BackAmara Raja Batteries stock is charged up as Q2 Ebitda beats estimates
Going ahead, Amara Batteries’ margin growth has levers such as improving volumes and moderation in lead prices
PremiumBattery manufacturer Amara Raja Batteries Ltd’s shares jumped by nearly 11% in Friday’s morning trade on the NSE thanks to better-than-expected September quarter (Q2FY23) results. Ebitda (earnings before interest, tax, depreciation and amortization) rose by as much as 34% year-on-year (y-o-y) to ₹360 crore. This was 21% above Emkay Global Financial Services estimates.
The beat here was primarily led by improvement in Amara Raja’s gross profit. This was driven by product price increases and higher benefits from softening of commodity costs such as lead. The Q2 gross margin rose by nearly 60 basis points (bps) y-o-y to 30.5%. One basis point is 0.01%. Ebitda margin rose by almost 150bps to 13.3%. Ebitda margin is at the highest in the past five quarters.
The growth was also aided by volume rise across automotive and industrial segments. The company noted that strong demand was seen in auto sector in aftermarket as well as OEM segments. OEM is original equipment manufacturer. Volumes from the passenger vehicle segment rose by 13-14% y-o-y while the increase from two-wheeler segment was around 10% y-o-y.
Further, the 5G rollout preparations is driving demand in the telecom segment. Overall, volumes grew by 10% y-o-y in Q2.
Going ahead, margin growth has levers such as improving volumes and moderation in lead prices. “Factoring-in better revenue & margin assumptions, we increase our FY23- 25E earnings per share by 2-8%," said Emkay analysts in a report on 4 November.
However, not everything is hunky-dory. Amara Raja has been impacted owing to headwinds from weaker mix and higher commodity prices, which has weighed on the sentiments for the stock. Analysts at Motilal Oswal Financial Services note that the declining cost of lithium batteries poses a threat to the auto and the industrial batteries business. As such, they reiterated their ‘Neutral’ rating as the expectation of better earnings growth balances out the increasing threat of lithium chemistry to the auto and industrial businesses.
Unsurprisingly, even after accounting after today’s rise, the Amara Raja stock is about 19% below its 52-week high of Rs714 apiece seen in November 2021. Emkay Global has a target price of Rs550 per share based on 11 times December 2022 estimated earnings per share. The broking firm has retained its ‘Hold’ rating as it does not see any near-term triggers. Amara Raja’s shares are now trading at around Rs575 apiece.
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