Home / Markets / Mark To Market /  Amara Raja investors are hardly excited about its backward integration plan

Shares of Amara Raja Ltd. were in focus after the company, post market hours on Modany, announced its backward integration plan. As a part of this plan, the company has proposed to buy the plastic component business for batteries from the promoter-owned entity Mangal Industries Ltd in a share swap deal.

In reaction, the stock rose 1.12% in opening deals on Tuesday only to give up gains later.

According to analysts at Motilal Oswal Financial Services, while the merger of the plastic component business is a step in the right direction, the capital outlay may have been better utilised for future technologies. "This needs to be seen in light of the limited use of plastics in the Li-ion batteries. This investment may not be future proof," said the Motilal Oswal report dated 27 September.

In a call with analysts, the company's management said it expects this backward integration to lead to better control over inventory management and the supply chain of raw materials.

Note that the deal will result in an equity dilution of 7.15% and lead to a 4.8 percentage points increase in the promoter's stake to 32.86%. As far as earnings are concerned, this merger is expected to add 110 basis points to the company's FY22 Ebitda margin and 3.7% earnings per share accretive on a fully-diluted basis. Ebitda is short for earnings before interest, tax, depreciation and amortisation. 

The Amara Raja management also expects synergies of 5 crore to 6 crore post tax.

The deal will require a slew of approvals and is expected to be completed over the next 12-14 months.

The Motilal Oswal report added that apart from gaining a credible technology partner, it needs to lay down a roadmap and strategy for its foray into Li-ion batteries. The domestic brokerage house is neutral on the stock as expectations of better earnings growth balance out the increasing threat of lithium chemistry in auto and industrial business.

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