Amara Raja Batteries: Hold

Recommendation: Hold

B. Krishnakumar

DESPITE the unfavourable business environment, storage battery producer, Amara Raja Batteries, has managed to avoid a major dent in its financial performance.

However, with economic recovery still not in sight, the company's earnings might come under pressure on account of rising cost of production.

Stakeholders in Amara Raja Batteries could remain invested and use price rally to gradually trim exposures in the company. Fresh buying may be contemplated on evidence of a pick-up in economic growth.

Amara Raja Batteries is a prominent player in the storage battery industry. It has a major presence in the industrial battery segment. The company derives a major chunk of its revenues from the telecom sector with BSNL (erstwhile Department of Telecommunications). Besides, the company has a major exposure to Siemens, Lucent, Alcatel and the Indian Railways.

Backed by a growing demand for the valve regulated lead acid batteries (VRLA), the company managed to post a strong growth in earnings in the mid-1990s. The entry of Exide Industries into the VRLA segment, coupled with the general slowdown in the telecom sector, has affected the company's performance in the recent years.

With technical backing from the global major, Johnsons Control of the US, Amara Raja ventured into the automotive battery segment recently. After an initial thrust towards the original equipment market, the company has now made a foray into the replacement market as well.

The positive impact of these moves is reflected in the form of a growth in performance even amidst the unfavourable business environment that has prevailed in the recent quarters. Despite the slowdown in the automobile and telecom sectors, Amara Raja has managed to report a 12.45 per cent rise in net profit to Rs 9.3 crore, while the turnover rose 17.24 per cent to Rs 59.77 crore.

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The higher realisations and margins associated with the earnings from the replacement market of automobile sector appears to have helped the company report a better performance compared to the market leader, Exide Industries. The company has also managed to expand its OE clientele base by adding Ashok Leyland and Mahindra and Mahindra.

The company has very recently commissioned a new plant to manufacture automotive batteries. Considering that the volume growth is the key driver of demand in the battery industry, the performance of Amara Raja could be strained until it achieves the critical minimum sales volume.

Till such time, the interest cost and depreciation charge would hamper growth in bottomline. And, even if Amara Raja manages to garner market share in the OE segment, it is unlikely to translate into higher profit margin as realisations are much lower in the OE market.

Given the growing competition in the automotive battery market from the likes of Exide, Tudor and Amco, it would take some time and effort for Amara Raja to capture a major presence in the automotive market. In this context, the association with the American major, Johnsons Control, would come in handy for Amara Raja to gain a better presence in the automobile market.

As of now, the growth in volume in the automobile and telecom sectors are the critical factors that would determine the company's performance. Considering the slowdown in activity across almost all sectors including telecom and computer hardware, the scope for volume growth appears rather limited in the near term.

Shareholders could, therefore, look for opportunities to exit from the company. Any evidence of a pick up in volume, especially in the automotive segment, could be used to pick exposures at a later stage.