This article provides in-depth fundamental analysis of Amara Raja Batteries Ltd, an Indian manufacturer of lead acid batteries (Amaron Batteries).
Amara Raja Batteries Ltd Research Report by Reader
Q: Dear Dr. Vijay Malik, I have analysed Amara Raja Batteries Ltd. It has been screened from screener.in using the financial parameters that you have mentioned on your site. Though I have not followed exact steps that you have suggested, I have tried to cover important aspects. Do give your views on the same.
About the Amara Raja Group:
The Amara Raja Group is an Indian Conglomerate Company with its corporate office at Hitec city, Hyderabad. The group has presence in packaged foods and beverages, electronics products manufacturing, infrastructure sector, power system production and fabrication of sheet metal products and fasteners. The Amara Raja Group is better known for its automotive battery brand “Amaron” which is the second largest selling automotive battery brand in India today. Amara Raja Group employs a work force of over 7000 employees and it has international joint venture alliance with Johnson Controls Inc. Amara Raja Batteries made it to Asia’s ‘Best Under A Billion’ 2010 list of companies compiled by Forbes magazine.
A first generation entrepreneur, Dr. Ramachandra Naidu Galla is the founder of Amara Raja Group Of Companies in 1985. The automotive batteries business unit commenced operations in 2001 with technology from Johnson Controls Inc., – joint venture partner and the world’s largest manufacturer of automotive batteries. It pioneered the introduction of Zero maintenance technology in India’s automotive battery segment, the key differentiator in an otherwise cluttered Indian automotive battery market.
It is named after Jay Galla’s grandparents Amaravati and Rajagopal Naidu.
About Amara Raja Batteries Ltd and business:
Amara Raja Batteries Ltd is an India-based company, which is engaged in the business of manufacture and sale of lead acid storage batteries for industrial and automotive applications. The Company’s products are supplied to various user segments, such as telecom, railways, power control and uninterruptible power supply (UPS) under industrial battery business, and to automobile original equipment manufacturers (OEMs), replacement market and private label customers under automotive battery business. The Company also exports its standby valve regulated lead acid (VRLA) battery products to various countries in the Indian Ocean Rim. The Company also provides installation and commissioning, and maintenance services to the customers. The automotive and industrial battery brands of the Company are Amaron, PowerZone, Power Stack, AmaronVolt and Quanta. The Company operates its integrated manufacturing facility in the city of Tirupati, Andhra Pradesh.
Financial Parameters of Amara Raja Batteries Ltd:
Peer Comparison of Amara Raja Batteries Ltd:
Financial Analysis of Amara Raja Batteries Ltd:
- PRICE: 948
- TTMEPS: 25
- P/E: 37.9
- 2Y FWD GROWTH RATE: 28
- PEG RATIO: 1.35
- DIVIDEND PER SHARE: 3.6
- DIVIDEND YIELD: 0.4
- EARNINGS YIELD(EY): 2.8
- TIME TO GET 8.5% EY: 4.6
- PRELIMNARY REMARK: FAIRLY VALUED
- PAST SALES GROWTH 10Y: 30%
- PAST SALES GROWTH 5Y: 23%
- PASTSALES GROWTH 3Y: 22%
- SALES PREDICTABILITY: HIGH
EPS Growth Rate Predictability:
- PAST EPS GROWTH 10Y: 37%
- PAST EPS GROWTH 5Y: 20%
- PAST EPS GROWTH 3Y: 24%
- EPS GR PREDICTABILITY: LOW
- MARKET CAP: 15401 Cr
- DEBT/EQUITY RATIO: 0.04
- CASH PER SHARE AFTER DEBT: Rs. 8
- GROSS MARGIN: 16.80%
- NET MARGIN: 11.30%
- ROE 10Y AVG: 24
- ROE 5Y AVG: 25
- ROE 3Y AVG: 26
- ROCE 10Y AVG: 30
- ROCE 5Y AVG: 35
- ROCE 3Y AVG: 37
- Sustainable GR: 22%
Future EPS & Price Projections:
- MAR16 EPS: 30.7
- MAR17 EPS: 39.2
- FAIR P/E: 35
- MAR16 PRICE(PROJECTED): 1075
- MAR17 PRICE (PROJECTED): 1372
- 2Y PRICE CAGR (PROJECTED): 23%
DCF (Intrinsic Value) Analysis of Amara Raja Batteries Ltd:
- INTRINSIC VALUE AT 0f% GR: 294
- INTRINSIC VALUE AT (DCF @22.5 GR): 3042
- MARGIN OF SAFETY: 69%
- DCF GROWTH RATE DISCOUNTED: 8%
- MARGIN OF SAFETY: 64%
- RISK BASED ON QUALITY, GROWTH& VALUATION: LOW
- OVERALL VALUATION: FAIRLY VALUED
- LONG TERM RETURN: 20 TO 25%
Amara Raja Batteries Ltd is not a cheap stock but quality always comes at a price. It is performing like a consumer company. Unlike other discretionary consumer companies, Amara Raja products need compulsory replacement once every 3 to 4 years. It has medium term triggers like improvement in operating efficiency leading to margin expansion. My estimates are conservative and it might do better than that.
Dr Vijay Malik’s Response
Thanks for writing to me! I appreciate the time & effort put in by you in analyzing Amara Raja Batteries Ltd and sharing your analysis for the benefit of author and readers of www.drvijaymalik.com
Let us first analyse the financial performance of Amara Raja Batteries Ltd over last 10 years.
Financial Analysis of Amara Raja Batteries Ltd:
Amara Raja Batteries Ltd has been growing its sales consistently at an excellent pace of 25-30% year on year since last 10 years (FY2006-15). It is important to note that this sales growth has been accompanied by sustained profitability. Operating profit margins (OPM) of Amara Raja Batteries Ltd has been consistent at 15-18% throughout last decade. Similarly, net profit margins (NPM) have also been consistent at 9-10% in last 10 years. Sales growth with sustained profitability margins is the first sign of any exciting investment opportunity.
Amara Raja Batteries Ltd has been paying taxes at 32-34% rate, which is equal to the standard corporate tax rate in India. This is another good sign.
Operating Efficiency Analysis of Amara Raja Batteries Ltd:
Over the years, Amara Raja Batteries Ltd has been reflecting improved operating efficiency. Net fixed assets turnover (NFAT) has been improving from 4.61 in FY2007 to 8.3 in FY2013. NFAT has been subdued over last two years on account of heavy capex being done by the company during this period. It remains to be seen whether Amara Raja Batteries Ltd would be able to derive similar efficiency levels from the new capex, as it has been doing in the past. An investor needs to keep a close track on the utilization levels of the new capex.
Inventory turnover ratio of Amara Raja Batteries Ltd has improved from 7.0 in FY2011 to 11.2 in FY2015. Improving asset and inventory turnover indicate that Amara Raja Batteries Ltd is able to use its capital more efficiently and generate higher sales from same level of assets.
Receivables days of Amara Raja Batteries Ltd have improved from 70 days in FY2007 to 44 days in FY2015. Improvement in receivables days indicates that the company has been able to collect the money from its customers faster, indicating its growing influence in the market. Improved collection practices lead to lower working capital finance requirements and thereby lower interest costs and improved profitability.
Amara Raja Batteries Ltd has PAT for last 10 years (FY2006-15) of INR 1,841 cr. whereas the CFO over the similar period is INR 1,782 cr. PAT has nearly been converted into CFO. There does not seem to be much concern on this parameter.
Margin of Safety in the Business of Amara Raja Batteries Ltd:
i) Self-Sustainable Growth Rate (SSGR):
Self-Sustainable Growth Rate (SSGR) of Amara Raja Batteries Ltd is about 40-45%. As mentioned in the article on Self-Sustainable Growth Rate, SSGR does not factor in working capital changes. However, we can estimate whether funds are being tied up in working capital by comparing cPAT with cCFO.
Analysis of SSGR indicates that if Amara Raja Batteries Ltd can manage its working capital management and operating efficiency properly, then it can grow continuously at about 40-45% growth rate without creating additional debt burden on the balance sheet. As Amara Raja Batteries Ltd has been growing at a rate of 25-30%, it has been able to manage its grow story without leveraging its balance sheet. It has miniscule amount of debt on its book as reflected by its debt to equity ratio of 0.04.
ii) Free Cash Flow Analysis of Amara Raja Batteries Ltd:
These findings of SSGR get re-affirmed when an investor analyses the cash flow from operations (CFO) of Amara Raja Batteries Ltd with its capital expenditure (Capex) requirements over last 10 years (FY2006-15).
During FY2006-15, Amara Raja Batteries Ltd realized total CFO of INR 1,782 cr. and out of it Amara Raja Batteries Ltd to spend INR 1,393 cr. into capital expenditure, thereby releasing free cash flow (FCF) of INR 389 cr. as surplus for shareholders. It is important to note that the INR 1,393 cr. of capex resulted in sales growing from INR 397 cr.in FY2006 to INR 4,211 cr. in FY2015.
This data indicates that Amara Raja Batteries Ltd is a good example of efficient capital utilization. Despite meeting its entire capex requirements, Amara Raja Batteries Ltd was able to generate FCF of INR 389 cr. out of which it distributed INR 274 cr. as dividend to shareholders (including dividend distribution tax).
The ability of Amara Raja Batteries Ltd to grow its sales with Ltd capex from its CFO and generating good amount of free cash flow (FCF) indicates that the company has a good advantageous business model.
The investors would agree that a company which generates good amount of free cash flow (FCF) post meeting entire capex requirement from its operating cash flow (CFO) would not need any debt or equity dilution. The same is true for Amara Raja Batteries Ltd; it is almost a debt free company with no history of equity raising over last 10 years. (The increase in share capital in FY2009 is on account of 1:2 bonus shares issued to shareholders).
Amara Raja Batteries Ltd has been paying regular dividend to its shareholders. Company has been increasing its dividend payout with increasing profits. It amounts to sharing the fruits of growth with shareholders. These are signs of a shareholders’ friendly management.
Share market too seems to have recognized it. The market capitalization of the Amara Raja Batteries Ltd has increased by INR 10,335 cr. against retained earnings of INR 1,567 cr. over last 10 years (FY2006-15). Management has created a value of INR 6.6 for the shareholders from every INR 1 of earnings retained & not distributed to shareholders.
Margin of Safety in the market price of Amara Raja Batteries Ltd:
Amara Raja Batteries Ltd is currently available at a P/E ratio of about 40, which does not offer any margin of safety as described by Benjamin Graham in his book The Intelligent Investor.
I do not use projected earnings or DCF for doing stock valuation. Therefore, I would not be able to comment future EPS/Price projections or DCF analysis of Amara Raja Batteries Ltd done by you.
You have opined that high P/E valuations of Amara Raja Batteries Ltd are justified by comparing it with consumer companies and by reasoning that quality always comes at a price. I would like to delineate a belief that I hold about investing:
“There is no one path to success in stock market investing. Investors have made money in markets by following high P/E growth investing, low P/E value investing, mix of both, arbitrage, technical investing, large cap investing, mid/small cap investing and many other such approaches. Therefore, I believe that there is no single standard path to succeed/make money in markets. The path an investor should follow is the one she is convinced with and feels comfortable with.”
Readers are right when they mention that good business may not be available at low P/E ratios (a P/E<10). An investor is free to invest in businesses with high P/E, if she is comfortable. However, I believe in investing fundamentally sound companies, which are yet to be recognized by the markets. I believe that such companies are present in the markets. Such opportunities might not be aplenty; however, I believe that an investor does not need to find dozens of good companies. My experience in markets says that one company a year is enough.
Nevertheless, there is no one path to success in markets and therefore, if an investor believes in investing high P/E companies, which are valued fairly, then she should invest in such companies without any second thoughts. Investing methods are personal choice.
However, we recommend that an investor may read the following articles to assess the PE ratio to be paid for any stock, takes into account the strength of the business model of the company as well. The strength in the business model of any company is measured by way of its self-sustainable growth rate and the free cash flow generating the ability of the company.
In the absence of any strength in the business model of the company, a low PE ratio of the company’s stock may be signs of a value trap where instead of being a bargain; the low valuation of the stock price may represent the poor business dynamics of the company.
- 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors
- How to Earn High Returns at Low Risk – Invest in Low P/E Stocks
- Hidden Risk of Investing in High P/E Stocks
Overall, Amara Raja Batteries Ltd appears to be a company growing at a fast pace, with sustained profitability margins & operating efficiency. It has been able to meet its capex requirements from its cash flow from operations and able to generate free cash flows. Amara Raja Batteries Ltd has a very healthy SSGR, which can ensure that it can keep on growing without needing debt to fund its growth, if it can manage its working capital efficiently.
These are my views about Amara Raja Batteries Ltd. However, you should do your own analysis before taking any investment related decision about Amara Raja Batteries Ltd.
You may use the following steps to analyse the company: “How to do Detailed Analysis of a Company“
Additionally, the investor should keep track of the future performance of the company for signs of improvement or worsening as part of their monitoring exercise. She may use the steps explained in the following article for monitoring stocks in her portfolio.
Hope it helps!
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- The above discussion is only for educational purpose to help the readers improve their stock analysis skills. It is not a buy/sell/hold recommendation for the discussed stocks.
- I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013.
- Currently, I do not own stocks of the companies mentioned above in my portfolio.