Amara Raja Batteries: Sell

Recommendation: Sell

Krishnan Thiagarajan

The company is a prominent player in the storage battery industry.

It has a major presence in the industrial battery segment and exposure to the telecom sector, in particular. It derives a major chunk of its revenues from the Department of Telecommunications (DoT).

Aided by the early-entrant advantage and the strong growth in demand particularly from the DoT, the company managed to post a strong growth in performance until 1997-98. However, the entry of Exide Industries into the industrial battery arena has altered the competitive dynamics in the industry. This, coupled with the dry-up in demand, has affected the performance of Amara Raja in the last couple of years.

For the year-ended March 2000, the company's turnover fell 29 per cent to Rs 132.08 crore and post-tax earnings 55 per cent to Rs 19.53 crores. On the equity base of Rs 10.27 crore, the per share earnings works out to Rs 19.

Even this fiscal, the company's performance has not improved significantly. For the six months ended September 2000, the turnover rose 25 per cent to Rs 5.98 crore while the post-tax fell 6 per cent to Rs 8.29 crore. The mounting competitive pressure coupled with the sluggishness in offtake of industrial batteries appears to have affected the company's performance.

In a recent move, Amara Raja has ventured into the automotive battery segment. Backed by the technical support from its American partner -- Johnsons Control -- the company turned aggressive in the replacement market of the automotive battery segment. This move is a positive development as the realisation and profitability is higher in the replacement market of the automotive battery industry.

However, taking into account the intense competition in the segment from the likes of Exide Industries and Tudor India, among others, Amara Raja would find continued pressure on profitability. Even if the company manages to make some headway in the automotive battery segment, the initial heavy expenses towards advertisement and promotional outgo, coupled with the recent firm trend in the price of lead (the key input), would inhibit any significant improvement in profitability or post-tax earnings.

In this backdrop and the recent spurt in the share price, shareholders of Amara Raja Batteries could book profit and contemplate re-entry on the evidence of a pick-up in the offtake of automotive batteries.