Hold Amara Raja Batteries Ltd For Target Rs.650 - ICICI Direct
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Steady quarterly performance, await larger Li-On play…
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 and aftermarket) and industrial battery space (UPS, telecom, solar, etc).
* Geographical mix as of FY21: Domestic ~88%, Export ~12%
* Battery capacity as of FY21: 1.4 crore units for 4W, 2 crore units for 2-W, 2 bn AH for industrial battery
Q3FY22 Results: The company reported a steady performance in Q3FY22
* Total operating income for Q3FY22 came in at ₹ 2,365 crore, up 4% QoQ
* EBITDA came in at ₹ 284 crore, up 6% QoQ with margins at 12%, flat QoQ
* PAT for the quarter was at ₹ 1445 crore, flat QoQ
What should investors do? ARBL’s share price has declined at ~6.3% CAGR from ~| 872 in February 2017, thereby underperforming Nifty Auto index in that time
* We retain HOLD rating given future growth challenge posed by EV transition
Target Price and Valuation: Introducing FY24E. We now value ARBL at revised target price of ₹ 650 i.e. 14x P/E on FY23E-24E average EPS (earlier TP | 850).
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, to give an integrated solution customised to the Indian context
* Given widespread electrification thrust and muted OEM sales in Covid impacted FY21, we build in ~14% sales CAGR over FY21-24E
* With commodity prices expected to stabilise in the near term, EBITDA margins are seen in the range of ~13.5-14%, going forward, in FY23E-24E
* Strong dealer network ~40,000+ 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 | 1,125
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