Finance Update

Johnson Controls’ exit shakes Amara Raja stock; what should investors do?

Last Updated : Apr 04, 2019 11:42 AM IST | Source: Moneycontrol.com






The stock declined sharply on April 3 after it informed bourses that Amara Raja Batteries has terminated shareholders agreement between Galla Family and Johnson Controls













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Amara Raja Batteries has been on sellers’ radar for some time now. The stock is down by nearly 10 percent so far in 2019, and nearly 17 percent in the last one year.

The stock declined sharply on April 3 after it informed bourses that Amara Raja Batteries has terminated shareholders agreement between Galla Family and Johnson Controls (JC) and other agreements entered by the Company with JC.

“Galla Family would acquire 2 percent equity shares of the company from JC and terminate the shareholders’ agreement with effect from April 1, 2019,” the company said in a BSE filing.

The announcement of the exit has created uncertainty in the short term for investors, but brokerages remain mixed. Edelweiss Securities downgraded the stock while Morgan Stanley maintained its overweight stance.

“Johnson Controls’ 24 percent stake in Amara Raja Batteries will go to Brookfield (asset management company) that bought Johnson Controls (JC) global battery business. The stake purchase by financial investor creates uncertainty on technology as the previous owner Johnson Control used to provide cutting edge technology to Amara Raja that led to its outperformance,” Sharekhan said in a note.

“The development is negative as this creates technological uncertainty. The stock has already reacted negatively on April 3,” it said.

Going slightly back into history, Amara Raja entered into a technical assistance agreement with JC in 1997. Since then it has fully absorbed all critical technologies over the years, including the one pertaining to Power Frame Technology licence agreement signed in September 2018.

However, JC announced in November 2018 the sale of its Power Solution business to Brookfield Business Partners.

The Galla family has now reached an agreement with JC to acquire 2 percent of AMRJ, potentially reducing JC’s shareholding to 24 percent and opening up the opportunity for another strategic buyer to enter without triggering the open offer clause of SEBI.

“[The termination of agreement] creates uncertainty over future technology development at AMRJ, i.e. whether it would find a new technical partner or charge up its in-house capabilities. We remain positive on the sector at large given it is a duopoly, auto replacement cycle is improving and lead prices are favourable,” Edelweiss Securities said in a report.

That said, factoring in the uncertainty over Amara Raja future technical capabilities, Edelweiss has revised down its PE to 20x Q1 FY21E (from 22x; Exide: 22x Q1 FY21E) downgrading the stock to “HOLD” with a revised target price of Rs 687.

Another brokerage firm, Morgan Stanley maintained its overweight call on Amara Raja with a target price of Rs 1,065.

Morgan Stanley is of the view that Amara Raja stake going to Brookfield will ease investor concern, and any further sell-down by Brookfield would not likely be any time soon. The new investor would likely look to create value first before exiting, it said.

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.


First Published on Apr 4, 2019 11:42 am
















































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Prakash Poojary
Business Analyst

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