When we last wrote about Amara Raja in early June 2023, the company was still called Amara Raja Batteries and we recommended the stock as a “buy” citing a very reasonable valuation of 15 times trailing 12-month earnings and plans to remain relevant in the era of electric vehicles (EVs).
As of September 2024, shareholders have received a substantial return of approximately 142% from our recommendation. The name change to Amara Raja Energy & Mobility also appears to have brought good fortune to the company, with the stock up approximately 138% since the rebranding at the end of September 2023. With the company’s efforts in the EV battery sector and a revaluation acknowledging the sharp rise in prices, the valuation has now risen to approximately 29 times past year earnings. However, the stock is still cheaper than peer Exide Industries, which is trading at over 35 times.
Essentially, the outlook for the traditional lead-acid battery business is stable. In the OEM business, passenger vehicle sales have peaked and are in a cyclical downturn, while two-wheeler sales have belatedly recovered post-COVID and are still buoyant. Battery makers typically make significant sales in the replacement market, which helps them survive even as new vehicle sales slow, and Amara Raja will continue to benefit from this trend. Although promising, the new energy business is still in its early stages and is in the process of building facilities, infrastructure, technology partnerships and acquiring customers. Significant investments are required and it will be necessary to closely watch how things develop. The business currently accounts for only about 4% of total revenue.
Long-term investors can continue to hold the stock, but the rising share price and current higher valuation mean that new exposure is not warranted at this time.
Stable footing
Amara Raja derives two-thirds of its revenue from automotive batteries (lead-acid), primarily from the four-wheeler and replacement markets. After two years of double-digit growth in FY22 and FY23 respectively, new vehicle sales growth is expected to fall to 8.4% in FY24 and further to 1.8% in the first four months of the current fiscal. The company supplies to almost all the big players including Maruti Suzuki, Hyundai, Honda, Mahindra & Mahindra and Tata Motors, but robust new vehicle sales post-COVID suggest that battery replacement demand for these vehicles will hold the fort in the short to medium term amid a cyclical downturn in new vehicle sales. The company has a 35% market share in the four-wheeler aftermarket.
Moreover, there are two factors that could help cushion the fall in new vehicle sales to some extent. First, new bike sales continue to grow at a high teens in FY25, where the company enjoys a 25 percent market share in supplies to OEMs. Second, Amara Raja also derives just under a third of its revenue from supplying industrial batteries (telecom, home inverters, UPS, railways, etc.), whose cycles and outlook are different to the automotive sector.
Emerging Segments
Promising in the long term is the new energy business which includes manufacturing of lithium-ion battery cells and packs, EV charging products and energy storage solutions. This business is undertaken through wholly owned subsidiaries Amara Raja Advanced Cell Technologies and Amara Raja Power Systems. Lithium battery packs are currently being supplied to three-wheeler OEMs. The company is setting up a new pack assembly plant in Telangana to cater to two-wheelers, three-wheelers and industrial applications. Production is expected to commence in FY25. It has also started construction of a Cell Gigafactory which will expand its initial capacity of 2GW in Phase I to 16GW by 2030. The company is working on both NMC (Nickel Manganese Cobalt) and LFP (Lithium Iron Phosphate) technologies for cells.
For cell technology, in-house R&D and investments and technology partnerships with several technology companies are expected to provide support. The company requires significant investments in its new energy business. Management expects to spend Rs 2,000 crore in the near term on an in-house R&D centre and NMC line (2GW) for cells. Another Rs 2,000-2,500 crore is expected in the near future on LFP lines (4-5GW). Commercial production of cells is expected by the end of FY26 or FY27.
Existing customers in the new energy segment include Piaggio, Mahindra & Mahindra, BSNL and Indus Towers. Amara Raja recently signed an agreement with Ather to supply cells for two-wheelers when the company commences production.
Segment profit margin for this business was 5% in the first quarter of FY25.
Finance
Consolidated net sales increased 16.7% to Rs 326.3 billion and net profit increased 25.6% to Rs 24.9 billion in the first quarter of FY25. Operating margin was 13.4%, up from 13.1% in the same period last year. Prices of lead, a key raw material, have been declining in recent months, but the company implemented price increases during the quarter to pass on higher copper, plastic and other operating costs.
The company expects to require capital expenditure of Rs 1,000-1,500 crore this fiscal year and is planning to raise some short-term debt to cover this. Long-term debt plans are also being considered given the expenditure requirements of the new energy business. However, the fact that the company does not currently have a significant debt load works in its favour.
