Stock Review: Amara Raja Batteries

 

THE stock price of the country's second-largest lead battery maker Amara Raja Batteries (ARBL) rose 3% on Monday after it posted better-than-expected results for the December 2010 quarter. The company's net profit was flat on a year-on-year basis because of high input costs. However, it fared much better than its bigger peer Exide Industries whose profit shrunk due to lower realisation.

   ARBL's sales grew 16% over the year-ago period, almost twice as fast as the growth in the previous quarter. It registered good volume growth in the automobile batteries segment, even as demand for industrial batteries, which accounts for over half of its revenue, remained muted.

   A high proportion of the company's auto battery sales is in the replacement market, which gives it better margins compared with Exide.

   The firm's operating margin contracted 300 basis points (bps) to 15.8% over the year-ago period due to higher cost of lead, its key raw material. Lead price was up 4.5% year-on-year and 17% over the second quarter. However, moderation in interest and depreciation cost, allowed the firm to hold on to the bottomline with net profit of Rs 39 crore for the third quarter, almost the same as the corresponding period the previous year.

   Analysts have a positive outlook on the company's revenue growth in the medium term, when it is likely to see healthy topline growth. Net sales are expected to increase 19% over the next two years due to higher automobile battery demand, which will help the company increase its market share marginally, according to Angel Broking.

   ARBL's stock has marginally underperformed the 10-stock ET Auto Ancillary index. It has declined 13% in the past three months compared with a 9% drop in the sector benchmark index. At the last traded market price of Rs 181, the stock traded at 10 times its earnings per share for trailing four quarters ended December 2010.

   Though ARBL's revenue growth is expected to sustain in future, earnings growth may remain lower due to the increasing cost of raw materials. It can also be impacted by a slowdown in new automotive demand due to a rise in interest cost, which can affect volume growth and impact earnings.