Amara Raja: Valuations capture growth

Strong volume-led revenue growth expected, but high stock valuation premium captures the positives

The Amara Raja stock has seen an uptick since the start of the month, thanks to brokerage upgrades on expectations of strong revenue growth and margin improvement. Top-line growth is expected to come after expansions, while lower lead costs will boost margins.

Also, analysts have given it higher valuations than market leader Exide, given the company’s consistent and faster growth. For example, on the revenue growth front in the March quarter, while Amara Raja exhibited a growth of 20 per cent, Exide’s sales grew only two per cent.

However, Amara is trading at 21.8 times its FY17 estimates while Exide is at 15.6 times, with the premium being 39 per cent. Analysts say a premium of 20-22 per cent is justified. Amara’s stock price gain of six per cent since May and earnings upgrades, and Exide’s price fall of 17 per cent, as well as downgrades, have accentuated the difference.

Over a one-year period, while Amara Raja gained nearly 70 per cent, the Exide stock has been flat.

Analysts expect Amara Raja to post good volume growth for both its automotive and industrial segments, with the former contributing 50 per cent to overall revenues. Analysts at Spark Capital believe the capacity expansion undertaken by the firm has been timely and will enable Amara Raja to record a 20 per cent annual volume growth over FY15-17.

The company is also expected to benefit from the recovery in automotive volumes on the original equipment manufacturer (OEM) side and a fall in the share of the unorganised replacement market. Of the auto revenues, replacement accounts for 70 per cent, while OEM sales are 28 per cent. Margins, up 16.2 per cent in FY14 to 17.2 per cent in FY15, are expected to gain 25-50 basis points. In the industrial segment, the company has benefited from strong replacement demand from the telecom sector, due to rapid addition of towers. As the segment contributes about 20 per cent to revenue, higher competition (Exide entered the segment again in FY15 after exiting four years ago) and slowdown in demand after rapid roll-out of towers could impact the company. The other key risk, of course, is a price cut by Exide to gain market share impacting both companies.

While Amara Raja’s operational performance has trumped its larger competitor for some time now and the company is expected to post strong growth, the valuations are already factoring in these positives. Although 72 per cent of analysts tracking the stock have a buy rating, with a Bloomberg consensus target price of Rs 932, the upside is only about 10 per cent from the current levels. Long-term investors, though, could consider it on meaningful declines.