Amara Raja Batteries

This is an exciting story which I've come across, both on forums, and found it in my stock screens too.

Here's a nice analysis of this business. I'm fairly confident that this business has a growing moat that can keep the profits growing for next 5-10 years.

Here I perform my own analysis of fair value:

1. The business has a 3y average EBIT of Rs 15.5 / share. Based on debt capacity bargain criteria of 1.75X debt capacity, or EV/EBIDTA of 7 or lesser, certainly the stock is expensive. This way, the fair value using 3y average is Rs 108, and using current EBIT (since the company is growing fast), it is Rs 152.

Note that I've ignored cash and investment and dividend to offset debt on the books.

2. The PEG for the company is certainly less than 1. In fact, at P/E of 16, it is still trading less than 20%+ growth rate in profits, and a significant re-rating is possible given the valuation multiples of Exide are much higher.

3. The current price of Rs 230 / share is all right - its fairly valued, and given strengths of business, and growing moat, it can sustain revised valuations of about 15X P/E or even higher.

However, the following are the risks:

1. If EXIDE falters and its downward rating happens, Amara Raja may not be able to sustain higher valuations and can come down (I really wish that happens)

2. If economy weakens further, demand may dampen and this poses risk to topline growth.

3. The management addresses the risks in AR, but seems a little too optimistic about being able to handle them. Specifically, they say the following:

a. They've reached a large base and it is difficult to continue growing fast
b. Even then, they want to double their topline in next 3-4 years!

Certainly, this is a little too optimistic, and will have to be funded through debt. So, there's a risk to reduced EBIT and hence PEG may go more than 1 very soon. This could pose risk to downside in stock price if macro economics remains bad for months and years to come.

In essence, I see a risk that stock price has run up quite fast, and chances are that price may not go much higher, if bad things happen. Hence, best case scenario is that it'll continue to grow and rerating continues and stock can easily move up to 300+ very soon from today's level of 240

But the bear case tells us that stock is fully pricing all positives at current price, and there's little to zero margin of safety right now.

Hence, I'll not take major position until it comes down to Rs 200 or below. In fact, I'll only take large positions if it drops below Rs 175

However, to make sure I don't miss out best case scenario and then repent for not having bought a spectacular business, I'll do the following:

1. Keep accumulating on dips up to a maximum of 4% of my portfolio.
2. When it crashes below Rs 175, slowly catch it to accumulate up to 10% of my portfolio.

Patience is going to be the key here. However, certainly it looks a great business, at fair price, and hence I'll start putting my bets, slowly and carefully, and wish markets start falling :-)