We haven’t talked a lot about Amar Raja Batteries from the long time and many investors have asked us for our views on it after recently it had almost fallen down around 30% from its 52 week high.

We always advise investors to invest in the good quality business and keep a track of its business quality. Here is the quality rating for this business from the last 10 years:

2015 2014 2013 2012 2011 2010 2009 2008 2007 2006
A1 A2 A1 A1 A2 A1 A2 A3 B3 B1

 

Amar Raja Batteries have a very stable investment quality ratings and convinces everyone to invest within. But same time it is also important to invest below its intrinsic value as your returns are determined by what you have paid to acquire that business.

Good quality business bought at expensive price will give you low returns. Before talking about valuations let us look at the business and try to understand its prospects. They are in the business where they supply batteries to automobile businesses and give power solutions to telecom industry for their towers.

There is a very short supply of power in India at the moment and will continue for next 2-3 years until reforms are made in power generation by the government of India and overall automobile sector is looking for a growth of about 10% in its volume for the next 5 years. These assumptions make Amar Raja’s business in great demand.

The cost of raw material had fallen down but depreciation of rupee had impacted its top line recently because as per their industrial contract they pass on those savings to their customer. Well, this is only a short term pain and these contracts are in relation to their industrial sector which represents 40% of their total revenues.

The automobile business is on the edge to revive and that will also help Amar Raja to grow its top line business for the next 2 -3 years. After talking to Amar Raja customers and also with the management we had come to our opinion that this business will keep gaining market share and profits will keep growing for the next 5 years.

A good business is the one which generates enough cash to take care of all their expenses and also to pay dividends and to upgrade or add their manufacturing units. Amar Raja has a good track record where most of the time it managed to fund its growth within its profits.

Talking about other analysts and their expectations, there are 23 analysts who expects its revenues to grow by 14% for this financial year and 21% for the 2017. They also expect its earnings per share to be Rs 29.50 for this financial year and also Rs 37.50 for the 2017.

We calculated its intrinsic value for the year 2015 as Rs 335 per share. If we punch the earnings what analysts are expecting then we should expect its intrinsic value around Rs 400 and Rs 540 for the year 2017. Looking at the history of how intrinsic value has climbed, we have noticed that intrinsic values have gone up 35% every year. If they keep climbing at the same speed than we expect Rs 610 as its intrinsic value for the year 2017.

Expecting intrinsic value in range of Rs 540- 610 for the year 2017, Amar Raja at Rs 875 looks very expensive and it is trading at almost 2018 valuations.

Important thing to understand here is that it is not necessary that price of Amar Raja to fall down as it is expensive today. In other words the probability of share price to climb up is far less than going down.

Aziz Dodhiya is the fund manager for the Valueoperations funds.