Network expansions by telecom service providers and the move to share infrastructure could result in increased demand for batteries, which support telecom tower and exchange infrastructure.
Bulk of the growth in the industrial batteries division is expected from telecom and UPS battery segments.
Parvatha Vardhini C
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.Telecom and UPS demand buoyant
ARB has about 26 per cent market share in the industrial batteries business. Bulk of the growth in this division is expected from the telecom and UPS battery segments.
Network expansions by telecom service providers and the move to share infrastructure could result in increased demand for batteries, which support telecom tower and exchange infrastructure. This year, the company will introduce Front-Access Terminal (FAT) back-up batteries for telecom players to be used at their base stations. Compared to the 2-volt cells currently used, FAT batteries (used the world over), carry the advantage of convenience and cost-efficiency.
UPS battery sales are likely to be propelled by growth in the IT and ITES industry, which requires back-up power, as well as demand from households and offices due to the continued power shortage situation.
To cater to the demand, ARB is expanding the capacity of both large VRLA (valve regulated lead-acid) batteries and smaller batteries used in telecom and UPS applications respectively. A further investment of Rs 52 crore is to be made this year.Two-wheeler batteries
In May, the company launched the 'Amaron Pro Bike Rider' battery for two-wheelers, with technology from its US- based collaborator, Johnson Controls. With this launch, ARB expects to cash in on the shift in demand to higher-end, premium bikes and other two-wheelers based on 'self-start' mechanism for which battery technology would be crucial. While the company has a combined capacity of one million units for manufacturing two-wheeler and small VRLA batteries for UPS, it expects to scale it up to 3.2 million units by 2010.
This plant is also designed to produce batteries that power electric motor cycles for which considerable demand is expected in the coming years.Batteries for hybrids
Given the increasing thrust on alternatives to petrol and diesel, ARB is also foreseeing a demand for hybrids in India, which in turn need batteries. Partner Johnson Controls, through a joint venture with the French battery producer, Saft, has the technology for lithium ion batteries. Both companies are working on developing next-generation batteries that are lighter and reduce petrol consumption. ARB expects to have access to this technology based on which it will develop a product for the Indian OEMs (Original Equipment Manufacturers). Although this venture is still a few years away, it could prove to be lucrative in the long-term.Financials
For the quarter ended June 2009, sales grew by 46 per cent to Rs 314 crore year on year. An exchange loss of Rs 9 crore on foreign currency loans, however, dragged the net profits down by 16 per cent to about Rs 15 crore.Concerns
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