Amara Raja's net sales of  ₹1,815 crore, a fraction higher than the year-ago period, was about 6% higher than the average estimate of 12 brokers on Bloomberg (HT file)
Amara Raja's net sales of 1,815 crore, a fraction higher than the year-ago period, was about 6% higher than the average estimate of 12 brokers on Bloomberg (HT file)

Will changing dynamics crimp Amara Raja’s earnings growth?

  • There are also challenges in the near term, with a price war on in the replacement market for auto batteries
  • Exide and Amara Raja will have to fight for a larger share of the replacement market, when the original equipment segment is dull

As equity markets opened weak on Monday, Amara Raja Batteries Ltd shares were among the few that opened 2% higher. Its power-packed June quarter performance, which beat the Street’s estimates on all fronts, sparked investor interest.

To begin with, net sales of 1,815 crore, a fraction higher than the year-ago period, was about 6% higher than the average estimate of 12 brokers on Bloomberg. The key driver was the robust 7% year-on-year (y-o-y) jump in sales volumes.

Here’s how that happened. The slowdown in original equipment (OE) sales was more than counter-balanced by the thriving replacement market. Further, the industrial segment reportedly clocked 11% y-o-y growth, driven by uninterrupted power supply systems. The telecoms sector continued its lacklustre trajectory even as inverter sales were not very impressive.

So, while sales from the replacement market brought in operating leverage, softer lead prices necessitated a pass through to the OEs. This dragged down revenue. However, the 10-12% y-o-y drop in lead prices added the punch to profits.

EBITDA for the quarter, therefore, rose 26% to 279 crore, higher than analysts’ forecasts. Ebitda is earnings before interest, tax, depreciation and amortization.

Also, investors were perhaps pleased with the 300 basis point y-o-y expansion in the Ebitda margin to 15.4%. This, especially since it comes when most auto and auto-component firms’ revenue and profitability are set to drop during the June quarter.

That said, it is time to turn cautious about prospects. On the one hand, lead prices have started moving up. And more importantly, there is no respite from falling auto sales and spreading economic gloom. Continued slow auto sales will then mirror in weak growth in the replacement market for batteries, which brings in higher realisations and profit margins.

On top of this, battery makers have the challenge of coping with the transition to electric vehicles. The trend towards OEs entering into tie-ups directly for lithium-ion batteries is increasing. Will this dent the duopoly held by Amara Raja and market leader Exide Industries Ltd?

And, there are challenges in the near term with a price war in the replacement market for auto batteries. According to a report by Motilal Oswal Services Ltd, Amara Raja recently reacted to the 5-6% price cut in the two-wheeler replacement market by Exide.

Also, the former increased the warranty period by six months across auto segments. These factors could weigh on blended realisations and profitability. After all, Exide and Amara will have to fight for a larger share of the replacement market, when the OE segment is dull.

Investors must also be watchful of Amara Raja’s technology and marketshare progression, following the recent exit of Johnson Controls, its technical and financial partner for over two decades.

So far, the strong performance has backed the stock’s valuation. At 620, Amara Raja trades at around 16 times its FY21 estimated earnings, pricing in the near-term 10-15% earnings growth. In fact, if lead prices continue to rise and sales fall prey to competition in a market that is shifting to the slow lane, growth and valuations may lose their charge.

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