Amara Raja’s lithium-ion pact powers the stock, but jerks likely ahead

Amara Raja is looking to develop a gigafactory and eying 16GWh capacity in 10 years. (Photo: iStockphoto)
Amara Raja is looking to develop a gigafactory and eying 16GWh capacity in 10 years. (Photo: iStockphoto)

Summary

  • The Amara Raja stock hits a new 52-week high of 1,656.05 on the news of its subsidiary Amara Raja Advanced Cell Technologies entering into a technical licensing agreement with GIB EnergyX Slovakia

MUMBAI :

A crucial and much-awaited trigger for battery maker Amara Raja Energy & Mobility Ltd has played out—a technology tie-up for lithium-ion.

Its subsidiary Amara Raja Advanced Cell Technologies entered into a technical licensing agreement with GIB EnergyX Slovakia, a subsidiary of China-based Gotion High Tech Co.

The partnership will help the battery maker get access to GIB’s LFP technology for lithium-ion cell manufacturing. This type of battery is mainly used in passenger vehicles and three-wheelers.

In reaction, the Amara Raja stock zoomed 20% on Tuesday, also hitting a new 52-week high of 1,656.05. Amara Raja is looking to develop a gigafactory and eyeing 16GWh capacity in 10 years. In 2023, Amara Raja announced an investment outlay of 9,500 crore to establish the Amara Raja Giga Corridor in the state of Telangana. The Street is excited as this deal could accelerate the process of meeting the target.

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Transition towards lithium-ion batteries

Amara Raja’s core business is manufacturing lead-acid batteries, but the industry is gradually transitioning to lithium-ion batteries. Hence, it is investing in building lithium-ion capacities to meet demand, mainly from electric vehicles.

Amara Raja has started assembling and supplying lithium battery packs and manufacturing chargers to customers in two-wheeler, three-wheeler and industrial segments. It has a small lithium-ion cell manufacturing facility with 2GWh capacity. This was built with an investment of 1,500 crore and is likely to come on stream in 2025-26. In this backdrop, the GIB deal is a step in the right direction. Remember that,Exide Energy Solutions has partnered with SVOLT to build its own lithium-ion battery plant, which is expected to begin operations in 2024-25.

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After Tuesday's jump, the Amara Raja stock has outpaced close competitor Exide Industries Ltd with returns of over 100% in calendar year 2024 so far.But the lithium-ion business is capital intensive, so in the medium term, Amara Raja’s return ratios and profitability may come under pressure. Plus, competition is high. Many large original equipment manufacturers (OEMs) have already tied up with various battery suppliers. For instance, Hyundai-Kia Motors has signed a memorandum of understanding with Exide.

“While OEMs will opt for multiple suppliers, we believe they will appoint other suppliers at a particular scale, which may take a couple of years," said a Kotak Institutional Equities report dated 25 June. In simple terms, huge investments are unlikely to fetch immediate results, especially on earnings growth. Further, the risk of cannibalization (lithium-ion batteries replacing lead-acid) means that Street needs to temper its earnings expectations from lead-acid business. Thus, valuation multiples may need to moderate. According to Bloomberg data, the stock trades at 27 times 2024-25 estimated earnings.

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