Buy Amara Raja Energy & Mobility Ltd For Target Rs. 1,160 By Geojit Financial Services Ltd
Long term growth story to remain intact.
Amara Raja Energy & Mobility Ltd. (ARE&M), the flagship company of the Amara Raja Group, is one of the largest manufactures of lead-acid batteries. Its segments comprise 70% automotive & the remaining industrial, with market dominance in the telecom segment.
* We expect the demand for lead-acid business to continue for near term due to change in OEM uptick in lithium ion batteries. The lead-acid business contributes 96% of total revenue, registering a growth of 9% YoY.
* ARE&M, Q3FY25 revenue grew by 7.5%YoY on the back of volume growth in the aftermarket & OEM segments. Industrial battery volume saw a moderate growth driven by muted recovery in telecon and UPS segments.
* EBITDA margin contracted by 195bps, largely due to higher operating costs in sourcing metals and power from a revision by the Andhra Pradesh govt. The company expects to mitigate the power cost through increased renewable energy usage in the future
* Investment for technological upgrades in the lithium ion project for 2W/3W batteries is progressing as per schedule, and have initiated supplying lithium battery packs for 3W applications.
* However, recovery in the new business progress have faced near term challenges like pricing pressure, volatility in raw material price and potential oversupply, resulted in valuation correction. We anticipates, continuous localisation efforts and synergies with OEMs enhance commercial production ramp-ups.
Outlook & Valuation
We believe the tie up with Gotion, china to develop a fully indigenous 16GWH Lithium ferrophosphate (LFP) battery this decade at Rs. 9,500 cr. investment to cater to both the Indian and overseas market will support the overall valuation. In addition, the 2W sector is likely to show stability in H1FY25 owing to a strong rebound in the overall domestic volume. On a 1 year fwd basis, the stock has corrected significantly due to external headwinds and currently trading near to its all time avg. We value ARE&M on SOTP with 16x EPS (Standalone) at Rs.1,029/ share, new mobility & energy investments at Rs.131 per share, with a target price of Rs. 1,160/share and reiterate our Buy rating at CMP
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