Q4FY23 Review: Amara Raja Batteries: Expect sharp slowdown in growth

24 May 2023 , 10:50 AM

AMRJ’s 4Q Ebitda missed Analysts of IIFL Capital Services estimate by 16% due to weakerthan-expected revenue and margins. Analysts of IIFL Capital Services see strong possibility of weak replacement demand in 2023, on the third anniversary of drop in new vehicle sales in 2020. As a result, they expect revenue and earnings growth to see sharp slowdown in FY24/FY25. Analysts of IIFL Capital Services cut their FY24/FY25 EPS estimates by 7-8% and downgrade the stock from ADD to REDUCE (TP Rs580). Concerns around the impact of electrification and terminal value of lead acid battery business are valid long-term concerns. In the near term, core earnings growth may be lacklustre, further denting the sector’s attractiveness. Large investments in building Li-ion capacity, and uncertainty on scale-up and profitability may keep investors on the side-lines.

Q4 Ebitda 16% below estimate: 

Q4 revenue grew 11% YoY but dropped 8% QoQ, and came in 13% below Analysts of IIFL Capital Services estimate. Gross margin (GM) contracted 40bps QoQ to 33.0%, due to uptick in price of lead and higher share of low-margin trading revenue. Ebitda margin contracted 120bps QoQ to 13.9%. It missed our estimate by 40bps (GM-led). Absolute Ebitda missed estimate by 16%, while PAT missed by 18%.

FY24 revenue growth to be subdued by low first-time replacement demand: 

Analysts of IIFL Capital Services expect AMRJ’s revenue growth to moderate from 20% Cagr over FY21-23 to mid-single-digit in FY24. The sharp fall in vehicle retails in FY21 is likely to hurt first-time replacement demand for batteries in FY24. Batteries typically have a well-defined 3yr replacement cycle. A fall in firsttime replacement volumes will drag down overall replacement growth. Analysts of IIFL Capital Services also expect Auto OE segment to see sharp deceleration, in line with their expectation for auto industry volume growth.

Investment in Li-ion batteries to weigh on cash flows/earnings: 

AMRJ is planning to invest Rs95bn over 10 years to set up a Lithium-ion battery giga-factory (incl. cell manufacturing). The plant would ultimately have a capacity of 16GWh, in addition to battery pack assembly unit of up to 5GWh. This project has a long gestation period. Even after the plant is commissioned, there would be uncertainty on cash flows given the lack of clarity on pace of EV adoption and low visibility on margins/ROCE.