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Amara Raja’s Q3 performance was a beat with revenue/EBITDA growth of 9%/3% YoY; margins expanded 46bps QoQ to 14.2% (vs. ~30bps decline at Exide). We have built in a ~9%/~8% revenue/PAT CAGR over FY24E-26E, factoring in continued recovery in the base lead-acid business (amid an uptick in replacement demand and stability in raw-material prices). We have tweaked our FY24E/FY25E/FY26E EPS by ~3%/2%/2%, driven by Q3 margin beat. Immediate triggers for the lithium business remain some time away (SOP for phase-1 in FY26E; Amara plans 16 GWh by 2032) despite large financial constraints (profitability and capex) and uncertainties around EV adoption rates and chemistries. We retain our SELL rating with an unchanged TP of Rs625 at 11x FY26E PER. Key upside risk: Large order wins in lithium cells.

Healthy performance in Q3 with sequential margin expansion Q3FY24

revenue grew 9.2% YoY to Rs28.8bn (in-line). For the lead-acid business, 4W/2W aftermarket grew 11%/15% YoY, while 4W/2W OEM grew 2%/30% YoY; the home UPS category was flat, while the overall industrial battery volume growth stood at 6-7%, led by telecom; revenue of lithium packs doubled YoY. EBITDA margin rose 46bps QoQ to 14.2% (Consensus est.: 13.8%) on ~54bps higher gross margins; key competitor, Exide had reported ~30bps QoQ margin contraction to 11.5%. Amara Raja’s PAT grew 7.6% YoY to Rs2.4bn (above estimates).

Earnings call KTAs

i) 3Ws/2Ws form 80% of the lithium pack revenue (supplying to OEMs like Piaggio and M&M); commenced supplies to telecom and power backup apps; ii) Current lithium pack capacity of 500 MWh is likely to be ramped up to 2 GWh; the initial 2 GWh lithium cell facility to commence operations during FY26, as stated earlier; for now, mgmt. believes 10-11% EBITDA margin and similar 10-11% RoE levels are possible at a scale of 7-9 GWh; iii) FY24E capex pegged at Rs2.5bn for the lead-acid business and Rs2.5-3bn combined for lead recycling and lithium (lead recycling operations to commence in Q1FY25); at least Rs6bn capex seen in FY25E, mainly for lithium; iv) There is a risk of global oversupply and consolidation if 4W EV penetration does not pick up beyond 50% and, thus, related risks around pricing/dumping exist; the company is keeping a close watch; v) It would commence lithium cell production with NMC technology and thereafter get into LFP; mgmt. believes LFP would address 60% of the market and chemistry changes will not cause significant capital redundancy, though changeover times may be a bit longer; vi) Not taken price hike recently, except in the OEM segment (automatic pass through); does not see the need for pricing adjustment at current lead levels but could look at price hikes if lead prices sustain at higher levels; vii) Revenue from pack business in 9M stands at Rs4bn; believes quarterly run rate of Rs2bn in this business is possible; viii) Would be participating in the current PLI tender for 10 GWh; ix) Integration of plastic component business from Mangal Industries is complete effective Feb-24.

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