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Buys the promoter-owned Plastic Component business

While valuations are reasonable, the timing can be questioned

* AMRJ has proposed to buy the Plastic Component business for batteries from the promoter-owned entity Mangal Industries (MIL) in a share swap deal. The Plastic Component business contributes ~39% to MIL's total revenue. AMRJ is MIL's sole customer and represents 100% of the former's plastic requirement. The Plastic Component of the Battery business consists of containers, jars, covers, and handles.

* In FY22, revenue from MIL's Plastic business stood at INR5.7b. EBITDA/PAT margin for this business stood at 17.2%/10%. It also has a net debt of INR990m. It has three manufacturing facilities, with 37k mtpa capacity, and is operating at 90% capacity utilization.

* The management believes this backward integration will lead to better control over the supply chain and inventory management of its raw materials. AMRJ is also in the process of setting up a battery recycling plant and the plastic scrap generated will be used in the manufacture of new plastic parts, thus aiding the acquired business.

* Dilution and implied valuation: The deal will result in an equity dilution of 7.15% and lead to a 4.8pp increase in the promoter's stake to 32.86%. The implied valuation for the Plastic Component business at ARMJ's CMP is INR5.9b, or 10.4x FY22 PAT. The deal is expected to be completed over the next 12-14 months and will require several approvals, including shareholders' approval (majority of minority shareholders).

* This merger will add 110bp to AMRJ's FY22 EBITDA margin, or 10% accretive to EBITDA, and 3.7% EPS accretion (on a fully-diluted basis). The management expects synergies of INR50-60m post tax.

* AMRJ's total purchases from related parties was INR10.2b in FY22 (~17% of its RM cost), of which purchases from the Plastic Component division was INR5.7b (or ~9% of its RM cost). Purchases from MIL stood at INR8.6b in FY22. The management is not looking to merge its other businesses as the latter has thirdparty customers.

 Valuation and view:

While the merger of the Plastic Component business is a step in the right direction, the capital outlay may have been better utilized for future technologies. This needs to be seen in light of the limited use of plastics in the Li-ion batteries. This investment may not be future proof. Apart from gaining a credible technology partner, it needs to lay down a roadmap and strategy for its foray into Li-ion batteries. The stock trades at 15.4x/10.7x FY23E/FY24E EPS. We maintain our Neutral rating with a TP of INR555 (12x Sep'24E EPS) as expectations of better earnings growth balances out the increasing threat of lithium chemistry in the Auto and Industrial business.

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