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Margins powered by volumes growth; price cuts in 2W aftermarket
* Volumes were up ~7% YoY, but price pass-through (5-6%) restricted revenue growth to just 2% YoY (INR18.2b v/s our estimate of INR17.4b). 4W battery volumes increased 5% YoY, driven by growth of 10-11% YoY in aftermarket and 22% YoY in exports, partly offset by an 18% YoY decline in OEM volumes. 2W volumes were up 6-7% YoY, driven by 20% YoY growth in aftermarket, despite 25-28% YoY decline OEM volumes. Inverter volumes were flat YoY. Industrial volumes increased 11% YoY, driven by 25% YoY growth in UPS, despite 8-9% YoY decline in telecom battery volumes.
* Operating leverage drives margins: Lead prices were lower by 10-12% YoY. Operating leverage and change in lease accounting (20-25bp benefit) drove EBITDA margin expansion of ~300bp YoY (stable QoQ) to 15.4% (our estimate: 15.1%). Implementation of AS116 (lease accounting) resulted in higher depreciation (by ~INR40m) and interest cost (by ~INR10m). Adj. PAT increased ~25% YoY (+18% QoQ) to INR1.4b (our estimate: INR1.3b).
* Takeaways from management interaction:
(a) AMRJ recently reacted to the 5- 6% price cut in the 2W replacement market by EXID. Also, the warranty period was increased by six months across auto segments.
(b) Realized lead price was at INR141-143k/ton (v/s INR154k in 4QFY19).
(c) Capex guidance of INR4-4.5b for ongoing capacity expansion in 2W batteries (by 3m units to 17m units), 4W batteries (by ~2m units to 14.5m) and implementation of punch-grid technology.
(d) AMRJ would be launching e-rickshaw batteries by 3QFY20.
* Valuation and view: We expect replacement market growth to remain strong for organized players. This, coupled with some stability in telecom segment volumes and soft lead prices, is likely to support margins. With the exit of Johnson Control, promoters are expected to play a pivotal role in the long-term strategy and technology sourcing. We estimate revenue/EBITDA/PAT CAGR of 7%/11%/10% over FY19-21. The stock trades at 19.9x/17.7x FY20/21E EPS. Maintain Buy with a target price of INR715 (20x Jun’21E EPS).
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