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Cost pressures dilute benefit from strong revenue growth

Started supplying Li-ion battery pack to 3Ws

* AMRJ’s 2QFY22 performance was in line, as RM cost pressures were diluted by strong revenue growth. Near term headwinds (rising RM prices) could affect a recovery in margin. The company has taken the first steps towards its next phase of growth in the new energy business by supplying Li-ion battery pack to 3Ws, but it is yet to finalize its full-fledged entry into lithium cell manufacturing.

* We cut our FY22E/FY23E EPS estimate by 7%/6% to account for high RM and other costs. We maintain our Neutral rating with a TP of INR780 (18x Mar’23E EPS).

RM cost inflation continues to hurt margin

* Revenue grew 17% YoY and 20% QoQ to INR22.6b, while EBITDA/adjusted PAT declined by 21%/28.5% YoY (+8%/+16% QoQ) to INR2.7b/INR1.44b in 2QFY22.

* Gross margin declined by 475bp YoY and 120bp QoQ to 29.9% (est. 30%), impacted by higher commodity costs. Lead was higher by 20-22% YoY.

* EBITDA margin declined by 570bp YoY and 140bp QoQ to 11.9% (est. 12.9%), impacted by higher other expense. EBITDA declined by 21% YoY (+8% QoQ) to INR2.7b (in line).

* Adjusted PAT declined by 28.5% YoY (+16% QoQ) to INR1.44b (est. INR1.5b).

* The company declared an interim dividend of INR4/share.

Highlights from the management interaction

* OEM volumes remained muted in 2QFY22, while Replacement volumes showed reasonable growth (11%/20% YoY for 4W/2W). Exports declined by 8-9% YoY due to logistical challenges. Volumes in the Industrial segment grew 11% YoY, with a broad based growth.

* ASP growth stood at 7-8% on a YoY basis, driven by price increases to passon the cost inflation in key raw materials. It undertook a cumulative price hike of ~6% over Jul-Sep’21 in the Replacement market.

* Lead cost was up by 20-22% YoY and 9% QoQ. Spot rates are almost 6.5% higher than its 2QFY22 average.

* It has started supplying lithium battery packs to 3W OEMs. It has also started supplying chargers to BPCL, and is developing an on board charger for 2W/3W applications.

* The contribution of the new energy business stood at INR200m in 2QFY22.

* It is increasing its 4W capacity to 16m by mid-FY23.

* FY22 capex is pegged at INR5-5.5b (1H: ~INR3b) for 4W capacity expansion and a 50MW solar plant. AMRJ is yet to finalize its lithium battery plans.

* Mr. Jayadev Galla, Chairman, Managing Director, and CEO, AMRJ, said “The demand signals are positive across all product segments, but the rise in input cost is negatively impacting margin. We will continue to focus on cost optimization and work towards improving operating margin. We are working on our new energy strategy to participate in emerging opportunities in new chemistries, and have started our lithium battery pack supplies for threewheeler applications.”

Valuation and view

The stock trades at 20.4x/16x FY22E/FY23E EPS. We maintain our Neutral rating with a TP of INR780 (18x Mar’23E EPS, in line with its 10-year LPA) as expectations of better earnings growth balances out the increasing threat of lithium chemistry for both the Auto and Industrial business.

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