I am currently in the process of looking for new ideas and have shortlisted a few. I have done some preliminary analysis and these ideas have made through the initial filters. However, these ideas need deeper analysis to make a final buy decision. I am discussing one such idea in this post – Amara raja batteries
Amara raja Batteries
The company is the no.2 batteries manufacturer in india and supplier to the industrial, automotive and telecom sectors. The company also has a strong presence in the after market with the amaron product range.
The company has grown its topline at 25%+ per annum and its net profit 20% per annum. This growth has not been a smooth upward trend. The company had a drop in profitability during the 2003 to 2005 time period. The company has managed to pay off most of the debt it acquired for adding capacity and now has a debt equity ratio of around 0.1
The company has maintained a return on capital in excess of 20% in the last 5 years, however the period from 2000-2005 was a period of poor returns due to lower margins and requires more investigation on the causes of the poor performance. The asset turns of the company has improved steadily from 2000 onwards.
The company has been expanding its retail distribution and is also expanding its relationship with various OEMs. The company is focusing on expanding its relationship with 2 wheeler OEMs now.
The company has done well over the years and provided good returns to the shareholders. The company has provided almost 36% annual return over the last 10 years, excluding dividends. This return has come partly through PE expansion during the period (from 4 to around 10 now) and the rest through an eightfold increase in the net profits.
In summary, the company is atleast worthy of a more detailed analysis.
I have exited all my holdings in the IT industry. I have had positions in Infosys, patni and NIIT tech at various points of time. I have exited these companies mainly for valuation reasons. I personally feel that the risk reward for IT companies is not attractive at currently valuations.
If the prices were to drop to 2008 levels (when midcaps were selling for 2-3 times earnings), I will not hestitate in creating new positions again.