4QFY2013 Result Update | Auto Ancillary

May 16, 2013

Amara Raja Batteries

Performance Highlights
Y/E March (` cr) Net Sales EBITDA EBITDA Margin (%) Adj. PAT 4QFY13 804 112 13.9 59 4QFY12 673 95 14.1 58 % chg (yoy) 19.4 17.5 (22)bp 1.9 3QFY13 761 122 16.0 81 % chg (qoq) 5.7 (8.1) (209)bp (26.6)

BUY
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Net Debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Auto Ancillary 4,237 (340) 0.5 328/134 54,226 1.0 20,247 6,170 AMAR.BO AMRJ@IN

`248 `285
12 Months

Report Title

Source: Company, Angel Research

For 4QFY2013, Amara Raja Batteries (AMRJ) posted lower-than-expected results on the bottom-line front despite a strong growth in the top-line. The performance was impacted due to operating margin pressures (due to increase in lead prices and higher share of traded goods) and also on account of higher depreciation and tax expense. AMRJ has announced an ambitious capital expenditure plan of `760cr to ease the capacity constraints across the product segments that it is facing currently. We expect the company to sustain its growth momentum going ahead, led by widening reach, strong product offerings and increasing capacity. While we broadly maintain our revenue estimates for FY2014/15, we revise our earnings estimates downwards slightly by 6.7%/6.4% to factor in the cost pressures going ahead. We maintain our Buy rating on the stock. Poor 4QFY2013 performance: For 4QFY2013, the top-line posted a robust growth of 19.4% yoy (5.7% qoq) to `804cr, broadly in-line with our estimates. We believe this was driven by a strong volume growth in the four-wheeler and two-wheeler replacement battery segments. The industrial battery segment too registered a strong revenue growth largely on account of the replacement demand in the telecom battery segment. The EBITDA margins deteriorated by 209bp on a sequential basis to 13.9%, against our expectations of 14.5%, due to increase in lead prices leading to a 272bp increase in raw-material expenditure as a percentage of sales. Additionally, higher contribution of traded goods (due to capacity constraints) which garners lower margins also impacted the performance. Led by a weak operating performance, impairment charge of `8cr and an additional depreciation expense of `5cr, net profit declined 26.6% qoq to `59cr, which was lower than our estimates of `76cr. Outlook and valuation: Due to the strong operating performance over the last few quarters, AMRJ has narrowed the valuation gap to the market leader, Exide from 35-40% to ~10% currently (one year forward basis). We expect the company to sustain its performance going ahead and estimate it to post a revenue and net profit CAGR of ~15% and ~10% over FY201315E respectively, aided by sustained growth in the automotive and industrial battery volumes. The stock has corrected ~15% after the lower-than-expected 4QFY2013 results. At `248, AMRJ is trading at 12.2x FY2015E earnings. We maintain our Buy rating on the stock with a target price of `285.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 52.1 18.5 15.8 13.6

Abs. (%) Sensex AMRJ

3m 4.0 (14.8)

1yr 26.3 77.5

3yr 19.1 195.0

Key financials (Standalone)

Y/E March (` cr) Net Sales % chg Net Profit % chg EBITDA (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

FY2012 2,367 34.4 218 47.2 14.5 12.8 19.7 5.1 29.7 34.6 1.7 12.0

FY2013E 2,961 25.1 296 35.8 15.2 16.8 14.8 4.0 31.4 35.9 1.3 8.6

FY2014E 3,418 15.4 316 6.7 14.5 18.5 13.4 3.2 26.6 29.4 1.3 8.7

FY2015E 3,892 13.9 348 10.2 14.5 20.4 12.2 2.6 23.8 26.0 1.0 7.2

Yaresh Kothari
022-3935 7800 Ext: 6844 yareshb.kothari@angelbroking.com

Please refer to important disclosures at the end of this report

Amara Raja Batteries | 4QFY2013 Result Update

Exhibit 1: Quarterly financial performance (Standalone)

Y/E March (` cr) Net Sales Consumption of RM (% of Sales) Purchases of TG (% of Sales) Employee expense (% of Sales) Other Expenses (% of Sales) Total Expenditure Operating Profit OPM (%) Interest Depreciation Other Income PBT (excl. Extr. Items) Extr. Income/(Expense) PBT (incl. Extr. Items) (% of Sales) Provision for Taxation (% of PBT) Reported PAT Adj PAT Adj. PATM Equity capital (cr) Reported EPS (`) Adjusted EPS (`)
Source: Company, Angel Research

4QFY13 804 447 55.6 106 13.2 35 4.4 104 12.9 692 112 13.9 0 27 7 92 0 92 11.5 33 35.4 60 59 7.4 17.1 3.5 3.5

4QFY12 673 401 59.6 43 6.4 24 3.6 109 16.2 578 95 14.1 0 12 4 87 0 87 12.9 28 32.7 58 58 8.7 17.1 3.4 3.4

% chg (yoy) 19.4 11.4 144.5 45.1 (5.0) 19.7 17.5 149.7 118.7 91.3 6.2 6.4 15.1 2.3 1.9

3QFY13 761 449 59.0 54 7.1 32 4.2 104 13.7 639 122 16.0 0 13 7 116 0 116 15.2 35 30.0 81 81 10.6 17.1

% chg (qoq) 5.7 (0.4) (5.7) 96.9 86.3 10.1 4.2 (0.6) (5.9) 8.3 (8.1) 155.6 102.3 0.6 (20.4) (20.2) (24.5) (5.8) 18.0 (26.3) (26.6) (30.5) 0.0 (26.3) (26.6)

FY2013 2,981 1,732 58.1 263 8.8 127 4.2 388 13.0 2,510 471 15.8 1 66 27 431 (9) 422 14.1 135 32.0 287 296 9.9 17.1 16.8 17.3

FY2012 2,381 1,523 64.0 84 3.5 100 4.2 318 13.3 2,025 356 15.0 2 46 12 319 319 13.4 104 32.5 215 215 9.0 17.1 12.6 12.6

% chg (yoy) 25.2 13.7 213.4 26.3 22.2 24.0 32.3 (59.2) 42.2 133.5 35.3 32.4 30.4 33.3 37.6

2.3 1.9

4.7 4.7

33.3 37.6

Better-than-expected growth in top-line: For 4QFY2013, top-line posted a robust growth of 19.4% yoy (5.7% qoq) to `804cr, broadly in-line with our estimates. We believe this was driven by a strong volume growth in the four-wheeler and two-wheeler replacement battery segments. The industrial battery segment too registered a strong revenue growth largely on account of the replacement demand in the telecom battery segment. However, depressed demand from original equipment manufacturers (OEMs) and capacity constraints for four-wheeler batteries restricted further growth in the top-line. The company is planning to incur a capital expenditure of `760cr towards capacity expansion as it is facing capacity constraints across its product segments. AMRJ expects to increase large valve-regulated lead-acid (VRLA), medium VRLA, two-wheeler and four-wheeler battery capacities over the next 12-18 months. The company is expanding its four-wheeler battery manufacturing capacity at the Chittoor plant from 5.6mn units to 8.25mn units. The two-wheeler battery capacity would be enhanced to 8.4mn from the current 4.8mn units. The company is also expanding its medium VRLA battery capacity from 1.8mn units to 3mn units and expanding large VRLA capacity to 900mnAH.

May 16, 2013

Amara Raja Batteries | 4QFY2013 Result Update

Exhibit 2: Strong top-line growth of 19.4% yoy

(` cr) 900 Net sales (LHS) 43.2 yoy growth (RHS)

800
700

44.1 34.4
32.2

600
500

27.9

24.0
19.4

400
300

15.7
501

17.5

525

562

613

673

694

719

761

4QFY11

1QFY12

2QFY12

3QFY12

4QFY12

1QFY13

2QFY13

3QFY13

Source: Company, Angel Research

EBITDA margins under pressure: On the operating front, EBITDA margins contracted by 209bp on a sequential basis to 13.9%, against our expectations of 14.5%, due to increase in lead prices leading to a 272bp increase in raw-material expenditure as a percentage of sales. Additionally, higher contribution of traded goods due to capacity constraints also impacted the performance. The operating margins declined despite the ~4% price hike taken by the company in February 2013. On a yoy basis, margins declined by only 22bp as the impact of higher raw-material costs was mitigated by the decline in other expenditure. While the purchase of traded goods jumped 144.5% yoy (96.9% qoq) to `106cr; other expenditure declined by 5% yoy (flat qoq) during the quarter. While the cost pressures in the form of higher distribution expenses, higher power and fuel costs and increasing marketing spends should continue going ahead; we believe the impact would be limited given that lead prices have softened over the last one month. Further ~8% price hike over the last six months should also provide some relief to the company.

Exhibit 3: Average lead price trend

(US $/tonne) 5,000 4,000 Lead inventory (RHS) Lead prices (LHS) (tonne)

Exhibit 4: EBITDA margin declines on cost pressures

450,000 400,000 350,000 300,000
250,000 200,000 150,000 100,000 50,000 0 (%) 80.0 70.0 EBITDA margin 67.3 70.3 66.9 66.4 66.1 Raw-material cost/sales 66.7 65.7 66.1 68.8

60.0
50.0 40.0

3,000
2,000

30.0
20.0 10.0 14.2 12.9

15.7

17.3

14.1

17.2

16.4

16.0

4QFY13
13.9
3QFY13
4QFY13

1,000
0

0.0
4QFY11 1QFY12 2QFY12 4QFY12 1QFY13 2QFY13
3QFY12

Mar-07

Mar-08

Mar-09

Mar-11

Mar-12

Source: Company, Angel Research

Mar-13

Mar-10

Apr-06

Source: Company, Angel Research

May 16, 2013

804

200 100

(%) 50.0 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0

Amara Raja Batteries | 4QFY2013 Result Update

Lower-than-expected growth in adjusted net profit: Led by a weak operating performance, impairment charge of `8cr and an additional depreciation expense of `5cr, net profit declined 26.6% qoq to `59cr, which was lower than our estimates of `76cr.

Exhibit 5: Adjusted net profit ahead of estimates

(` cr) 90 80 70 60 50 40 30 20 8.2 Net profit (LHS) 10.7 9.2 Net profit margin (RHS) 11.1 11.0 10.6 (%) 12.0 10.0 7.4 8.0

8.7

7.4

6.0
4.0

52

66

76

79

81

41

39

58

59 4QFY13

10

2.0
0.0

2QFY12

3QFY12

1QFY13

2QFY13

Source: Company, Angel Research

May 16, 2013

3QFY13

4QFY11

1QFY12

4QFY12

Amara Raja Batteries | 4QFY2013 Result Update

Investment arguments
AMRJ is Indias second-largest manufacturer of lead batteries, with a market share of ~28%. US based Johnson Controls is a joint venture partner of AMRJ and holds a 26% equity stake in the company. The automotive and industrial battery segments accounted ~50% each to the total revenues in FY2013. We expect the automotive battery market to post an 15-18% CAGR in sales over FY201315E, led by healthy growth in replacement demand, an 8-10% CAGR in new vehicle sales and shrinking market share of unorganized players. Thus, during FY201315E, we expect AMRJs automotive battery segment to post an ~15% revenue CAGR. Also, with a strong focus on strengthening its distribution network, we expect AMRJ to increase its market share going ahead. AMRJ pioneered the use of maintenance-free batteries with a presence in the railway signaling, telecom, power and supply solutions segments. Going forward, we expect the power backup (home UPS) segment to drive demand for industrial batteries, leading to a ~13% revenue CAGR in AMRJs industrial battery segment over FY201315E.

Outlook and valuation

We expect the company to sustain its growth momentum going ahead, led by widening reach, strong product offerings and increasing capacity. While we broadly maintain our revenue estimates for FY2014/15, we revise our earnings estimates downwards slightly by 6.7%/6.4% to factor in the cost pressures going ahead. We expect the company to post a revenue and net profit CAGR of ~15% and ~10% over FY201315E respectively, aided by sustained growth in the automotive and industrial battery volumes.

Exhibit 6: Change in estimates

Y/E March Net Sales (` cr) OPM (%) EPS (`)
Source: Company, Angel Research

Earlier Estimates 3,418 15.1 338 3,892 14.9 371

Revised Estimates 3,418 14.5 316 3,892 14.5 348

% chg 0.0 (61)bp (6.7) 0.0 (43)bp (6.4)

FY2014E FY2015E FY2014E FY2015E FY2014E FY2015E

Due to the strong operating performance over the last few quarters, AMRJ has narrowed the valuation gap to the market leader, Exide from 35-40% to ~10% currently (one year forward basis). The stock has corrected by 15% after the lower-than-expected 4QFY2013 results. At `248, AMRJ is trading at 12.2x FY2015E earnings. We maintain our Buy rating on the stock with a target price of `285, valuing the stock at 14x FY2015E earnings.

May 16, 2013

Amara Raja Batteries | 4QFY2013 Result Update

Exhibit 7: Angel vs consensus forecast

Angel estimates FY14E Net sales (` cr) EPS (`) 3,418 18.5 FY15E 3,892 20.4 Consensus FY14E 3,500 19.6 FY15E 4,155 22.9 Variation (%) FY14E (2.3) (5.7) FY15E (6.3) (11.1)

Source: Company, Angel Research

Exhibit 8: One-year forward P/E band

(`) 400
350 300 CMP (`) 5x 10x 15x 20x

Exhibit 9: AMRJ P/E Premium/Discount to Exide

(%) 40.0 20.0 0.0 prem./ disc. to Exide Five-yr average Prem/Disc

250
200 150 100 50

(20.0) (40.0)
(60.0) (80.0) (100.0)

Jul-06

Jul-09

Dec-02

Mar-08

Nov-03

Nov-09

Aug-11

Source: Company, Angel Research

May-13

Source: Company, Angel Research

Exhibit 10: Auto Ancillary Recommendation summary

Company Amara Raja Batteries Automotive Axle Bharat Forge* Bosch India# Exide Industries FAG Bearings Subros
# ^

Reco. Buy Neutral Neutral Neutral Accumulate Neutral Neutral Accumulate

CMP (`) 248 268 233 8,989 142 1,402 213 26

Tgt. price (`) 285 150 30

#

Upside (%) 15.0 5.7 14.0

P/E (x) FY14E 13.4 15.5 16.0 24.1 18.1 15.9 17.0 4.8
^

EV/EBITDA (x) FY14E 8.7 6.0 6.7 15.1 10.0 9.3 7.7 3.7 FY15E 7.2 4.5 5.8 12.5 8.3 7.2 6.7 3.1 12.2 9.9 13.4 20.5 15.5 12.8 14.4 3.5

RoE (%) FY14E 26.6 9.5 13.6 18.0 18.1 15.5 27.5 11.1 FY15E 23.8 14.0 14.7 17.9 18.2 16.5 25.8 13.7

FY13-15E EPS CAGR (%) 8.4 (4.7) 18.6 19.9 21.8 6.9 23.0 49.0

FY15E

Motherson Sumi*

Source: Company, Angel Research; Note: * Consolidated results;

December year end;

September year end

Company background
Amara Raja Batteries, a JV between Galla family and Johnson Controls, US, is India's second largest manufacturer in the organized valve-regulated lead-acid (VRLA) batteries market, finding applications in the automotive (~50% of total revenue) and industrial (~50% of total revenue) segments. AMRJ has a market share of 26% in four-wheeler OEMs, 19% in four-wheeler replacement and 25% in two-wheeler replacement battery markets. The company also commands dominant market shares of 46% and 32% in the telecom and UPS battery segments respectively. AMRJ derives ~45% and ~35% of its industrial segment's revenue from the telecom and UPS battery segments respectively.

May 16, 2013

May-13

0
Jun-06 Apr-01 Apr-07 Jan-09 Feb-02 Sep-04 Oct-10 Jul-05
Jul-12

Jan-05

Jan-08

Jan-11

Nov-11

Aug-12

Apr-04

Apr-07

Oct-08

Oct-05

Apr-10

Amara Raja Batteries | 4QFY2013 Result Update

Profit and loss statement (Standalone)

Y/E March (` cr) Total operating income % chg Total expenditure Net raw material costs Other mfg costs Employee expenses Other EBITDA % chg (% of total op. income) Depreciation & amortization EBIT % chg (% of total op. income) Interest and other charges Other income Recurring PBT Extraordinary expense PBT (reported) Tax (% of PBT) PAT (reported) ADJ. PAT % chg (% of total op. income) Basic EPS (`) Adj. EPS (`) % chg FY2010 FY2011 FY2012 FY2013E FY2014E FY2015E 1,464 11.5 1,176 880 61 62 173 288 70.4 19.7 43 246 82.3 16.8 8 17 255 8 255 88 34.4 167 159 97.7 10.9 9.8 9.3 97.7 1,761 20.3 1,504 1,158 86 88 171 257 (10.8) 14.6 42 216 (12.2) 12.2 3 8 220 220 72 32.8 148 148 (6.9) 8.4 8.7 8.7 (6.9) 2,367 34.4 2,025 1,607 92 100 225 342 33.1 14.5 46 296 37.2 12.5 2 28 322 322 104 32.2 218 218 47.2 9.2 12.8 12.8 47.2 2,961 25.1 2,510 1,995 115 127 273 452 31.8 15.2 66 385 30.2 13.0 1 47 431 9 422 135 32.0 287 296 35.8 10.0 16.8 17.3 35.8 3,418 15.4 2,924 2,293 137 157 337 494 9.5 14.5 81 413 7.2 12.1 8 52 457 457 142 31.0 316 316 6.7 9.2 18.5 18.5 6.7 3,892 13.9 3,327 2,611 156 182 378 565 14.2 14.5 109 456 10.3 11.7 12 60 504 504 156 31.0 348 348 10.2 8.9 20.4 20.4 10.2

May 16, 2013

Amara Raja Batteries | 4QFY2013 Result Update

Balance sheet statement (Standalone)

Y/E March (` cr) SOURCES OF FUNDS Equity share capital Reserves & surplus Shareholders Funds Total loans Deferred tax liability Other long term liabilities Long term provisions Total Liabilities APPLICATION OF FUNDS Gross block Less: Acc. depreciation Net Block Capital work-in-progress Investments Long term loans and advances Other noncurrent assets Current assets Cash Loans & advances Other Current liabilities Net current assets Total Assets 491 185 306 23 16 631 62 109 460 319 312 656 539 224 315 38 16 15 732 45 97 590 349 383 767 621 267 355 32 16 12 937 229 121 586 407 530 944 750 333 417 45 16 35 1,257 411 173 674 566 690 1,204 1,410 414 996 85 21 35 1,079 143 205 731 607 472 1,610 1,528 522 1,006 92 25 35 1,409 376 233 799 669 740 1,898 17 527 544 91 22 656 17 629 646 90 20 10 767 17 806 823 84 22 15 944 17 1,043 1,060 87 20 38 1,204 17 1,299 1,316 237 20 38 1,610 17 1,587 1,604 237 20 38 1,898 FY2010 FY2011 FY2012 FY2013E FY2014E FY2015E

May 16, 2013

Amara Raja Batteries | 4QFY2013 Result Update

Cash flow statement (Standalone)

Y/E March (` cr) Profit before tax Depreciation Change in working capital Others Other income Direct taxes paid Cash Flow from Operations (Inc.)/Dec. in fixed assets (Inc.)/Dec. in investments Other income Cash Flow from Investing Issue of equity Inc./(Dec.) in loans Dividend paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in cash Opening Cash balances Closing Cash balances FY2010 FY2011 FY2012 FY2013E FY2014E FY2015E 255 43 38 (17) (17) (88) 214 (47) 31 17 1 (195) 8 (36) (223) (8) 70 62 220 42 (83) (13) (8) (72) 86 (63) 0 8 (55) (1) 29 (77) (49) (17) 62 45 322 46 38 29 (28) (104) 304 (76) 0 28 (49) (0) (6) 46 (111) (71) 184 45 229 422 66 21 6 (47) (135) 333 (142) 0 47 (95) 3 60 (56) 181 229 411 457 81 (49) (52) (142) 295 (700) (5) 52 (653) 150 60 90 (268) 411 143 504 109 (35) (60) (156) 361 (125) (4) 60 (69) 0 60 (60) 233 143 376

May 16, 2013

Amara Raja Batteries | 4QFY2013 Result Update

Key ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage (EBIT / Int.) 0.0 0.0 31.0 0.0 0.1 70.5 (0.2) (0.5) 121.0 (0.3) (0.8) 386.1 0.1 0.1 51.0 (0.1) (0.3) 38.5 3.2 47 56 35 65 3.4 52 57 38 61 4.1 43 48 31 49 4.3 34 43 32 36 3.2 33 43 36 32 2.6 31 43 35 32 35.9 42.5 33.5 30.3 30.6 24.9 34.6 41.9 29.7 35.9 49.6 31.4 29.4 28.6 26.6 26.0 30.5 23.8 16.8 0.7 2.5 27.5 2.8 0.3 34.9 12.2 0.7 2.7 22.6 2.3 0.1 23.9 12.5 0.7 3.4 28.6 1.9 (0.2) 23.6 13.0 0.7 4.0 35.5 0.8 (0.6) 14.7 12.1 0.7 3.1 25.7 3.5 (0.1) 22.7 11.7 0.7 2.6 21.4 3.5 (0.0) 20.6 9.8 9.3 11.8 1.5 31.8 8.7 8.7 11.1 2.3 37.8 12.6 12.8 15.3 1.9 48.2 16.8 17.3 20.7 3.0 62.0 18.5 18.5 23.2 3.0 77.0 20.4 20.4 26.7 3.0 93.9 25.4 21.0 7.8 0.6 2.9 14.7 6.5 28.6 22.3 6.6 0.9 2.4 16.6 5.6 19.7 16.2 5.1 0.8 1.7 12.0 4.3 14.8 12.0 4.0 1.2 1.3 8.6 3.2 13.4 10.7 3.2 1.2 1.3 8.7 2.7 12.2 9.3 2.6 1.2 1.0 7.2 2.1 FY2010 FY2011 FY2012 FY2013E FY2014E FY2015E

May 16, 2013

10

Amara Raja Batteries | 4QFY2013 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Amara Raja Batteries No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to -15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

May 16, 2013

11