Towards a 'charged' future
We initiate on Amara Raja Batteries with an ADD rating. Currently, the company has a ~20% market share in the USD 5bn lead-acid battery (LAB) segment. We expect it to gain further share as revenues are forecasted to grow in double digits over the next 3-5 years (vs. mid-single-digit for the industry). While Amara Raja would benefit from the shift towards the organised segment in the near term, we believe that the advent of new technologies such as lithium-ion will change industry dynamics; though the pace of adoption is expected to be very gradual. Amara Raja’s future technology partnerships (after the exit of Johnson Controls) and its ability to foray into alternative battery chemistries will determine its growth opportunities in the long term.
* Organised segment to gain share: The share of unorganised players is high at 30-40%, particularly in the replacement market. We believe that larger players will continue to gain a share of the LAB market, driven by (1) steady formalisation of the economy (post introduction of GST), (2) advanced and more efficient production techniques introduced by organised companies (punched grid technology), (3) launch of entry-level brands/batteries with shorter warranty cycles to compete with the unorganised segment. Amara Raja currently is ~20% of the overall market.
* Amara Raja's revenues to grow in double digits: While industry growth is expected to moderate from the 10-12% levels earlier to mid-single digits in the next 3-5 years, we believe that Amara Raja's revenue will grow in double digits, led by (1) sustained market share gains by the organised segment (as highlighted above), (2) focus on exports (10% of revenues), and (3) opportunities in the e-rickshaw/motive power category (new categories).
* Lithium–opportunity or threat? The lead-acid battery segment is expected to witness a substitution threat from lithium-ion batteries, with the technology shift being driven by both the government and private sector. The FAME-II scheme for automobiles envisages usage of 2.3 GWh/p.a. of battery capacity that will be required, based on the proposed subsidy amount. However, post the COVID outbreak, we believe the adoption of EVs will be delayed. Within the telecom segment (~10% of revenue), Jio is operating 100% of its towers with lithium batteries.
* Prospective technology partnerships: After the exit of Johnson Controls, we await the new technology partnerships that Amara Raja will forge, including those on alternative battery chemistries.
* Initiate with an ADD: We initiate coverage on Amara Raja with an ADD rating and set a target price of Rs 780, at 19x Jun-22E EPS, which is in line with its long-term P/E average. Key risks: Higher-than-expected market share gains on the upside and a sudden shift in technology on the downside.
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