All charged up

Updated: Apr 29 2007, 07:48am hrs
Battery manufacturers are excited by the growth seen in the telecom and automobile industry. With the continuous increase of telecom subscribers in urban areas and faster penetration in the rural areas, the domestic market could see consistent growth in telecom battery supplies. On the other hand, growth in the sale of vehicles in the automobile industry has slowed a little because of the rise in consumer loan interest rates.

Business
Amara Raja Batteries, manufactures industrial and automotive batteries in India. It has a technical collaboration with Johnson Controls Inc, USA, a global market leader in automotive systems and building controls. The company sells the batteries in high growth sectors like telecom and automotive. The automotive batteries are sold under the brand name Amara. The industrial batteries are sold under the brand Power Stack and Power Plus. It supplies batteries to all the major automobile companies in India. The company has also started manufacturing UPS batteries under the brand name Quanta. It is the leading player in industrial VRLA (value regulated lead acid) batteries. Amara Raja is a supplier to telecom companies like BSNL, Bharti, Hutch and Idea. In case of the automotive segment, it has original equipment manufacturer agreements with companies like General Motors, Hyundai Motor, and Maruti. They have also started supplying batteries for Tata Motors successful mini truck, ACE.

Export is an area where the company has seen major growth. Exports have grown from Rs 14.56 crore in FY04-05 to Rs 31.05 crore in FY05-06 showing a growth of 113.04%. It exports to APAC countries, Africa and the Middle East.

A major concern for the company is the raw material cost. Lead is a major raw material in batteries. Lead constitutes around 70% of the raw material cost. The price of lead has seen an increase of 43.50% from $1008 mt in February 2005 to $1448 mt in February 2006. On the other hand, the company's average purchase price of lead and lead alloy in the FY06-07 was Rs 55.10 per kg. On April 2, 2007, the price of lead went up to Rs 80.96 per kg ($1= Rs 42), jump of around 47% in the prices. However, in FY05-06 the effect of the rise in the prices was nullified by continuous improvement in operational efficiency and focused efforts in controlling costs.

On Expansion drive
The company has continuously been expanding its capacity from 0.725 million units in FY2001-02 to 2.6 million units in FY2005-06. In FY2005-06, the installed capacity was running at 82%. Further, to fulfill demand the company expanded its capacity to 3.6 million units in the previous financial year.

In the same period, the company also announced two investment plans. The first was an investment to increase the automotive battery capacity from 3.6 million units to 5.4 million units. For this capacity, the company will invest Rs 88.2 crore. The expansion is expected to complete by the second quarter of FY07-08. The second was a plan to set up a 5.4 million units facility at Tirupati to manufacture two wheeler and small VRLA batteries. The proposed investment will be Rs 113.4 crore spread over three years.

Financials
The company performed well in the third quarter of FY06-07. Sales grew from Rs 97.77 crore to Rs 146.26 crore at 49.6%. Net profit grew from Rs 6.87 crore to Rs 9.68 crore at 40.9% for the same period.

The company's sales, operating profit and net profit have grown at a CAGR of 30.60% 57.60% and 157.89% respectively from FY03-04 to FY05-06. Their operating and net profit margins are also showing very good improvement. In 2003-04, the operating margin was at 7.75% and 15.61% in the last nine months of FY 2006-07. Net profit margins for the same period were at 7.90%.

The company was debt free from FY2002-03 to FY2004-05. But, in FY2005-06, the company took a term loan for its expansion plans.

The interest costs have gone up from Rs 0.14 crore to Rs 1.34 crore because of an increase in the working capital and new fixed term loan.

Valuation
On an annualised basis the company's fully diluted earning per share is at Rs 37.23. At the current market price, the annualised P/E multiple stands at 10.10 times, which is lower than its peers like HBL Power Systems (19.24), Exide Industries (23.43) and Nippo Batteries (21.04).

Increase in the international price of lead can affect profitability adversely. Higher interest rates on working capital loans can affect profitability as when the company goes for fresh loans to fund its expansion plans.

The author does not hold any sharesin the company.