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Strong growth in replacement continues, margins stabilizing
Amara Raja Batteries (AMRJ) reported an in-line 1QFY20 with 2% yoy sales growth. Strong double-digit volume growth in 4W/2W replacement was offset by a sharp reduction in OEM volumes due to slowdown. EBITDA margins at 15.4% (53bps ahead of EE) expanded 300bps yoy (remained flattish qoq), surprised positively in a seasonally weak quarter for the company’s margins. In an overreaction, the stock came under pressure last week due to a 5% price cut taken by AMRJ and EXID in the 2W replacement market; we feel stock should recover as 2W replacement contributes 8-9% of sales and AMRJ has no plans of taking a price cut in 4Ws. We pare FY20/21E EPS by 1%/3% due to a cut in OEM volumes; we also trim our target P/E from 22 to 21x due to sector de-rating, but retain LONG with a Sep’20 TP of Rs 737 (vs. a Jun’20 TP of Rs 757 earlier).
Lithium ion batteries — critical to enter 2Ws, which would see fastest penetration:
Due to government initiatives, low daily running and limited use by most owners for long distance travel, 2Ws will see the fastest adoption of electric drivetrains. With government subsidy only available on lithium ion battery-driven electric 2Ws, it is important for AMRJ to enter the space through some technology tie-up. The company’s FY19 Annual Report mentions the setting up of a pilot plant for assembly of lithium ion battery packs for 2W/3W applications. Most 4Ws launched globally so far have had a lead-acid battery for SLI applications, and hence the threat is not so imminent in 4Ws.
Stock overreacts from surprise price cut in 2W aftermarket:
Last week saw a sharp negative reaction in stocks of both AMRJ and EXID due to a surprise ~5% price cut taken from July in the 2W segment. However, as the 4W segment has already seen warranty increases from January, a price cut is unlikely in the 4W segment. The 2W aftermarket contributes 8-9% of total sales; therefore, the price cut is likely to have an impact of ~50bps.
OEM slowdown negates growth in 4W/2W replacements & UPS; margin delivery strong:
4W/2W replacement volumes grew 10%+/15%+ as the replacement market remained strong; however, OEMs saw declines of ~15%/20% in these segments. UPS volumes grew 20%+ off last year’s low base, while telecom volumes declined ~5%. Employee costs included Rs 30mn of one-off related to retirement benefits. Despite this, the company reported EBITDA margins of 15.4%, surprising positively in seasonally weak quarter.
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