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Lower other income leads to PAT miss

Margins to revive in 2H

* Amara Raja’s (ARENM) 1QFY26 PAT at INR1.9b was below our estimate of INR2.1b due to lower-than-expected other income. Margins remained under pressure at 11.5% due to higher non-lead alloy costs and higher power costs.

* We cut our FY26/FY27 EPS estimates by 8%/2% to factor in a weaker-thanexpected performance in 1Q. While the market is optimistic about ARENM’s li-ion initiative, we are cautious about its potential returns. We believe the stock, trading at around 21.1x FY26E/17.2x FY27E EPS, appears fairly valued. Therefore, we maintain a Neutral rating with a TP of INR1,030, based on 18x FY27E EPS.

Lower other income leads to PAT miss

* 1QFY26 standalone revenue grew ~7% YoY to INR33.5b (marginally ahead). Domestic revenue increased by 10%+, led by robust demand from OEMs in the 4W and 2W segments and healthy volumes in the aftermarket segment. In addition, its HUPS and tubular batteries business delivered a strong seasonal performance, while its allied business gained market momentum and penetration. In the industrial segment, ARENM saw strong traction in UPS/data centers, with 15% growth. The new energy business was driven by healthy volumes in the stationary business. The lead-acid business contributed 96% of revenues (INR32.8b). Export volumes remained subdued on account of muted demand conditions.

* Gross margins came in below our expectations at 29.5%, primarily due to rising prices of non-lead alloy. EBITDA margins at 11.5% (down ~220bp YoY and flat QoQ) were below our estimates of 12%. EBITDA fell 10.2% YoY to INR 3.9b (in-line).

* Other income of INR139m came in much lower than our estimate of INR245m. This resulted in an Adj. PAT miss, which fell 20.7% YoY to INR1.9b (vs. estimate of INR2.1b)

Highlights from the management commentary

* Demand outlook: 2W replacement is likely to grow at 10-11% and 4W replacement at 6-7%. Similarly, UPS segment is likely to post 5-6% growth. However, exports may remain subdued at least in the near term.

* Management expects margins to improve from 2Q onward as tubular battery production ramps up and recycling plant scales up. ARENM expects power costs to normalize by 3Q.

* Gigafactory update: The construction of a customer qualification plant (CQP) and a research lab is on track and expected to be completed by the end of FY26. The phase 1 for the 1 GWh cylindrical NMC cells is set to commence production by FY27. Deliberations are ongoing on whether to expand to 2 GWh or diversify into LFP cylindrical cells. The long-term capacity target of 16 GWh by FY30 has been stated.

*ARENM has invested around INR12b in its EV subsidiary so far, with an additional INR12b required for CQP, R&D and other working capital requirements.

* FY26 capex is estimated at INR12-13b, with INR8-9b for new energy projects and the balance for the lead-acid business.

Valuation and view

* ARENM’s venture into the lithium-ion business is strategically sound given the opportunities in the segment and risks facing its core business. However, there are notable challenges: 1) market opportunities are limited by existing OEM partnerships; 2) low-margin nature of lithium-ion business is likely to dilute returns; and 3) long-term viability of technology remains uncertain despite the large capital investment.

* While the market is optimistic about ARENM’s li-ion initiative, we are cautious about its potential returns. We believe the stock, trading at around 21.1x FY26E /17.2x FY27E EPS, appears fairly valued. Therefore, we maintain a Neutral rating with a TP of INR1,030, based on 18x Jun’27E EPS

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