Replacement demand to support quick recovery; Retain Buy
* Q1FY21 revenue stood at Rs11.5bn, down 37% yoy but better than the estimated 56% fall. Revenue was aided by flat growth in the telecom segment and pickup in auto replacement demand in May-Jun’20.
* EBITDA margin at 13.2% beat our estimate of 11.3%, led by better-than-expected revenue and cost reduction efforts. AMRJ was able to retain the benefits of low lead prices with no pass-through in the replacement market.
* Amid weakness in the auto sector in FY21E, a swift recovery is expected in the battery segment, led by a pickup in replacement demand. Volumes should improve gradually in Industrial/OEM segments ahead. Also, we expect market share gains to continue for AMRJ.
* We expect a 10%/15% CAGR in revenue/earnings over FY20-23E, with average ROCE of 24% and FCF of Rs5bn/year. We retain Buy with a TP of Rs803 (Rs732 earlier), based on 15x Sep’22E EPS (Mar’22E EPS earlier). We maintain EW stance in sector EAP
Weak results but above estimates: Q1 revenue fell 37% to Rs11.5bn, better than the estimated 56% fall. The telecom segment has witnessed improvement with flat growth. Auto replacement demand improved in May-Jun’20, limiting the decline in Q1 volume at 26% in automotive and 21% in 2Ws. In comparison, the OEM segment was weak with a steep fall of 80% in automotive and 60% in 2Ws. EBITDA margin contracted 210bps yoy to 13.2%, better than the estimate of 11.3%, due to higher-than-expected revenues. Gross margin contracted 110bps yoy to 33.5%, owing to a decrease in inventory. Employee expenses fell 15% to Rs840mn, owing to pay-cuts. Despite a provision of Rs125mn relating to receivables from BSNL, Other expenses declined 29% to Rs1.5bn, due to lower scale and cost reduction efforts. Overall, PAT stood at Rs627mn, down 56% (vs. estimate of 86% fall), owing to better-thanexpected operating performance.
AMRJ remains a formidable second player; Retain Buy: In the duopoly battery market, AMRJ continues to be a formidable 2nd player behind Exide Industries. Excellent franchise model and operational efficiency have enabled AMRJ to deliver a strong performance, and we expect the momentum to continue. Revenue/Earnings CAGR is expected at 10%/15% over FY20-23E, with average ROCE of 24% and FCF of Rs5.2bn/year. We retain Buy and EW in sector EAP, with a TP of Rs803 (Rs732 earlier), based on 15x Sep’22E EPS (Mar’22E EPS earlier). Although the shift toward EVs remains a structural risk, EV penetration could be gradual. Other risks are lower-than-expected revenue in OEM/replacement demand in the Auto segment, weak demand for inverter batteries, higher competitive intensity, and adverse currency/commodity prices.
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