Markets
Rich valuation could loosen Amara Raja’s connection with investors
Summary
- Despite a post-earnings dip, the battery maker’s stock is up around 80% this year and trades at 24 times estimated FY26 earnings. But is this valuation justified?
The June quarter (Q1FY25) earnings of battery maker Amara Raja Energy & Mobility Ltd failed to recharge investor sentiment. The stock is down 7% since the results were announced on Saturday, while the Nifty 500 index is down just 2.2%.
A particular disappointment for the Street was the 90-basis-points sequential contraction in the standalone Ebitda margin to 13.7%. While the reading was better than that of rival Exide Industries Ltd, it fell short of analysts’ estimates. An unfavourable product mix and rising raw material costs weighed on Amara Raja’s gross margin and hurt profitability.
As for volumes, year-on-year original equipment manufacturer (OEM) volumes grew about 6% in the four-wheeler segment, replacement rose 11%, and exports jumped 45%. In the two-wheeler segment, year-on-year OEM volume rose 25% and replacement was up 18%.
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On the flipside, industrial volume fell around 5%, led by subdued performance of its telecom segment owing to a high base. These misses caused some brokerages to downgrade their earnings forecasts. Motilal Oswal Financial Services Ltd cut its FY25 and FY26 earnings-per-share estimates by 10% and 16%, respectively, to factor in the increase in commodity prices.
Lithium-ion batteries are a long-term threat
For now, Amara Raja’s core business, manufacturing lead-acid batteries, is expected to be steady. However, the industry’s gradual shift to lithium-ion batteries poses a long-term threat. The company is investing in building lithium-ion capacity to meet the growing demand, mainly from electric vehicles. It has plans for ₹9,500 crore of capital expenditure (capex) over 10 years to increase its lithium-ion cell manufacturing capacity to 16 GWh.
To scale the business, Amara Raja formed a technology partnership with Gotion InoBat Batteries EnergyX Slovakia in June, which boosted the stock to a new 52-week high that month. The company has also brought on Ather Energy as one of its OEM anchor clients.
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In FY25, Amara Raja is looking to invest ₹1,000-1,500 crore as capex for lead-acid batteries and new energy projects. The company is currently debt-free, but may need short-term debt this year. It also has plans for long-term financing, management said during the earnings call. This could be a dampener for the stock, especially as the new lithium-ion factories will take time to become fully operational, and because the low margins of this business could dilute returns.
Even so, the 81% jump in Amara Raja’s stock so far this year suggests that the market is focused on the positives. The stock trades at 24 times estimated FY26 earnings, Bloomberg data showed. Amid these challenges, the valuation doesn't seem justified.
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