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Earnings beat led by lower RM costs

Sets up a wholly owned subs for li-ion cell and pack manufacturing

* AMRJ’s 2QFY23 earnings were led by softening of RM costs coupled with volume growth across segments. The recent moderation in lead prices will aid margin recovery. Volumes should see an upward trajectory in both automotive and industrial segments.

* We raise FY23E/FY24E EPS by 28%/14% to factor in the recovery in the automobile segment and exports coupled with the benefit from softening RM costs. We reiterate our Neutral rating with a TP of INR590 (12x Sep’24E EPS).

EBITDA beat driven by improving gross margin

* Revenue/EBITDA/Adj.PAT grew 19%/34%/40% YoY to INR27b/INR3.6b/INR2b in 2QFY23 (v/s est. INR25.4b/INR2.65b/INR1.3b). 1HFY23 revenues/ EBITDA/ Adj. PAT grew 28%/20%/24.5% YoY.

* Overall volumes grew 10% YoY with similar growth witnessed in autos and industrial segment.

* Gross margins improved 60bp YoY (390bp QoQ) at 30.5% (v/s est. 27.5%), led by a 9% YoY decline (down 6.5% QoQ) in spot lead prices. Price hikes (2- 2.5% QoQ) and soft lead prices boosted gross margins.

* Higher gross margins led to a 150-bp YoY improvement in EBITDA margin (up 340bp QoQ) to 13.3% (v/s est 10.5%). EBITDA grew 34% YoY (up 38% QoQ) to INR3.6b (v/s est.INR2.65b) in 2QFY23.

* Further, tax diluted adj. PAT grew 40% YoY/54% QoQ to INR2b (v/s est. INR1.3b) in 2QFY23.

* CFO for 1HFY23 was at INR6.7b (v/s INR4.5b in 1HFY22). Capex for the period was INR2.6b (v/s INR3b in 1HFY22). FCFF improved to INR4.1b (v/s INR1.5b in 1HFY22) due to lower capex and better operating performance

* The company announced an interim dividend of INR2.9 for FY23YTD.

Highlights from the management commentary

* 4W volumes grew 13-14% YoY, driven by strong growth in OEMs, ~10% growth in replacement, and 18-19% growth in exports. 2W volumes grew 10% YoY, with 11-12% growth in replacement, and 7-8% YoY growth in OEMs. Home inverter volumes declined 10% YoY.

* Industrial segment grew ~10% YoY, with ~15% growth in Telecom, and 8- 10% growth in other segments.

* It has incorporated wholly owned subs for li-ion cell and pack manufacturing. It plans to start investing for the new energy venture from 2HFY23 onwards.

* Capex in lead acid business for FY23 is expected to be at INR5-6b for capacity expansion, solar power, and recycling plant. Investment in li-ion will be over and above it.

Valuation and view

* The stock trades at 12.6x/11x FY23E/FY24E EPS. We reiterate our Neutral rating with a TP of INR590 (12x Sep’24E EPS) as the expectation of better earnings growth balances out the increasing threat of lithium chemistry to the Auto and Industrial businesses.

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