Valuations factor in robust volume outlook for Amara Raja

Given cost pressures and high stock valuation, the stock could see pressure even after Monday's 6% correction

Shares of automotive and industrial battery maker Amara Raja Batteries plunged as much as 7.6 per cent intra-day on Monday as weak performance in the October-December quarter (third quarter, or Q3), coupled with expensive stock valuation, triggered strong profit booking.

Additionally, concerns over profitability and earnings took a toll on sentiment, and could keep the stock under pressure in the near-term.

The company’s revenue in Q3 grew 12 per cent year-on-year to Rs 1,960 crore, compared to the Street’s belief of Rs 2,010 crore, or 15 per cent growth. Capacity constraints restricted sales in the four-wheeler replacement segment impacting the company’s top line, even as other businesses reported healthy growth.

While the top line fell short of expectations, higher costs hurt the company’s operational performance. Earnings before interest, tax, depreciation, and amortisation (Ebitda) grew 8 per cent versus analysts’ estimate of 16-20 per cent growth. Consequently, Ebitda margins contracted 60 basis points to 15.6 per cent, compared to 16.2 per cent in the corresponding quarter. Despite a 17.5-per cent rise over the previous year, the company’s net profit at Rs 193 crore also came in below analysts’ expectations.

The management remains confident of the business outlook led by healthy replacement demand and sustained recovery in the original equipment manufacturer (OEM) segment. Within the industrial segment, telecom and commercial uninterrupted power supply are likely to post near double-digit growth in the coming quarters.

In the medium-term, plans to set up a lead recycling plant and 50-megawatt solar power project will also help lower costs. It is estimated that with the commissioning of these two plants, Amara will be able to meet 25 per cent and 30 per cent of its lead and power needs, respectively. Nonethel­ess, the sharp run-up in the firm’s share price seems to have discounted these positives.

“Even after factoring in stro­ng volume growth, led by recovery in automotive and industrial segments and market share gains in the replacement segment and two-wheeler OEM segment, the firm’s stock valuation at 19.2x its 2022-23 estimated earnings are expensive,” said analysts at Kotak Institutional Equities.

Additionally, higher lead prices and deteriorating product mix, led by increasing contribution from automotive OEM and industrial segments, are likely to keep margins under pressure. While analysts expect the company to take some price hike, it remains to be seen whether these will help offset cost pressures.

Long-term investors are advised to avoid the stock at the current levels, given the adv­erse risk-to-reward situation.