Estimates

6 June 2014

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Email : kadambari.balachandran@motilaloswal.com

Contact(+65)68189232

Contact: (+65) 68189233 / 65249115

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Motilal Oswal Securities Ltd

6 June 2014

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