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EBITDA below estimates; all eyes on entry into lithium battery space

* Q3 adjusted EBITDA declined by 10% yoy to Rs2.76bn, 5% lower than estimates, mainly due to delays in the pass-through of commodity inflation. Revenue grew by 21% to Rs23.7bn (est.: Rs23.1bn), slightly above estimates on better-than-expected revenues in the replacement segment.

* We reduce FY22-24E EPS by 5-9% on lower margin assumptions. A revenue CAGR of 11% over FY22-24E should be supported by a pickup in the Auto OEM/industrial segments and stable growth in Auto replacement. Margins should improve gradually on the passthrough of commodity price increases and better scale.

* AMRJ plans to set up a Lithium-ion cell manufacturing facility under the PLI scheme. Any progress in this regard, such as the selection of AMRJ under the PLI scheme and the announcement of tie-ups with OEMs for battery supplies, could provide visibility for longterm survival and growth.

* We retain our Hold rating on the stock. Our DCF-derived TP stands at Rs710 (Rs775 earlier), based on 13x Mar’24E EPS (14x Dec’23E earlier). Apart from the announcement of the lithium cell manufacturing project, other upside risks could be in form of higher-thanexpected demand in Automotive and Industrial segments and a benign commodity environment.

EBITDA below estimates: Revenue grew by 21% yoy to Rs23.7bn, above our estimate of Rs23.1bn. The replacement segment has done well, with volume growth of ~28% in 2Ws and ~11% in 4Ws. The industrial segment also witnessed 5-6% growth. However, the OEM segment’s performance was weak, with a ~27% decline in 2Ws and a ~20% fall in 4Ws. EBITDA came in at Rs2.84bn. Excluding one-time export incentives (relating to prior periods), EBITDA declined by 10% to Rs2.76bn, 5% below estimates, mainly due to delays in the pass-through of commodity inflation. Thus, the reported PAT declined by 25% to Rs1.4bn, below our estimate of Rs1.55bn, due to a lower operating profit.

Maintain Hold: Under the PLI scheme, AMRJ plans to set up a 10GWH lithium-ion cell manufacturing facility in collaboration with a foreign partner. Any progress in this regard, such as selection of AMRJ under the PLI scheme and announcement of tie-ups with OEMs for battery supplies, could provide visibility for the long-term survival and growth. AMRJ is already working with Piaggio 3Ws for supplies of lithium-ion batteries. Our calculations imply a positive NPV for this project, assuming a 5% PLI incentive rate (see Exhibit 8). Retain our Hold rating on the stock. Our DCF-derived TP stands at Rs710 (Rs775 earlier), based on 13x Mar’24E EPS (14x Dec’23E earlier). We lower the target multiple due to a change in margin and capex assumptions over the next few years in the DCF model.

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