Amara Raj is in value zone with attractive risk reward. Buy for target price of Rs 900 (27% upside)

In value zone, attractive risk reward at play…

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.).

• Geographical mix as of FY23: Domestic ~88%, Export ~12%

• 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

Investment Rationale:

• Steady state Lead Acid business, exports & aftermarket to cushion growth: Amara Raja is a prominent player in the Lead acid business with sizeable presence across Automobile (~70% of sales) as well as Industrial side (~30% of sales). In the automobile space it is present across the OEM as well as aftermarket channel and is the leader in aftermarket space. Consequently, it has on consistent basis has reported better operating margins vs. its listed peer (last 10-year average EBITDA margins at Amara Raja stands at ~15% vs. its listed peer average of ~13%, a long-term outperformance of ~200 bps). Given the growing impetus on EV transition the growth prospects of this business is at risk. However, given the present population of vehicles as well as healthy OEM sales volumes post Covid (FY22-24) coupled with company’s 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 lagged competition in terms of commitment and actions towards the new energy space i.e., Li-On battery domain and hence the underperformance in stock price. However, in the recent past it has made a big announcement wherein it 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 a capex outlay of ~₹ 1,200 crore and operational in next 2-3 years. With capex under execution and plans for sizeable foray in the new energy space, long term prospects at AREM are promising.

Rating and Target Price

• With steady growth prospects in base business, increasing focus in new energy domain, merger of related businesses at fair value, healthy net cash positive B/S & inexpensive valuations, we have a positive view on the stock

• We assign BUY rating to Amara Raja Energy & Mobility with a target price of ₹ 900, thereby valuing it at 17x PE on combined PAT on FY25E basis.