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Strong performance across segment

Amara Raja Batteries Ltd. (ARBL) is India’s second largest Lead-acid battery manufacturer. Its segments comprise 70% automotive & the remaining industrial, with market dominance in the telecom segment.

• We expect growth in the auto sector, superior product mix and higher RM pass through to OEMs will support the margin expansion.

• Investment for technological up-gradation in the lithium ion project for 2W/3W batteries is progressing as per schedule and have started supplying lithium battery packs for 3W applications.

• ARBL, Q4FY23 revenue grew by 11%YoY on the back of volume growth in the aftermarket & OEM segments. Overall, 4W & 2W volume grew by 7% and 20%, respectively. Revenue for the full year grew by 19%YoY.

• EBITDA margin expanded by +380bps, owing to higher RM pass though to customers and internal efficiencies.

• The company’s strategy is to incorporate lithium ion projects and expansion as a wholly owned subsidiary, to support long term visibility. We value ARBL at 13x FY25E EPS and recommend Buy rating.

Strong growth across segments.

During Q4FY23, revenue grew by 11%YoY, led by robust demand in the automotive and aftermarket segments. Exports showed very healthy growth in Middle East and Southeast Asian markets. As expected, EBITDA margin expanded by 380bps to 13.9% in Q4, making it the highest figure in the past 5 quarters. The avg. lead price witnessed respite, As a result , PAT grew by 89% YoY. Currently, the lead price is trading at Rs.175/kg, which is likely to witness moderation. The company announced the current expansion in the lithium-ion cell manufacturing facility will be culminated under a wholly-owned subsidiary that will set up a multi-gigawatt hour lithium-ion cell manufacturing facility, as it intends to set up a domestic manufacturing eco-system for the same. Currently, the new energy or lithium business is doing Rs250 cr., and planning to reach Rs750cr in the current fiscal year. The demand signal is positive across all segments and we believe respite in the commodity price and cost optimisation to limit margin degradation.

Strategy to power newer mobility.

ARBL’s investments in capacity expansion are in line with the future demand for 2/3W and 4W. The company has launched several strategic initiatives to take advantage of alternative power batteries both through lithium ion and other new age chemistries that are enabling faster transformation in renewable energy, electric mobility, microgrids, etc. The first commercial production for sell side will take anywhere between 24– 30 months to start 2 gigawatt hours of production. Currently, the pilot project with regard to the technology transfer from ISRO is progressing as per schedule and has started supplying lithium battery packs and chargers to 3W applications.

Lack of synergies restricts lithium expansion.

Despite the use of lead in the industry, slower progress in Li-ion cells in automotive and industrial segments is posing a threat to revenue expansion. There is no use of a lead acid battery in e-2W and e-3W as an auto component. As a result, it will impact lead acid battery makers. In addition to in-house R&D and production, the company is planning to develop partnerships and create amalgamation activities with OEMs. Here, ARBL will start the piolet production and as a first stage, send samples to various customers to get approval. The company announced the lithium ion expansion under separate subsidiary, to attract prospective investors or synergies to overcome the current legacy approach.

Valuations.

We believe moderation in the raw material price and improving volume will drive margin growth. In addition, the auto sector is likely to show a pick up in H1FY24 owing to a strong rebound in volume and margin expansion. We expect margins to expand due to respite in raw material prices. However, on a 1 year fwd. basis, the stock is trading below its historical average and has shown good attraction in the last month. We value ARBL at 13x FY25E EPS with a target price of Rs. 762/share and recommend Buy rating at CMP.

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