Amar Raja backward integrates by acquiring plastic component business from promoter entity

What's Buzzing 

In a regulatory exchange filing, Amar Raja Batteries has informed exchanges about demerging plastic component for battery business of Mangal Industries (MIL) (unlisted promoter entity) and merging it into Amar Raja Batteries (ARBL) (listed entity) for a swap ratio of 65 equity shares of ARBL for every 74 equity shares of MIL. Total ARBL shares to be issued to promoters for acquiring this business is pegged at 1.22 crore shares (acquisition value = 1.22*485 (CMP) = Rs 592 crore). Resultant promoter holding in ARBL will increase from 28.1% to 32.9%.

Context

The plastic component for battery business at MIL has a capacity of ~37,000 MTPA and has three manufacturing units. It currently generates ~Rs 570 crore of revenue (FY22, ~39% of MIL's topline) with EBITDA pegged at Rs 98 crore (EBITDA margins at 17%) and PAT at Rs 57 crore (PAT margins at 10%) with ARBL being the sole customer. The consequent valuation at which it is being acquired is derived as ~1x P/S, ~10x P/E and ~7x EV/EBITDA and is expected to be EPS and margin accretive from the first year itself. The company also informed about Rs 5-6 crore of post-tax saving (synergies) due to this backward integration.

Our Perspective

ARBL is a part of the duopolistic organised Indian lead acid battery market with a strong presence across automotive (OEM, aftermarket) and industrial battery space (UPS, telecom, solar, etc). It derives ~87% revenues from domestic market and rest 13% from exports. Its cumulative battery capacity across eight plants in India as of FY22 is pegged at 1.62 crore units for 4-W, 2.91 crore units for 2- W and 2 billion AH for industrial battery. MIL’s plastic component for battery business includes manufacturing plastic containers, covers, jars and handles, which constitutes ~10% of raw material costs for ARBL and is core to its operations. We view this transaction as fair from the minority shareholder's perspective as it is executed at inexpensive valuations and expect it to contribute positively to ARBL's financials, going forward. The transaction is slated to be completed over the next 12-14 months i.e. sometime in FY24E. This is a non-cash transaction with swap shares being issued against the assets acquired. However, over the long term, given the technology transformation in the automobile space in terms of electrification and consequent opportunity for Li-On batteries and limited growth potential for the lead-acid battery space, the company is yet to commit a big capex. We believe this will cap the upside potential for its stock price and is a precursor to ARBL being considered for any fresh portfolio inclusion.