Amara Raja Batteries: Buy

Bulk of the growth in the industrial batteries division is expected from telecom and UPS battery segments.

The stock of Amara Raja Batteries (ARB) has shown resilience during market turbulences in the past. The stock managed to rally despite the steep correction in January this year to reach its 52-week high of Rs 275 in February. However, a 16 per cent decline in net profits(despite a strong growth in sales) due to foreign exchange losses in the first quarter coupled with broader market volatility has seen the stock dip to new lows recently.

The current market price of Rs 101 is an attractive entry point for investors with a long-term perspective. At this price, the stock trades at a P/E of about 10 times its annualised per share earnings of FY-09 (annualised June quarter earnings). The company’s growing market share, capacity expansions, successful entry into the two-wheeler batteries segment and plans to cater to demand for battery powered cars buttress our buy recommendation.

Lead accounts for 70 per cent of the raw material used by ARB. Rising lead prices during a major part of FY 2008 had taken a toll on the margins. Lead prices appear to have stabilised currently but declining inventories and lower exports from China may again keep prices on the higher side. Like Exide, the market leader, ARB has been able to pass on the increase to its customers periodically. But Exide may score over ARB in shielding itself from volatilities in lead prices as it has acquired two smelting companies from where it would partly source lead over the next three years to save on raw material costs.

Source: Hindu Business Line