Hold Amara Raja Batteries Ltd For Target Rs.475- ICICI direct
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Await larger commitment to new energy, Li-On space…
About the stock: Amara Raja Batteries (ARBL) is a part of the duopolistic organised Indian lead acid battery market with a strong presence across automotive (OEM, aftermarket) and industrial battery space (UPS, telecom, solar, etc).
* Geographical mix as of FY22: domestic ~87%, export ~13%
* Battery capacity as of FY22: 1.62 crore units for 4-W, 2.91 crore units for 2- W, 2 bn AH for industrial battery; cumulative across eight plants in India
Q1FY23 Results: The company reported a steady performance in Q1FY23.
* Operating income for Q1FY23 came in at | 2,620 crore, up 20% QoQ
* EBITDA came in at | 261 crore, up 19% QoQ with margins at 10%, flat QoQ
* PAT for the quarter was at | 132 crore, up 33% QoQ
What should investors do? ARBL’s share price has de-grown at ~8.5% CAGR from ~| 800 in August 2017, thereby underperforming Nifty Auto index in that time.
* We downgrade from HOLD to REDUCE rating given future growth challenge posed by EV transition and delayed commitment towards Li-On space
Target Price and Valuation: Revising our estimates we now value ARBL at a revised TP of | 475 i.e. 13x P/E on FY24E EPS of | 36.6/share (earlier TP | 650).
Key triggers for future price performance:
* Sizeable presence in Li-On battery domain in both automotive & industrial
* Scalable business prospects in the present capabilities in the EV ecosystem such as EV chargers & electronics that go into energy storage systems
* Given widespread electrification thrust, healthy OEM sales & pick-up in industrial segment, we build ~14% sales CAGR over FY22-24E
* With commodity prices expected to stabilise in the near term, EBITDA margins are seen in the range of ~10-11%, going forward, over FY23E-24E
* Strong dealer network in after market segment (Amaron Dealers)
Alternate Stock Idea: Leaving aside ARBL, in our auto OEM coverage we like M&M.
* Focused on prudent capital allocation, UV differentiation & EV proactiveness
* BUY with target price of | 1,550
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