Replacement demand, expansion to support revenue growth for Amara Raja

The company outperformed Exide for the fifth consecutive quarter

Steady replacement demand, improvement in telecom segment, and market share gains are positive signs for Amara Raja Batteries. Expansion into new segments could add to incremental revenues over the next few quarters.

The near-term trigger for the stock, however, has been the June quarter (Q1) results. The Q1 show not only beat analysts’ estimates but was better than that of peer Exide Industries, leading to a 9 per cent gain in the stock price.

Though revenues and operating profit were down 37-45 per cent year-on-year (YoY) they were above estimates, led by auto replacement, telecom, and home uninterruptible power systems (UPS). In comparison, Exide Industries reported a steeper 45 per cent fall in revenues while its operating profit margins were down 350 basis points. This is the fifth consecutive quarter of outperformance for Amara Raja. 

Despite the 280 basis points fall in gross margins on a sequential basis, dip in staff costs helped the company limit the fall in operating profit margins to 200 basis points. With utilisation levels improving, margins are expected to improve for the firms going ahead. 

Among the key segments, battery supplies to automakers were expectedly hit the most, falling over 80 per cent YoY for four-wheelers and 60 per cent for two-wheelers. The industrial segment, too, declined 35 per cent while inverters were down 20 per cent. However, the auto replacement segment (two- and four-wheelers) arrested the decline as they fell 20-27 per cent. The segment has already seen a recovery with YoY growth for June and July, according to the management. 

With the lockdown easing, brokerages expect a sharp recovery. Nomura Research expects replacement demand to remain resilient because of the limited lifespan of batteries. What should help growth is market share gain from the unorganised segment, which has a share of 20 per cent in car batteries. While replacement growth for battery players is expected to be in the single digits in FY21, it is expected to jump to the 12-15 per cent range in FY22. Growth in the telecom segment, exports and new segments such as e-rickshaws and solar should add to Amara Raja’s revenues. 

Given the outperformance in the quarter, analysts at Edelweiss Research have upgraded the stock with a target price of Rs 845 and have ascribed a 15 per cent valuation premium over Exide. From the current levels this indicates an upside of 14 per cent.