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Amara Raja’s margins miss estimates

LiveMint logoLiveMint 28-05-2014 R. Sree Ram

For a change, Amara Raja Batteries Ltd’s financial performance failed to meet analysts’ expectations. The battery maker reported a 10% growth in sales, driven by the replacement market. Aided by a wide product offering, replacement sales volumes grew in double digits. Sales to original equipment manufacturers (OEM) are more or less flat. But strong brand pull meant that the company gained market share in both aftermarket and OEM business segments.

The healthy sales, though, are eclipsed by lower-than-expected operating performance. Margins and operating profits grew slowly as the company dragged its feet in passing on the rise in input costs.

Cost of materials as a percentage of sales increased 3.6 percentage points to 62% from the year-ago period. Employee and other expenses grew in the range of 10-17%. The company raised prices of industrial batteries.

But a sharp rise in expenses weighed on margin expansion. Against the expectations of a 2.5 percentage point expansion in margins, the company was able to increase its margins by only 1.58 percentage points to 15.5%. Compared with the December quarter, they are lower by about 1.9 percentage points. Hence, operating profit grew at a slower than expected pace of 23%. Net profit at `80 crore is also lower than analysts’ expectations of `85-92 crore.

Overall, the miss on margins came as a negative surprise. The stock slumped 2.15% after it released its earnings on Wednesday. While the management is wary about escalating costs, it is confident about delivering double-digit growth rate in sales and profit in the current fiscal year.

Sales will continue to be driven by replacement demand, both in the automobiles and industrial battery segments, according to Dolat Capital Market Pvt. Ltd. The replacement market may be holding the fort for the company.

What investors need to keep an eye on is margins. A continued drop can lower the stock’s appeal. As Nirmal Bang Institutional Equities points out, Amara Raja’s stock has seen a “strong re-rating over the past almost two years, driven by consistent and sustained outperformance vis-à-vis peer and market leader Exide Industries Ltd.” The major drivers of the re-rating were gains in market share and superior margins.

Amara Raja continues to maintain the competitive advantages. Its operating margin is still higher than Exide. But Exide is also showing signs of revival. Its March quarter performance is better than analysts’ expectations although one quarter does not make a trend. Improving performance by the competition, however, means Amara Raja will need to deliver more than sales growth for its stock to continue gains on valuation multiples.

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