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In line op. performance; slower price hikes to hurt margin

Plant fully operational now, no material impact from 4-5 days closure

* AMRJ’s 4QFY21 operating performance was in line with our estimates as strong revenue growth led operating leverage diluted the impact of higher RM cost. Weak demand visibility and lead price inflation will impact near term performance. Its strategy to meet the upcoming challenge from new chemistries would be an important driver for the stock.

* We have left our FY22E/FY23E EPS estimate largely unchanged. We maintain our Neutral rating with a TP of INR870/share (18x Mar’23E EPS).

Strong growth across segments

* Revenue/EBITDA/PAT grew 33%/30%/39% YoY in 4QFY21 to INR21b/INR3.16b/INR1.89b. For FY21 Revenue/EBITDA grew 5%/2% YoY, while adjusted PAT fell 2%.

* Revenue growth was driven by 35-40%/20% growth in Auto/Industrial segment volumes in 4QFY21.

* Gross margin, at 32.6% (est. 33.7%), declined 130bp QoQ (+378bp YoY). Lead prices rose 4-5% QoQ in 4QFY21. This, coupled with higher trading mix, resulted in lower gross margin.

* EBITDA margin declined 60bp QoQ (-30bp YoY) to 15.1% (est. 15.6%) supported by lower staff cost. EBITDA grew 30% YoY to INR3.16b (est. INR3.04b).

* Higher other income boosted adjusted PAT to INR1.89b (est. INR1.76b), a growth to 39% YoY.

* Announced a dividend of INR11/share (including a final dividend of INR6/share; similar to FY20)

Highlights from the management interaction

* Growth in Auto segment volumes in 4QFY21 was driven by: a) 2Ws (50% YoY growth) as volumes from OEMs doubled and Aftermarket grew 20-25%; b) 4Ws (20% growth) led by Aftermarket (+17% YoY), OEMs, and exports (20-25% YoY growth); and c) Inverters (+100% YoY).

* Growth (20%) in the Industrial segment was driven by UPS (20-25% growth) and Telecom (10-15%).

* There was no price increase in the Replacement market in 4QFY21, however, it hiked prices by 1-1.5% in 1QFY22.

* It lost 4-5 days as its factory was shut due to a closure notice from the Andhra Pradesh Pollution Control Board (APPCB). Post stay on this order by the court, the plant is now fully operational, and AMRJ is working towards correcting the observations made by APPCB.

* AMRJ has completed expansion of capacities in 4Ws/2Ws (by 1.5m/3m units to 14m/20m units). Capex in FY22 is estimated at INR4-4.5b (v/s ~INR5b in FY21).

* It is working on PLI for advanced chemistry cell batteries and awaiting detailed guidelines from the government.

Valuation and view

The stock trades at valuations of 19.2x/16.4x FY22E/FY23E EPS. We maintain our Neutral rating with a TP of INR870/share (18x Mar’23E EPS, in line with its 10-year LPA) as expectations of good earnings growth balances out the increasing threat posed by lithium technology to its Auto and Industrial business.

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