Amara Raja Batteries (AMARAJ)

CMP: | 630 Target: | 590 ( -6%) Target Period: 12 months REDUCE

May 16, 2019 Subdued performance; growth a concern… Amara Raja Batteries (ARBL) reported a muted set of Q4FY19 numbers. Revenues were at | 1,567 crore (down 0.9% YoY). EBITDA rose 14.9% YoY

to | 242 crore with attendant EBITDA margins at 15.5%, up 54 bps Particulars sequentially. ARBL enjoyed significant gross margin expansion on both YoY (353 bps) and QoQ basis (203 bps), mitigated by an increase in employee Particular Amount costs & other expenses. Consequent reported PAT rose 8.7% YoY to | 119 Market Capitalization | 10761 Crore Total Debt (FY19P) (| crore) 46.8 crore. ARBL declared a final dividend of | 5.08/share for FY19. Cash & Investments (FY19P) (| crore) 72.0 EV (FY19P) | 10735.8 Crore

Result Update Result Replacement demand, benign lead prices to support! 52 week H/L (|) 908 / 610 Equity capital (| crore) 17.1 ARBL’s segment mix was at ~75% automotive and ~25% industrial. Face value (|) | 1 Replacement demand forms a lion’s share of automotive demand at ~70% while OEM demand makes up the rest. The auto OEM space has been Key Highlights witnessing muted demand since Diwali, thereby having a knock-on impact on ancillary players including battery makers. OEM demand is expected to  Revenue growth for Q4FY19 below expectations. FY19 revenue (up remain subdued in the next few quarters amid vast regulatory changes 12.1% YoY) impacted positively by (ABS, BS-VI) and general slowdown in consumer discretionary expenditure. by 2-W & 4-W replacement demand However, for battery manufacturers, the replacement market would and inverter segment while OEM continue to provide steady state demand, especially in view of robust OEM segment was a laggard sales seen during the past few years, thus driving revenue growth.  Steady replacement demand and benign lead prices to support future Concurrently, margins at battery players including ARBL would benefit from growth moderation in lead price (currently ~US$1850/tonne vs. Q4FY19 average ~US$2050/tonne). We build in ~7.3% CAGR in battery volumes and ~220  Termination of technology agreement with Johnson Controls bps improvement in EBITDA margins over FY19-21E. However, our topline increases uncertainty growth is pegged at 0.3% CAGR due to sharp 15%+ decline in lead prices.  Downgrade to REDUCE with revised target price of | 590 Technology agreement termination lends uncertainty! In April 2019, ARBL and erstwhile technology partner Johnson Controls (JC) ended their long standing agreements related to shareholding and technical Research Analyst

assistance & licensing consequent to JC’s exit from its global power Shashank Kanodia, CFA Research Equity Retail [email protected] solutions business. Also, 2% of JC’s stake was bought by the Galla family – with the resulting shareholding now at 28% (Galla Family) & 24% (JC). While Jaimin Desai ARBL has in the past assimilated all technology from JC, the agreement [email protected] termination raises concerns over future innovation at the company. Thus, it increases uncertainty in what is going to be disruptive times for battery makers, going forward, with increasing thrust on lithium ion adoption.

Valuation & Outlook Securities ICICI We expect sales, EBITDA and PAT to grow at -0.4%, 8.3% & 7.5% CAGR, respectively over FY19-21E. With the slowdown in the auto OEM space amid a decline in discretionary spend and muted growth prospects in the industrial domain (telecom space), we downgrade the stock to REDUCE with a revised target price of | 590 i.e. 18x P/E on FY21E EPS of | 32.7 /share.

Key Financial Summary

Key Financials FY17 FY18 FY19P FY20E FY21E CAGR (FY19P-21E) Net Sales 5,317.2 6,059.2 6,793.1 6,202.1 6,744.5 -0.4% EBITDA 849.9 883.2 951.8 1,016.2 1,115.4 8.3% EBITDA Margins (%) 16.0 14.6 14.0 16.4 16.5 Net Profit 478.5 471.3 483.5 511.8 559.2 7.5% EPS (|) 28.0 27.6 28.3 30.0 32.7 P/E 22.5 22.8 22.3 21.0 19.2 RoNW (%) 18.5 16.0 14.5 13.9 13.7 RoCE (%) 25.8 23.3 21.2 20.2 20.0

Source: ICICI Direct Research, Company Result Update | Amara Raja Batteries ICICI Direct Research

Exhibit 1: Variance Analysis Q4FY19 Q4Y19E Q4FY18 YoY (%) Q3FY19 QoQ (%) Comments Revenues for the quarter came in below our estimates Total Operating Income 1,567 1,715 1,581 -0.9 1,695 -7.5 primarily indicating some loss of volumes by the company vs. competition Raw Material Expenses 1,022 1,145 1,087 -6.0 1,139 -10.3 Employee Expenses 82 86 78 4.1 87 -5.9 Other Expenses 221 218 205 8.0 216 2.6 EBITDA 242 267 211 14.9 253 -4.2 Gross margin expansion on QoQ and YoY basis mitigated EBITDA Margin (%) 15.5 15.6 13.3 212 bps 14.9 54 bps by increase in both other expenses as well as employee costs Other Income 6 15 24 -73.3 13 -49.4 Depreciation 68 67 59 16.1 66 4.0 Depreciation came in on expected lines Interest 2 2 1 41.2 2 3.4 Tax 59 71 64 -8.7 67 -12.0 Lower than estimated topline resulted in PAT being lower- Reported PAT 119 142 110 8.7 131 -8.8 than-expected EPS (|) 7.0 8.3 6.4 8.7 7.7 -8.8 Key Metrics Sales (| crore) 1,567 1,715 1,581 -0.9 1,695 -7.5 RM cost (% to net sales) 65.2 66.7 68.7 -353 bps 67.2 -203 bps Gross margins expanded encouragingly 200 bps QoQ Lower sales leads to optically high employee costs as a Other expenses (% to net sales) 14.1 12.7 13.0 116 bps 12.7 140 bps percentage of sales Employee Expense (% to net sales) 5.2 5.0 5.0 25 bps 5.1 9 bps Source: Company, ICICI Direct Research Exhibit 2: Change in estimates FY20E FY21E (| Crore) Old New % Change Introduced Comments Revenues revised lower for FY20E, on account of slowing OEM sales in auto space Revenue 7,816 6,202 -20.6 6,744 and sharp decline in lead prices with consequent transmission of same to end customers (selectively). Introduce FY21E numbers EBITDA 1,109 1,016 -8.4 1,115 We expect gross margins to expand primarily tracking lower lead prices. Over FY19- EBITDA Margin (%) 14.2 16.4 220 bps 16.5 21E, we build in 250 bps expansion in EBITDA margins PAT 595 512 -14.0 559 Lower sales lead to downward revision in EPS estimates for FY20E. Introduce FY21E EPS (|) 34.8 30.0 -14.0 32.7 numbers Source: Company, ICICI Direct Research

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Financial story in charts

Exhibit 3: Topline trend 8,000 6,793 6,744 7,000 6,059 6,202 We expect sales to be largely flat over FY19-21E, 6,000 5,317 albeit supported by steady state replacement 4,618 demand. We build in battery volume CAGR of ~7%. 5,000 4211 However, it is dragged by a sharp decline in lead 4,000 3,437

(| crore) (| prices to the tune of ~15%+ 3,000 2,000 1,000 0 FY14 FY15 FY16 FY17 FY18 FY19P FY20E FY21E

Source: Company, ICICI Direct Research

Exhibit 4: Profitability trend

800 10.6 12 700 9.8 9.0 10 8.3 8.3 600 7.8 7.1 8 We factor in 7.5% PAT CAGR at ARBL over FY19-21E 500 to | 559 crore 400 6 300 4 200 2 100 411 492 478 471 483 512 559 0 0 FY15 FY16 FY17 FY18 FY19P FY20E FY21E

PAT (| crore) PAT margin (%) (RHS)

Source: Company, ICICI Direct Research

Exhibit 5: Return ratio profile

45.0 36.6

36.0 32.6 32.5 Return ratios trend on a decline tracking muted sales 27.0 25.8 23.3 21.2 20.0 and PAT growth. It is, however, still at comfortable

(%) 20.2 27.2 23.2 level of ~20% as RoCE 18.0 23.3 18.5 13.7 9.0 16.0 14.5 13.9

0.0 FY14 FY15 FY16 FY17 FY18 FY19P FY20E FY21E

RoCE RoNW

Source: Company, ICICI Direct Research

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Exhibit 6: Valuation Summary Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE (| cr) (%) (|) (%) (x) (x) (%) (%) FY17 5317.2 15.1 28.0 -2.7 22.5 12.5 18.5 25.8 FY18 6059.2 14.0 27.6 -1.5 22.8 12.0 16.0 23.3 FY19P 6793.1 12.1 28.3 2.6 22.3 11.0 14.5 21.2 FY20E 6202.1 -8.7 30.0 5.9 21.0 10.2 13.9 20.2 FY21E 6744.5 8.7 32.7 9.3 19.2 9.1 13.7 20.0

Source: Bloomberg, ICICI Direct Research

Exhibit 7: ARBL currently trading at 19.2x its two-year forward expected EPS 1400

1200

1000

800

(|) 600

400

200

0

Feb-10 Feb-12 Feb-15 Feb-17 Feb-11 Feb-13 Feb-14 Feb-16 Feb-18 Feb-19

Nov-09 Nov-11 Nov-14 Nov-16 Nov-10 Nov-12 Nov-13 Nov-15 Nov-17 Nov-18

Aug-11 Aug-13 Aug-16 Aug-18 Aug-09 Aug-10 Aug-12 Aug-14 Aug-15 Aug-17

May-10 May-13 May-15 May-16 May-18 May-09 May-11 May-12 May-14 May-17 May-19 Price 40x 34x 29x 23x 18x 12x 7x

Source: Reuters, ICICI Direct Research

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Exhibit 8: Recommendation history vs. consensus 1,200 100.0

1,000 80.0 800 60.0

(|) 600 (%) 40.0 400

200 20.0

0 0.0 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Aug-17 Nov-17 Feb-18 May-18 Aug-18 Nov-18 Feb-19 May-19

Price Idirect target Consensus Target Mean % Consensus with BUY

Source: Reuters, ICICI Direct Research

Exhibit 9: Top 10 shareholders Rank Name Latest Filing Date % O/S Position (m) Change (m) 1 Johnson Controls Mauritius Pvt. Ltd. 31-Mar-19 26.0 44.4 0.00 2 RNGalla Family Pvt. Ltd. 31-Mar-19 24.2 41.4 0.00 3 Nalanda Capital Pte Ltd 31-Mar-19 7.8 13.3 1.52 4 Capital Research Global Investors 31-Dec-18 1.9 3.3 0.20 5 Amara Raja Group 31-Mar-19 1.8 3.1 0.00 6 UTI Asset Management Co. Ltd. 30-Sep-18 1.8 3.0 1.13 7 Wasatch Advisors, Inc. 31-Mar-19 1.6 2.8 0.02 8 Kotak Mahindra Asset Management Company Ltd. 31-Mar-19 1.0 1.7 0.59 9 Franklin Templeton Asset Management (India) Pvt. Ltd. 31-Mar-19 1.0 1.7 -0.67 10 Reliance Nippon Life Asset Management Limited 31-Mar-19 0.8 1.4 0.20 Source: Reuters, ICICI Direct Research

Exhibit 10: Recent activity Buys Sells Investor name Value ($ mn) Shares (mn) Investor name Value ($ mn) Shares (mn) Nalanda Capital Pte Ltd 15.86 1.52 Franklin Templeton Asset Management (India) Pvt. Ltd. -6.98 -0.67 Kotak Mahindra Asset Management Company Ltd. 6.09 0.59 Fidelity Management & Research (Hong Kong) Limited -3.68 -0.35 Reliance Nippon Life Asset Management Limited 2.05 0.20 Investec Asset Management Ltd. -2.70 -0.27 Capital Research Global Investors 2.09 0.20 Newton Investment Management Ltd. -1.63 -0.16 IDFC Asset Management Company Private Limited 0.87 0.08 Axis Asset Management Company Limited -1.03 -0.10 Source: Reuters, ICICI Direct Research

Exhibit 11: Shareholding pattern (in %) Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Promoter 52.1 52.1 52.1 52.1 52.1 FII 19.0 20.3 20.4 20.7 19.4 DII 11.0 10.0 9.4 9.2 10.3 Others 18.0 17.7 18.1 18.1 18.2 Source: Company, ICICI Direct Research

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Financial Summary

Exhibit 12: Profit and loss statement | crore Exhibit 13: Cash flow statement | crore (Year-end March) FY18 FY19P FY20E FY21E (Year-end March) FY18 FY19P FY20E FY21E Total operating Income 6,059 6,793 6,202 6,744 Profit after Tax 471.3 483.5 511.8 559.2 Growth (%) 14.0 12.1 -8.7 8.7 Add: Depreciation 230.3 261.2 285.3 317.0 Raw Material Expenses 4,116.3 4,644.1 3,995.1 4,347.6 (Inc)/dec in Current Assets -565.8 -106.3 72.1 -180.2 Employee Expenses 309.0 345.2 384.5 438.4 Inc/(dec) in CL and Provisions 233.4 -90.5 -29.5 76.4 Other Expenses 750.7 852.0 806.3 843.1 CF from operating activities 369.3 547.9 839.7 772.4 Total Operating Expenditure 5,175.9 5,841.4 5,185.9 5,629.1 (Inc)/dec in Investments 0.0 0.0 0.0 0.0 EBITDA 883.2 951.8 1,016.2 1,115.4 (Inc)/dec in Fixed Assets -427.6 -460.5 -450.0 -450.0 Growth (%) 3.9 7.8 6.8 9.8 Others 23.3 -37.1 136.3 -31.1 Depreciation 230.3 261.2 285.3 317.0 CF from investing activities (291.3) (491.6) (658.3) (592.3) Interest 5.1 7.0 4.7 4.7 Issue/(Buy back) of Equity 0.0 0.0 0.0 0.0 Exceptional Items 0.0 0.0 0.0 0.0 Inc/(dec) in loan funds 0.0 0.0 0.0 0.0 PBT 714.2 730.4 769.6 840.9 Dividend paid & dividend tax -85.3 -145.6 -154.2 -168.6 Total Tax 242.9 246.9 257.8 281.7 CF from financing activities (137.5) (95.8) (154.2) (168.6) PAT 471.3 483.5 511.8 559.2 Net Cash flow -59.6 -39.6 27.1 11.4 Growth (%) -1.5 2.6 5.9 9.3 Opening Cash 170.9 111.3 71.7 98.9 EPS (|) 27.6 28.3 30.0 32.7 Closing Cash 111.3 71.7 98.9 110.3 Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

Exhibit 14: Balance Sheet | crore Exhibit 15: Key ratios (Year-end March) FY18 FY19P FY20E FY21E (Year-end March) FY18 FY19P FY20E FY21E Liabilities Per share data (|) Equity Capital 17.1 17.1 17.1 17.1 EPS 27.6 28.3 30.0 32.7 Reserve and Surplus 2,920.3 3,318.2 3,675.8 4,066.3 Cash EPS 41.1 43.6 46.7 51.3 Total Shareholders funds 2,937.4 3,335.3 3,692.9 4,083.4 BV 172.0 195.3 216.2 239.1 Total Debt 58.4 46.8 46.8 46.8 DPS 4.2 7.1 7.5 8.2 Deferred Tax Liability 87.8 95.9 87.6 95.2 Cash Per Share 10.8 17.2 15.7 17.1 Total Liabilities 3,175.6 3,593.4 3,942.7 4,340.9 Operating Ratios (%) Assets EBITDA Margin 14.6 14.0 16.4 16.5 Gross Block 2,249.0 2,621.2 3,185.9 3,635.9 PBT / Net sales 10.8 10.2 11.8 11.8 Less: Acc Depreciation 550.9 812.1 1,097.4 1,414.4 PAT Margin 7.8 7.1 8.3 8.3 Net Block 1,698.2 1,809.1 2,088.5 2,221.5 Inventory days 63.2 57.0 60.0 60.0 Capital WIP 226.4 314.7 200.0 200.0 Debtor days 47.1 41.3 45.0 45.0 Total Fixed Assets 1,929.7 2,128.9 2,292.2 2,425.3 Creditor days 35.7 27.4 30.0 30.0 Investments 35.1 20.5 220.5 370.5 Return Ratios (%) Inventory 1,049.7 1,061.4 1,019.5 1,108.7 RoE 16.0 14.5 13.9 13.7 Debtors 782.5 768.6 764.6 831.5 RoCE 23.3 21.2 20.2 20.0 Loans and Advances 9.2 8.6 7.8 8.5 RoIC 23.9 22.7 22.3 22.7 Other Current Assets 65.0 184.4 293.4 267.9 Valuation Ratios (x) Cash 111.3 71.7 98.9 110.3 P/E 22.8 22.3 21.0 19.2 Total Current Assets 2,017.6 2,094.7 2,184.3 2,326.9 EV / EBITDA 12.0 11.0 10.2 9.1 Creditors 592.3 510.4 509.8 554.3 EV / Net Sales 1.8 1.5 1.7 1.5 Provisions 56.0 61.9 61.8 67.2 Market Cap / Sales 1.8 1.6 1.7 1.6 Other current liabilities 287.5 344.8 330.1 301.4 Price to Book Value 3.7 3.2 2.9 2.6 Total Current Liabilities 935.7 917.1 901.7 923.0 Solvency Ratios Net Current Assets 1,081.8 1,177.6 1,282.6 1,403.9 Debt/Equity 0.0 0.0 0.0 0.0 Other Non-Current Assets 74.7 66.8 144.2 144.2 Current Ratio 2.0 2.4 2.4 2.4 Application of Funds 3,175.6 3,593.4 3,942.7 4,340.9 Quick Ratio 1.0 1.2 1.2 1.2 Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

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Exhibit 16: ICICI Direct Research coverage universe (Auto & Auto Ancillary) Sector / Company CMP M Cap EPS (|) P/E (x) EV/EBITDA (x) RoCE (%) RoE (%) (|) TP(|) Rating (| Cr) FY18 FY19E FY20E FY18 FY19E FY20E FY18 FY19E FY20E FY18 FY19E FY20E FY18 FY19E FY20E Amara Raja (AMARAJ) 630 590 Reduce 10761 27.6 28.3 30.0 22.8 22.3 21.0 12.0 11.0 10.2 23.3 21.2 20.2 16.0 14.5 13.9 Apollo Tyre (APOTYR) 176 180 Hold 10088 12.7 11.9 15.3 14.9 15.8 12.3 7.5 7.5 7.3 7.8 8.2 8.0 7.4 8.3 8.2 Ashok Leyland (ASHLEY) 82 85 Hold 24119 5.3 6.4 7.8 15.4 12.9 10.6 7.3 6.6 5.0 28.1 28.2 31.9 21.9 23.2 24.3 Bajaj Auto (BAAUTO) 2940 2380 Hold 85078 140.6 149.7 167.2 17.8 16.7 14.9 11.9 11.3 9.3 22.9 21.1 21.7 21.5 20.3 20.2 Balkrishna Ind. (BALIND) 787 820 Hold 15215 38.2 42.5 49.8 21.1 18.9 16.2 14.2 11.6 9.5 22.4 21.0 22.4 18.1 21.0 22.4 Bharat Forge (BHAFOR) 448 535 Buy 32590 16.2 23.5 27.6 29.0 20.0 17.0 13.9 11.5 9.9 18.2 21.1 23.3 17.3 20.8 21.4 Bosch (MICO) 16930 17565 Hold 51672 449.1 545.6 622.9 40.4 33.2 29.1 25.1 22.4 18.9 14.4 14.9 15.2 21.4 22.2 22.6 Eicher Motors (EICMOT) 20146 19000 Hold 54918 718.9 808.1 912.5 26.1 23.2 20.5 16.8 16.6 14.3 39.1 32.5 29.6 29.9 24.8 22.8 Escorts (ESCORT) 555 600 Hold 6801 28.1 39.6 43.1 23.5 16.7 15.3 13.1 10.6 8.9 18.8 19.6 19.8 13.5 16.0 15.0 Exide Industries (EXIIND) 206 200 Reduce 17544 8.2 9.1 10.1 27.3 21.7 21.2 14.5 12.7 11.2 19.0 18.4 18.7 12.9 12.9 12.9 Hero Moto (HERHON) 2495 2700 Hold 49829 185.1 169.5 171.2 13.6 14.8 14.7 8.2 9.2 8.7 42.4 37.1 34.2 31.4 26.3 24.1 JK Tyre & Ind (JKIND) 79 82 Hold 1795 2.9 10.0 22.0 3.9 8.6 3.9 9.2 5.8 4.1 7.7 12.2 16.1 3.6 12.9 19.2 Mahindra CIE (MAHAUT) 215 275 Buy 8152 13.2 15.1 17.4 17.1 14.9 12.9 8.9 7.6 6.5 12.4 11.8 12.0 13.2 13.9 14.9 Maruti Suzuki (MARUTI) 6474 5815 Sell 195567 255.6 248.3 256.3 27.0 27.8 26.9 14.5 15.8 14.4 21.1 16.3 15.9 18.5 16.3 15.2 Motherson (MOTSUM) 118 125 Hold 37374 5.1 5.3 7.0 25.7 24.5 18.6 9.3 8.5 6.8 16.3 15.2 18.0 17.4 15.7 18.0 Tata Motors (TELCO) 175 145 Hold 51850 26.8 -83.4 16.6 5.6 NA 9.1 2.4 3.3 2.6 9.1 5.1 9.9 10.3 5.9 12.6 Wabco India (WABTVS) 6202 7000 Hold 11763 143.8 172.2 212.3 46.9 39.2 31.8 30.4 26.2 20.8 17.9 17.8 18.2 25.1 25.7 26.0 Source: Reuters, ICICI Direct Research

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RATING RATIONALE ICICI Direct endeavors to provide objective opinions and recommendations. ICICI Direct assigns ratings to its stocks according to their notional target price vs. current market price and then categorizes them as Buy, Hold, Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock

Buy: >15% Hold: -5% to 15%; Reduce: -15% to -5%; Sell: <-15%

Pankaj Pandey Head – Research [email protected]

ICICI Direct Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai – 400 093 [email protected]

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ANALYST CERTIFICATION

I/We, Shashank Kanodia, CFA, MBA (Capital Markets), and Jaimin Desai, CA, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.

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