Neutral Amara Raja Ltd For Target Rs.1,120 by Motilal Oswal Financial Services Ltd
High RM prices, power cost adjustment dent profit
Exports and replacement to remain key growth drivers for LAB segment
* Amara Raja’s (ARENM) 3QFY25 results missed our estimates as EBITDA and PAT were hit by higher alloy metal costs and a power cost adjustment from the Andhra Pradesh government for FY24. Lead-acid battery (LAB) business grew 9% YoY, with most segments performing well, except for 4W OE and telecom.
* We cut our FY25/FY26 EPS estimates by 6%/7% to factor in provisions related to higher power and other operational costs. The stock at ~18.6x FY26E/16x FY27E EPS appears fairly valued. We, hence, maintain a Neutral rating with a revised TP of INR1,120 (based on 18x Dec’26E EPS).
Margins impacted by rising power costs in the State
* 3QFY25 standalone revenue grew ~10% YoY to INR31.6b (in line), whereas EBITDA/PAT fell 4%/9% YoY to INR4.2b/INR2.3b (est. INR4.5b/INR2.6b). 9MFY25 revenue/EBITDA/PAT grew ~11%/6%/6% YoY.
* The growth momentum was driven by exports, automotive after-markets and UPS segment. LAB contributed 96% of revenue, while the remaining came from the new energy business, including battery packs and chargers. LAB segment grew 9% YoY, driven by strong demand in automotive and industrial applications. In telecom, lithium adoption led to a decline.
* EBITDA margin contracted 200bp YoY/100bp QoQ at 13.1% (est. 14.3%). Operating margins were impacted by 100-120bp due to higher alloy metal costs (tin and antimony) and a power cost adjustment from the Andhra Pradesh government for FY24.
* An exceptional item of INR1.11b was recognized in the P&L, representing the difference between the cumulative amount received and the insurance claim receivable for the tubular battery plant.
* Adj. PAT declined 9% YoY at INR2.3b (est. INR2.6b).
Highlights from the management commentary
* LAB growth is expected to remain steady in the coming quarters. Lithium packs and chargers are projected to grow at least 10% in FY25. Discussions with multiple 2W and 3W OEMs for NMC cells are ongoing, though no new major agreements have been disclosed. The company aims for a steady ramp-up in its lithium cell business after CY27.
* FY26 outlook: 4W segment is expected to grow 8-9%, while 2W demand could rise by 11-12%, occasionally reaching 13%. The UPS segment is projected to grow 6-7%, and exports could see 13-14% growth. Total LAB revenue is expected to grow 11-12%.
* Li-ion plant: The NMC plant's timeline is slightly delayed, with commercial supplies now expected by early CY27 instead of FY27. The LFP plant will commence at least three to four quarters after the NMC plant due to capital equipment gestation and software development requirements.
* Capex: For FY25, total capex is expected to be around INR10b, with INR3-4b allocated to lead-acid business and INR5-6b to the new energy business. 4W battery capacity utilization is at 85-90%, while 2W is close to 90%. Industrial UPS batteries’ utilization is at 85%, whereas LVRLA is lower at 65-70%.
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 18.6x FY26E/16x FY27E EPS appears fairly valued. Therefore, we maintain a Neutral rating with a revised TP of INR1120, based on 18x Dec’26E EPS.
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