Stock Pick: Amara Raja Batteries (ARBL)

1	Describe the business in a few sentences. What does the company do? Who are its primary customers?
	Amara Raja Batteries is a lead acid battery manufacturer. They own the popular Amaron brand. They produce automobile and industrial batteries. They supply to almost all major auto companies (4 wheeler & 2 wheeler) and telecom companies.
2	Is the sector that the company is in growing? i.e. Is there a headwind or a tailwind present?
	The sector is growing and is likely to continue its growth trajectory. Industrial batteries will be required for both new and replacement demand for a larger installed base of UPS & power backup users (Hospitals, Offices, Telecom towers etc). Similarly, demand for automotive batteries will continue as the replacement demand will continue to be robust. Dieselisation of cars will also drive towards more powerful batteries and Amaron is better placed inthis regard than its primary competitor and market leader Exide.
3	What is the current market share of the company? Can the market share be increased?
	OEM 4 Wheeler = 26% 2 Wheeler  = 0% (Just getting started, so good growth expected in this segment) Replacement 4 Wheeler = 34%
4	Who are the primary competitors? Why is this company a better investment than them?
	The market is an effective duopoly between Exide and ARBL with Exide being the market leader. ARBL, being the smaller company, has been able to grow much faster compared to Exide. In addition, ARBL has much better return ratios (RoE = 29% vs 16% of Exide). Exide’s PE is 29 at CMP of 153 ARBL’s PE is 15 at CMP of 221 Historical data: ARBL Compounded Sales Growth 10 Years: 33.68% 5 Years: 31.48% 3 Years: 20.96% Compounded Profit Growth 10 Years: 46.64% 5 Years: 34.64% 3 Years: 23.03% Return on Equity 10 Years: 27.82% 5 Years: 29.36% 3 Years: 29.91% Exide Compounded Sales Growth 10 Years: 21.62% 5 Years: 19.71% 3 Years: 10.81% Compounded Profit Growth 10 Years: 25.43% 5 Years: 24.63% 3 Years: 16.46% Return on Equity 10 Years: 25.63% 5 Years: 26.15% 3 Years: 25.50%
5	What is the owners’ and managements’ stake in the company?
	The company is a JV between the Bhalla’s and Johnson Controls (world’s leading battery company). Both the entities own 26% each in the company. Jayadev Galla, the MD, is also interested in getting into politics and there was a news that he was to contest polls on a Congress ticket. His mother is a minister in the AP government. This may be a problematic area for the company. The MD delving into electoral politics may not find sufficient time to devote in growing the company's business.
6	Are management's salaries too high?
	Management salaries including profit commissions are extremely high. Between the father-son duo of the Galla’s they take nearly 28 cr (FY12).

1	How much debt is there in the balance sheet? Is it increasing, decreasing or remaining constant?
	Practically debt-free. Most of the debt is working capital. For most of the last 10 years, debt level has been very low. Between 2006-07 to 2008-09 debt was relatively higher but has since reduced significantly.
2	Is the debt level normal for the sector the company is operating in (i.e. how much is the debt-equity ratio of its nearest competitors)?
	Exide has zero debt as well. This is a good cash flow generating business.
3	Is the Networth rising over the years?
	Networth has gone up significantly over the last 10 years. It has moved up from 175 cr in 2003 to 823 cr in 2012, growing 18.77% CAGR.
4	Has the company increased its sale, net profit, operating margins and net margins over the years?
	Yes. OPM has been around 15% and NPM around 8-9%.
5	Has the company increased it RoE, RoCE, (RoA for financial companies) over the years or atleast maintained it? How does it compare to its competitors?
	It has maintained RoE, RoCE at healthy levels and is better than Exide.
6	Has the EPS growth over the years kept pace with sales/profit growth? (Impact of dilution)
	No dilution. The stock has split from a FV of 10 to 2 in 2007. And from FV of 2 to 1 in 2012. The company has given a 1:2 bonus in 2008.
7	Is the company operating cashflow positive? Is the operating – investment cashflow positive? Is the company net free cashflow positive? Is the Operating cash flow higher than earnings per share?
	Strong cashflows.
8	Does the company pay tax, dividends every year?
	Company pays tax at the rate of around 30% Dividend payout ratio is 17% Dividend Yield: 0.85%
9	Is the Free Cash Flow per share higher than dividends paid?
	Much higher.
10	Is the business capital intensive?
	Business is not capital intensive. Company does not need to add debt and has strong cash flows.

	Valuations
1	What is the expected valuation?
	FY13E EPS = 16 FY14E EPS = 20 Expected PE of 15~18 would give a price range of 300-360 in 1.5 yrs (Upside of 35%-60%).
2	Is the PE ratio below 15?
	PE is 15.
3	Why do you think the stock is under priced? Is there an expectation to double the investment in 2-3 year timeframe? If not, why bother?
	Being a duopoly and strong growth expected on the back of replacement demand, a 25%+ growth cannot be ruled out for the next 3 years. In addition, there is a possibility of re-rating to somewhere close to 18-20.
4	What has been the share price over the last 5 years? Has it matched the profit growth? If not, why not? Does the market know something I don’t?
	Over a 5 year period stock has returned 373% vs 8.63% of the Sensex

	Risks
1	What will happen if the interest rates go up (or down)?
	No impact
2	What will happen if there is cheap import (from China or somewhere else)?
	Very difficult to import and create a retail presence. So, no problems on this  front.
3	Is the Sensex/Nifty PE above 22 (broader market overheating)
	Sensex PE is around 17 and P/B is 3.13. Not very overvalued but it has run up in the near past.

Recommendation: Long term investors can add ARBL to their portfolios at the CMP and add more on dips or on periodic basis.

Disclosure: I am invested in ARBL and am likely to increase my exposure in the future. Please do your own due diligence before investing.