Double digit growth on anvil, base valuations to prevail
About the stock: Amara Raja Energy & Mobility (AREM) 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, etc.).
• Approaching E-Mobility through a mix of EV chargers, captive Li-On cell manufacturing plant (16 GWh by FY32E) and stake in Log-9 materials
Q3FY24 Result Summary: Company reported healthy performance in Q3FY24. Net sales for the quarter came in at ₹ 2,881 crore, up 9% YoY. EBITDA in Q3FY24 came in at ₹ 410 crore with corresponding EBITDA margins at 14.2%, up 40 bps QoQ. PAT in Q3FY24 stood at ₹ 240 crore, up 7.5% YoY. In the automotive battery business, the company witnessed healthy growth from both domestic and exports as well as OEM and aftermarket segments. While the boom in telecom sector acted as the major driver for the industrial battery volumes which witnessed strong growth.
Investment Rationale
• Steady Lead Acid business, exports & aftermarket to cushion growth: Amara Raja is a prominent player in Lead acid business with sizeable presence across Automobile (~70%) & Industrial side (~30%). In automobile space it is present across OEM & aftermarket channel and is the leader in aftermarket space. It has on consistent basis reported better operating margins vs. its listed peer (last 10-year avg. EBITDA margins at Amara Raja stands at ~15% vs. its listed peer avg. of ~13%, a long-term outperformance of ~200 bps). Given the present population of vehicles and healthy OEM sales volumes over FY22-24 coupled its efforts to augment exports, we believe this segment is well poised to grow higher single digit going forward.
• Steadily increasing allocation to new energy space (Li-0n battery): The company has in the recent past has entered into MoU with Govt. of Telangana for setting up of Li-Ion Battery Gigafactory. The said facility is expected to have cell manufacturing capacity of up-to 16GwH & assembly capacity of up to 5 GWh with overall investment pegged at ~₹9,500 crores over next 10 years. In the first phase, it is setting up a Li-On cell plant of 2GwH capacity at capex outlay of ~₹ 1,200 crore with likely commissioning by FY26E. With capex under execution and plans for sizeable foray in the new energy space, long term prospects at Amara Raja are promising.
Rating and Target Price
• Introducing FY26E & rolling over our valuations, we now value Amara Raja at ₹1,200 i.e. 18x PE on FY26E, broadly in tandem with peer. We assign BUY rating on the stock. We are yet to ascribe any value to its efforts in the new energy space and await more meaningful developments in this domain
• Capital efficient business model, healthy net cash positive B/S & inexpensive valuations, act as good margin of safety to our investment call.
Click here to download IDirect Amara Raja Co Update April 24
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