Predicting the future of any industry can be a challenging concept. However looking at the automobile market, and the directions of vehicle giants like Nissan, Tesla, Mercedes Benz and Audi, alongside the falling fossil fuel resources, the future of the car market seems to be in electric vehicles. Amara Raja batteries is the second largest seller of automotive brands in India, and is well known through its brand Amaron. In terms of the electric vehicle boom world-wide, the company has started the production of battery charging stations alongside a newly developed 500 MWH Lithium Ion battery specifically designed for an electric auto fleet launched in Tirupati, India. The company spends around Rs 13 crore or R&D each year, which by the company's standards is not very large, however is rising with its profits. The company stems from humble beginnings, started in 1985, by Ramachandra Naidu Galla. With a passion for exploring, the chairman has ensured that most production facilities remain in rural parts of India, giving the locals employment.
Over the past year the company's stock price has stagnated after the decision of Amara Raja's parent company, Johnson Controls decided to sell its power management business globally. This required it to exit its existing stake in Amara Raja.
Like most of the companies we cover on this blog, Amara Raja holds a very strong balance sheet. Looking at the liabilities section, there is very little growth in the company's debts, which themselves are only a fraction of the market capitalization of the firm. The company holds a book value of Rs 195 which is not too high in comparison to the price because in the battery industry, assets such as customer satisfaction and product quality cannot be added to the balance sheet. However looking at the liabilities and current assets alone, it can be said that Amara Raja, will most likely not face a crisis or liquidity crunch during this ongoing economic crisis.
Looking at the company's profit and loss account, there is a clear and sustainable growth in both net profit and revenue. With a 5.6% CAGR growth in income and 14.6% CAGR growth in revenue it is clear that the growth story of this stock has not yet disappeared. The stark difference in revenue growth and profit growth is due to the fluctuation of raw material prices such as lithium and nickel. Currently the firm trades at PE of 14, which although is relatively low, could be lower looking at the bleak future demand for batteries.
As seen the nickel price were seen in 2016, subsequent to the low raw-material prices during the FY 2016, and a high profit margin
Currently, around 26% of the company is owned by its promoters. After the exit of Johnson Controls, there was a subsequent increase public shareholding. 30% of the holding comes from institutional investors while the rest is owned by the public.
To conclude, I do not believe that the Amara Raja Battery business is a great one to invest in right now. Although they have a healthy balance sheet and income statement, firstly it will see a short-run fall in demand and secondly, due to its de-merger it is important to see the new effect on its sales. Hence, since this is a good, honest and growth driven company, it may be a good idea to keep this in your watch list, and buy once the company is in a more stable position.