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Expresses intent of going big on new energy (Li-On) space

We attended the virtual Amara Raja Batteries (ARBL) investor event wherein the company laid out its plans on maximising lead acid battery (LAB) business potential and exploring the upcoming opportunity presented by the mega change i.e. lithium-ion batteries (LIB). With limited organic growth prospects in the LAB domain amid increasing pace of adoption of electric vehicles, ARBL expressed its intent to scout for a partnership (technology partner, JV, etc) and venture into Li-On cell manufacturing domestically. It is envisaging setting up a globally competitive facility with capacity of ~10 GWh at a potential capex outlay of ~US$1billion, over a period of time.

LAB: Potential maximisation focus of status quo business

ARBL said (1) it is targeting ~15-17% revenue CAGR over the next five years, (2) efficiency improvement, focus on exports as growth driver and inorganic acquisitions form the core of future LAB strategy, with global consolidation underway in the industry seen leading to opportunities, (3) as of FY20, global LAB market was ~US$38 billion in size comprising automotive (66%), industrial (29%) and others (5%), (4) Indian LAB market was worth ~| 36,500 crore in FY20 (automotive 51%, inverter 22%, stationary 15%, unorganised 12%), (5) lead acid will continue to find application in EVs (PV segment) as auxiliary power source (12v) for electronics-based content, (6) lead acid is preferred by domestic tower companies except the major new provider, (7) as per forecasts, LAB demand globally (490 GWh in 2020) is seen being stable till 2030, although LIB industry is set to overtake LAB after 2025 and (8) majority of lead acid components are recyclable, (9) with an overall output of ~15 GWh, ARBL commands ~22-25% market share domestically.

LIB: Broad intent outlined for new energy domain

ARBL said (1) electric 3-W and 2-W are expected to lead India’s EV journey, (2) it is looking to address cell manufacturing and pack assembly (combined form ~55-60% of LIB value chain) along with possible local procurement of some materials like copper and aluminium foils, (3) global competitiveness can be achieved with ~10 GWh capacity (requires ~US$1 billion investment), (4) ~2-3 GWh capacity is required for every 1 million electric 2- Ws sold, (5) present capabilities include 500 MWh assembly plant capacity, pilot R&D plant for cell chemistry/design and products for electric 2-W, 3-W, (6) EV charging solutions capabilities span slow & fast AC charging and DC fast charging with the vertical having future revenue potential and (8) Indian LIB market size annually is seen at ~30 GWh by 2025 & ~150 GWh by 2030

Valuation & Outlook

Recently notified Advance Cell Chemistry PLI scheme by the government (provides | 18,100 crore incentives over 5 years) promotes indigenisation of fast growing LIB market. ARBL’s intent of competing strongly in the new technology landscape is a step in the right direction but we await specific action and funding contours before decisively turning position on the stock. Revising our estimates, we upgrade the stock from REDUCE to HOLD, valuing ARBL at | 850 i.e., 18x PE on FY23E (earlier target price | 700).

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