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Strong revenue performance in Q1; Lower input cost benefits to reflect from Q2

* For Q1FY23, Amara Raja (AMRJ) reported 20% qoq revenue growth (3-year CAGR at 13%) to Rs26.2bn, 5% above estimates, due to improved growth in auto/industrial segments. EBITDA grew by 19% (3-year CAGR at -2%) to Rs2.6bn, 11% below estimates, due to higher-than-expected commodity hit and one-time costs of ~Rs100mn. Management expects benefits of lower commodity prices to reflect in Q2.

* We have cut our FY23 EPS forecast by 2% due to lower margin assumption and broadly retained our FY24 estimates. We have built in a 13% revenue CAGR over FY22-24E, supported by robust growth in the auto OEM segment, pickup in the industrial segment, and stable growth in the auto replacement market.

* AMRJ plans to commence work on a small lithium-ion cell manufacturing facility this year with capability of multiple cathode cell chemistries. Any progress in this regard, such as the announcement of investment plans and forming tie-ups with OEMs for battery supplies, could provide clarity on long-term growth survival.

* We retain our Hold rating on the stock. Our TP of Rs530 (Rs520 earlier) is based on 11x Sep’24E EPS (Jun’24E earlier).

* Strong revenue performance in Q1: AMRJ’s revenue grew by 20% qoq (3-year CAGR at 13%) to Rs26.2bn, 5% above estimates, due to improved growth in both auto and industrial segments. Within auto, two-wheelers (2Ws) have seen higher growth. Within industrials, the inverter segment has witnessed better growth. EBITDA grew by 20% (3- year CAGR at -2%) to Rs2.6bn, 11% below estimates due to higher RM cost and one-time costs of ~Rs100mn. RM/sales increased 130bps to 73.4%, owing to delay in the passthrough of commodity inflation. One-time costs relate to higher energy cost due to power holiday in Andhra Pradesh because of demand-supply mismatch. Management expects margins to improve ahead because of benefits of lower commodity prices to start reflecting in Q2. Overall, earnings grew 33% qoq to Rs1.3bn, 13% below estimates, due to lowerthan-expected operating profit.

* FY23 revenue growth expectations: Management expects auto replacement and industrial segments such as Telecom/UPS to see double-digit growth.

* Maintain Hold: Despite losing out in the PLI-ACC scheme, AMRJ plans to commence work on lithium-ion cell manufacturing facility this year. Any progress in this regard could provide clarity on long-term survival and growth. It is already working with Piaggio threewheelers (3Ws) for supplies of lithium-ion batteries. We retain Hold with a TP of Rs530.

* Key downside risks: Lower-than-expected demand in key geographies, increased competitive intensity, and adverse movement in commodity prices/currency rates.

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