Neutral Amara Raja Energy & Mobility Ltd For Target Rs. 1390 By Motilal Oswal Financial Services Ltd
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Preparing for next leg of growth
Capacity utilization of 85-90% of 16 GWh required for 10-11% EBITDA margins We attended the Analyst Meet of Amara Raja Energy & Mobility (ARE&M), followed by a visit to its Telangana gigafactory, showcasing its battery assembly pack unit. It has committed a capex of INR95b (announced in FY23) for the next 10 years for the same. The management noted that, in order to achieve a significant scale in the cell manufacturing business, it is critical to have less diversity in the type of cells as margins of 10-11% can be achieved only with capacity utilization of 85-90% of 16 GWh. We believe that, at 28x/24x FY25/26E EPS, the stock is fairly valued for the new energy business. Hence, we maintain a Neutral rating with a TP of INR1390, based on 20x Jun’26E EPS.
* About the upcoming gigafactory in Divitipally, Telengana: The factory is spread across 265 acres and houses three major divisions: 1) battery pack assembly plant, 2) customer qualification plant (CQP), and 3) cell manufacturing plant. Total planned battery cell manufacturing capacity is 16GWh and battery pack assembly capacity is 5GWh. Presently, part of the battery pack plant is operational, while the construction of CQP (SOP by Dec’25) and cell manufacturing plant (SOP from Dec’26) is in full swing. In this plant, ARE&M plans to employ 80% of workforce from local areas, with 50% women employees.
* Battery pack assembly plant: After the groundbreaking ceremony in Sep’23, the plant has reached a capacity of 1.5GWh currently, which could be expanded to 5GWh once it is fully operational. Presently, two lines for e2W/e-3W are set up, which can produce 16k (1GWh)/8k (0.5GWh) packs monthly. Battery packs ranging from 2kWh to 4kWh are assembled for e2Ws, while packs ranging from 8kWh to 8.5kWh are for e-3Ws. There are currently two customers for e-2Ws and one customer for e-3W (ARE&M is a sole supplier to Piaggio). Capacity utilization for e-2Ws/e-3Ws stands at 25%/75% currently.
* Other notable factors:
* By 2030, cell demand is expected to be dominated by autos (70%), followed by stationary applications (30%). None of the customers of stationary applications will produce their own cells; hence, it is an opportunity for the company. Similarly, not all OEMs would produce their own cells; hence, ARE&M could get business due to its expertise in LAB business and strong customer relationships, as per management.
*Stationary applications with high density and high discharge would see usage of Li-ion batteries. In stationary applications, the telecom sector is seeing a strong shift to Li-ion cells for its batteries. Moreover, upcoming data centers in India would require Li-ion batteries.
* To achieve a significant scale in the cell manufacturing business, it is critical to have less diversity in the types of cells (eg. Ola would produce just one type of cell – 4680, which will power all its e-scooters).
* The management believes that overcapacity in cell manufacturing is a passing phase. Presently, EV penetration is still in single digits across countries, barring China. Even a 1% rise in EV penetration can drive 30-40% growth in demand for cells.
* Margins of 10-11% are only possible when capacity utilization is 85-90% of the proposed capacity of 16GWh. Presently, Chinese cell manufacturers have 50- 60% capacity utilization; hence, they are not able to earn double-digit margins.
* In the recently auctioned PLI, ARE&M was the second in the waitlist, whereas Reliance was the winner for 10GWh. Now, Ola/ Reliance/Rajesh Exports have PLI benefits 20GWh/15GWh/5GWh, while the remaining 10GWh will be with the Ministry of Power, which would be utilized for stationary applications.
* ARE&M will also invest INR3-4b for developing an R&D center near the Hyderabad airport.
* Brand AMARON would be expanded further into other categories in the aftermarket segment other than batteries.
Valuation and view
While the market seems to be upbeat about Amara’s lithium-ion foray, we remain circumspect of the returns from the business. We believe the stock, trading at 28x/24x FY25/26E EPS, appears fairly valued for the new energy business. Hence, we maintain a Neutral rating with a TP of INR1390, based on 20x Jun’26E EPS.
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