Stock pick of the week: Stock pick of the week: Why analysts are bullish on Amara Raja Batteries


Stocks of auto component companies such as Amara Raja have fallen due to poor auto sales in the recent past.

Besides sectoral headwinds, the company’s second quarter performance was also weak, contributing to the fall in its stock price.

Though Amara Raja’s revenue rose 23% year-on-year, its net profit fell 6% due to the increase in raw material prices.

However, analysts feel that this sub-par performance is just a temporary blip and Amara Raja’s long-term prospects continue to be bright. There are several reasons for their optimism.

Analysts views
Buy: 16

Sell: 3

Hold: 2

First, the domestic auto demand is expected to pick up once again due to the recent fall in petrol and diesel prices. Even otherwise, the auto segment slowdown has not impacted Amara Raja as much as other auto component makers because its strength is more in the replacement market where the company enjoys 30% market share.

To increase its market share further, Amara Raja is looking to boost its capacity by around 50% in the 4-wheeler battery segment and 75% in 2-wheeler battery segment in few years. The company is likely to acquire a market share of 40% in the battery replacement business and 30% in original equipment manufacturer business (currently, 24%).

Though the introduction of electric vehicles in India has been slow, it is expected to gain speed in the coming years. This will provide tremendous opportunities for battery players like Amara Raja. The Indian battery segment is effectively a duopoly now and Amara Raja is fast reducing the gap with the market leader, Exide Industries.

In fact, Amara Raja is already a market leader in segments like telecom (48% market share) and UPS (32% market share). Though the company’s domestic telecom segment continues to be under stress, it could see some recovery because of higher exports to South-East Asia and West Asian countries. Due to Amara Raja’s aggressive growth, it is also expected to excel in exploiting upcoming opportunities in the storage of solar and wind power.

Margin pressure, mostly triggered by the rally in commodity prices, has been the main problem for Amara Raja. Margins are expected to improve from the second half of 2018-19 because of the fall in lead prices, steps taken to improve cost efficiency, and price hikes by the company. Increased capacity and the resultant improvement in operational efficiency will also result in margin improvement for Amara Raja. Since a majority of the capacity expansion has happened, the company’s free cash flow generation is also expected to improve in the coming years.

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Amara Raja compared with Sensex and ET Auto-ancillaries Index. Stock price and index values normalised to a base of 100. Source: ETIG & Bloomberg


Selection Methodology
We pick the stock that has shown the maximum increase in ‘consensus analyst rating’ in the past one month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search is restricted to stocks that are covered by at least 10 analysts. You can see similar consensus analyst rating changes during the past week in the ETW 50 table.



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