Neutral Amara Raja Ltd for the Target Rs 944 by Motilal Oswal Financial Services Ltd
Earnings beat, driven by strong revenue growth Price hikes and strong demand to support earnings
* Amara Raja (AMRJ)’s 1QFY27 PAT of INR2b came in 6% higher than our estimates. The company has recently taken a 3% price hike in the lead-acid business and expects to take a further hike of 2-3% to offset the commodity cost inflation in the business.
* Driven by a better-than-expected 1QFY27 performance, we raise our EPS estimates by 6%/8% for FY27/FY28. Management continues to maintain a positive medium-term outlook for the lead-acid business with medium-term revenue growth potential of about high single-digit to low double-digit levels.
* However, while the market is optimistic about AMRJ’s Li-ion initiative, we are cautious about its potential returns. We believe the stock, trading at around 21.6x FY27E/17x FY28E EPS, appears fairly valued. We reiterate our Neutral rating with a TP of INR944, based on 15x standalone FY28E EPS and INR92/sh value of the investment in the New Energy business.
Earnings beat driven by better-than-expected revenue growth
* AMRJ’s 1QFY26 standalone revenue grew ~20.6% YoY to INR40.4b, 13% higher than our estimate. The new energy business revenue grew 73% YoY to INR2b, while lead acid business revenues grew 22% YoY to INR40b.
* Automotive domestic business revenues grew 20%+ YoY on the back of healthy OEM demand and double-digit growth in the aftermarket segment.
* The Home Energy segment grew 30%+ YoY, supported by a strong summer season, while the Industrial Battery business sustained momentum with the UPS segment recording double-digit revenue growth.
* The export business continued to face headwinds from geopolitical uncertainty and shifting global trade dynamics.
* EBITDA margin contracted ~140bp YoY to 10.1%, below our estimate of 11.1%, led by rising input cost pressure.
* EBITDA rose 5% YoY to INR4b (in line).
* PAT grew ~5% YoY to INR2b (6% above est.) due to higher revenue growth.
* AMRJ invested INR1.5b in 1Q in the new energy business, taking the total investment to INR16.5b.
Valuation and view
* AMRJ’s venture into the lithium-ion business appears strategically sound, given the opportunities in the segment and the evolving risks in its core business. However, there are notable challenges:
1) market opportunities are limited by existing OEM partnerships
2) the low-margin nature of the lithium-ion business is likely to dilute returns
3) the long-term viability of the technology remains uncertain despite the large capital investment.
* Driven by a better-than-expected 1QFY27 performance, we raise our EPS estimates by 6%/8% for FY27/FY28. Management continues to maintain a positive medium-term outlook for the lead-acid business with medium-term revenue growth potential of about high single-digit to low double-digit levels.
* However, while the market is optimistic about AMRJ’s Li-ion initiative, we are cautious about its potential returns. We believe the stock, trading at around 21.6x FY27E/17x FY28E EPS, appears fairly valued. We reiterate our Neutral rating with a TP of INR944, based on 15x standalone FY28E EPS and INR92/sh value of the investment in the New Energy business.
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