Home / Markets / Mark To Market /  Amara Raja’s margins rise but not enough to power the stock

Amara Raja Batteries Ltd could not quite power its numbers as most investors would have wanted to see. The company’s revenue fell 1% in the March quarter, thanks to a slowdown in demand from original equipment manufacturers (OEMs).

But that doesn’t seem to have perturbed investors too much. The company’s shares have held firm since its results were announced on 15 May. That’s largely because Amara Raja has passed the margins test quite smoothly, improving profit margin by 220 basis points from a year earlier.

Analysts attribute the margin enhancement to lower lead prices. Besides, a shift away in the revenue mix to the replacement market, as against the OEM segment, has also added to gross margins.

Ebitda margin widened to 15.5% in Q4, as against 13.3% a year earlier. Ebitda is earnings before interest, tax, depreciation and amortization.

Future margin trends are more likely to be shaped by softening lead prices. “If the recent fall in lead price (currently at $1,760 per tonne vs. 4Q average of $2,038) sustains, it may further aid margins," pointed IIFL Securities Ltd in a note to clients.

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(Graphic: Naveen Kumar Saini/Mint)

Coming back to sales, volumes in the four-wheeler OEM segment slid 10% in Q4. Another key factor slowing down growth for the company was lower realizations in its key products. The only cheer for Amara Raja came from the replacement market both in the four-wheeler and two-wheeler segments, though the growth has been slower than before.

Growth has been flat in the industrial segment, too, due to sluggishness in the telecom industry. The management highlighted that business potential in telecom has reduced by 20%. In the inverter segment, too, growth has been flat.

The stock price had been weighed down last year as the company had terminated its agreement with Johnson Control Inc. for technical assistance. However, the management sounded optimistic about its in-house technology- building capabilities.

Still, the Amara Raja stock has lost a considerable amount of its valuation, and its one-time premium to Exide Industries Ltd’s stock has disappeared. A year ago, its one-year forward price-earnings (P-E) multiple was about 25 times, which has now shrunk to about 17 times forward earnings, according to Bloomberg consensus estimates. That’s even lower than Exide’s forward P-E of 19.1 times. To regain some of its lost mojo in a slowing automobile market may not be easy.

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