In-line; Replacement demand good, rise in lead price a risk
Market share gains from unorganized to continue
* AMRJ’s 1QFY21 performance was supported by a better mix (lower OEM sales) and lower lead prices. While aftermarket recovery was good, recently there has been inflation in lead prices (14.6% increase in spot INR prices v/s 1QFY21 average).
* We have upgraded our FY21/FY22E EPS estimates by 3.5% each to factor in the faster-than-expected replacement recovery and lower depreciation. Maintain Neutral with TP of INR739 (18x Sep’22E EPS)
Telecom and aftermarket shines; Margins supported by mix
* 1QFY21 revenue/EBITDA/PAT declined ~37%/45%/56% YoY to ~INR11.5b/INR1.52b/INR0.62b.
* Telecom volumes were flat while all other segments declined – Aftermarket (20-25% down), Home inverter (25% down), UPS (40% down), 2W OEM (60% down) and 4W OEM (80% down).
* Gross margin expanded by 105bp YoY (-280bp QoQ) to ~33.5% (v/s est. ~37%) due to consumption of high-cost inventory. Adjusted for impact in change in inventory, gross margins were stable on QoQ basis. Benefit of mix was off-set by high-cost inventory. Pricing in aftermarket was stable.
* EBITDA margins declined 220bp YoY (-220bp QoQ) to ~13.2% (v/s est. ~14.3%) due to operating deleverage. EBITDA declined 45% YoY to ~INR1.52b (in-line). PAT declined ~56% YoY to ~INR627m (in-line).
Highlights from management commentary
* Status of production – Currently, capacity utilization is at 80-85%, though it is lower than pre-COVID levels. However, the situation is dynamic due to the sporadic lockdown and its possible impact on supply chain.
* Demand – Aftermarket demand is good; however, its sustenance after normalization of the current situation is a key monitorable.
* Other expenses – One-off expense of INR125m for provision in delay for BSNL’s receivables.
* Exports faced major challenges as many countries were either impacted by the lockdowns or disruption in logistics.
* Spot lead prices have seen inflation of ~14.5% from 1QFY21 average of ~INR127/kg.
* It has launched its e-rickshaw battery in 1QFY21 and expects small sales to happen in 2QFY21.
* Capex was largely maintained at ~INR4b for FY21. The company is planning to expand its 4W (2m units) and 2W (2-3m units) capacity.
Valuation and view
* We have upgraded our FY21/FY22E EPS estimates by 3.5% each to factor in the faster-than-expected replacement recovery and lower depreciation.
* The stock trades at valuations of 21.2x/18.4x FY21/FY22E EPS. Maintain Neutral with TP of INR739 (18x Sep’22E EPS, 10% discount to 10-year LPA).
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