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Strong revenue outperformance leads to overall beat

RM cost inflation keeps margin under pressure

* AMRJ’s 1QFY22 performance was led by strong revenue growth across segments. Drivers for demand are in place, but rising RM prices (lead, plastic, sheet metal, and copper) could restrict performance in the near term. AMRJ is geared up for the next phase of transformation in the Lead Acid Battery segment. It is also foraying into the New Energy business: lithium ion/battery pack, EV charging products, energy storage solutions, etc. We expect this to be an important driver for the stock

* We cut our FY22E/FY23E EPS estimate by 13%/5% to account for higher RM cost. We maintain our Neutral rating with a TP of INR820 per share (18x Mar’23E EPS).

Strong growth across segments, but cost inflation hurts margin

* Revenue/EBITDA/PAT fell 10%/21%/35% QoQ (+64%/+64%/+98% YoY) to INR18.9b/INR2.5b/INR1.24b in 1QFY22. Revenue growth was driven by outperformance across segments.

* Gross margin declined by 150bp QoQ (-240bp YoY) to 31.1% (est. 33%), despite higher contribution from Replacement on a QoQ basis, due to RM cost inflation and higher trading mix, which resulted in lower gross margin. Lead prices rose 7-8% QoQ in 1QFY22.

* Higher staff costs, partially offset by lower other expenses, led to a 180bp QoQ EBITDA margin decline (flat YoY) to 13.2% (est. 13.6%). EBITDA declined by 21% QoQ (+64% YoY) to INR2.5b (est. INR2b).

* Higher depreciation, combined with lower other income, led to an adjusted PAT of INR1.24b (est. INR1b), a decline of 35% QoQ (+98% YoY).

Highlights from the management interaction

* Despite the lockdowns, the Auto segment saw growth in both OEM/Aftermarket as well as exports. In Industrials, Telecom and Commercial UPS segments registered strong YoY growth.

* All segments fell 5-6% QoQ, except Telecom (flat QoQ). On a YoY basis, the 4W Aftermarket/2W segment grew 30-40%/~45%.

* Aftermarket sales are growing at 8-9%/12-13% in the 4W/2W space in 2QFY22 so far.

* It took a price hike of ~1.5% each in Apr’21, Jul’21, and Aug’21 to offset RM cost inflation. Lead cost rose 7-8% YoY and 5-6% QoQ, and spot rates are almost 15-18% higher than its 1QFY22 average.

* Capex for FY22 is estimated at INR4-4.5b and is entirely for lead acid batteries. It is yet to finalize capex on lithium ion cell manufacturing.

Valuation and view

* The stock trades at valuations of 20.2x/15.9x FY22E/FY23E EPS. We maintain our Neutral rating with a TP of INR820/share (18x Mar’23E EPS, in line with its 10-year LPA) as expectations of better earnings growth balances out an increasing threat of lithium chemistry to both the Auto and Industrial business.

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