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Improving realisations, margin betterment; maintaining a Buy

For Amara Raja, volumes improved across automotive and industrial business on a y/y basis. The aftermarket segment grew, while the OEM segment was weak. Growth in telecoms and UPS aided growth in the industrials segment. Supplies to EV 3W applications have commenced and augurs well for long-term growth. Multi-gigawatt capacity is on track and would be ready in the next 16-18 months. We maintain a Buy at a revised TP of Rs819 (14x FY25e).

Strong top-line performance aided by volume growth. Q3 FY23 revenues grew 12% y/y, but q/q were down 2% to Rs26.3bn. Volumes grew ~8-9% y/y on strong demand in automotive replacement and the industrials segments. Within automotive, 4W OEMs and replacements grew ~5% despite a high base last year, the 2W aftermarket grew ~15% y/y, while OEMs were weak. Exports also grew strong, said management. The industrials segment grew a strong ~20% y/y on one-off demand from the launch of 5G towers and better UPS offtake. We continue to expect strong volume growth in subsequent quarters as OEM offtake picks up in the near term. On battery packs, supplies to M&M and Piaggio for their 3W EV applications have commenced and is expected to grow well in the near term. Accordingly, we expect 11% growth in FY24 and FY25.

Margin betterment in two years. The Q3 FY23 gross margin expanded 288bps sequentially to 33.4%. After falling at the start of Q3, lead prices inched up towards the end (~5%); accordingly, we expect Q4 would be lower. As OEMs pick up, we expect better margins in the long term. Accordingly, we expect margins of 13.6% in FY24 and FY25.

Valuation. We expect an 11% revenue CAGR over FY23-25, and earnings to grow 12% to Rs9.9bn, leading to an EPS of Rs58.5. We maintain a Buy rating, with a revised TP of Rs819 (14x FY25e).

Risks. Lower growth in the replacement market in FY24 and FY25.

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