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New Energy and LAB exports to be the key growth drivers

Targeting 8-10GW of li-ion capacity to remain cost competitive

* Amara Raja’s senior management team presented (click here for the presentation) their new strategic initiative, laying down future growth drivers in the form of New Energy and Mobility.

Key highlights from the meeting:

* Under this strategy, it is focused on value maximization in its core Lead Acid Battery (LAB) business and is foraying into the New Energy business in the form of lithium-ion cell/battery pack, EV charging products, energy storage solutions, etc.

* While the LAB business will go global, the New Energy business will focus on opportunities in India.

* While growth in LAB will recover strongly, deliverance of 15-17% CAGR over five years is largely dependent on successful execution of its export strategy.

* While its entry in the New Energy business is a step in the right direction, its success will be dependent on a technology partner, cost competitiveness, targeted segments, etc.

* For lithium cell manufacturing, it is targeting 8-10GW capacity (needing an investment of USD0.8-1b) to attain global competitiveness.

* Considering that investment in the New Energy business will be over 5-10 years, it can fund this capex through free cash flows of the core business (average INR3-4b p.a) and debt (currently net cash on its Balance Sheet).

New Energy a new growth engine

* In the New Energy business, it is looking to be more than a battery company and participate in the bigger storage ecosystem. It would focus on Li-ion cell and pack, EV charging products, energy storage systems, and home energy solutions.

* AMRJ is exploring partnerships with various organizations. In the last 2-3 years, it has undertaken pilot scale R&D and cell manufacturing on its own to understand the technology. It is open to various structures from technical collaborations to JVs. It is also aiming to leverage the startup ecosystem.

* While large global players may not be keen to partner with AMRJ, smaller players may be interested in partnering with AMRJ as it offers good brand, relationships with OEMs, reach, etc.

* It expects 2Ws and 3Ws to see faster electrification, with 10%/46% EV penetration in 2Ws/3Ws by FY25. It doesn't expect 2W/3W OEMs to backward integrate into cell manufacturing, which opens up the opportunity for players like AMRJ. As per AMRJ’s estimates, India would need a Li-ion battery capacity of 30GW/150GW by CY25/CY30.

* All these new Energy businesses would be part of the listed entity.

Funding capex for the New Energy business not a big challenge

* For lithium cell manufacturing, it is targeting 8-10GW capacity to attain global competitiveness. This would entail investments of USD0.8-1b over 5-10 years.

* It can fund this capex through free cash flows of the core business (current average INR3-4b p.a) and debt (currently net cash on its Balance Sheet).

* The biggest concern is demand risk in India and hence it wants to be globally competitive to keep its export options open.

LAB – focus on value maximization

* In the matured LAB business, it is focusing on maximizing value by: a) improving efficiencies by leveraging process/product technology, b) global foray, and c) inorganic opportunities. Through this strategy, it is targeting 15-17% revenue CAGR over the next five years.

* Growth in the domestic business will be driven by: a) underlying industry recovery, b) ramp-up in inverters, e-rickshaws, motive power, etc., and c) launch of technologically superior products in both the Autos and Industrial segment.

* In the Industrial segment, it expects the Telecom/UPS segment to grow at 9.8%/6.3% CAGR over FY20-25.

* AMRJ is also looking to enter lead smelting operations, as its board has approved investing in the lead recycling business.

Exports a big focus area; open to M&As

* While export revenue has grown at 25% CAGR over the last four years, it is still very small at 12-13% of sales. It currently exports to 35 countries in the Asia Pacific Rim and Africa.

* Globally, the LAB industry is 490GWh (of which, AMRJ has 3% share) and is expected to remain stable till CY30. It expects the lithium technology to impact the Industrial segment (34% of the industry) first and Autos (66% of the industry) later.

* Globally, the LAB industry is consolidating, throwing up acquisition opportunities for AMRJ. In greater potential markets with high tariff barriers, it would either look at M&As or at a greenfield plant.

* In UPS, it is targeting global leadership, driven by MVRLA battery on patented punch-grid technology.

Succession planning – Next generation in the driver’s seat

* Mr. Jayadev Galla will take over as Chairman of the board from Dr. Ramachandra N Galla.

* Given the strategic importance of the New Energy business, AMRJ has decided that Mr. S. Vijayanand (current CEO) will take charge as President – New Energy.

* The board has decided to induct Mr. Harshavardhana Gourineni (Harsha) and Mr. Vikramadithya Gourineni (Vikram) as Executive Directors to actively drive the transition to ‘Energy and Mobility.’

* Harsha, currently MD and CEO of Mangal Industries (a promoter owned entity), would drive value maximization strategy for the LAB business. Vikram, MD of Amara Raja Power Systems and Amara Raja Electronics (both promoter owned entities), will drive the New Energy business.

Valuation and view

* We expect value migration from unorganized to organized players such as EXID and AMRJ in the Replacement segment, driven by tax reforms such as GST and lower corporate tax rates.

* Healthy replacement demand would lead to better capacity utilization and margin. However, current margin performance may not sustain in FY22 as volume recovery with OEMs would result in mean reversion of mix and margin.

* Falling cost of lithium batteries poses a threat not just to the Auto segment, but also to Industrial Batteries. Successful transition to the new chemistry poses a risk as well as an opportunity. While its entry into the new energy business is a step in the right direction, its success will be dependent on a technology partner, cost competitiveness, targeted segments, etc.

* The stock trades at 19.1x/16.4x FY22E/FY23E EPS. We maintain our Neutral rating with a TP of INR860/share (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 Autos and Industrial Business.

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