Amara Raja, Exide Industries slide up to 30% from recent peaks. What should investors do?

Shares of battery manufacturers Amara Raja Energy and Exide Industries have been on a consistent downward trajectory over the past five months, including November, as both stocks face persistent selling pressure.

The companies' recent financial results for the September quarter have failed to boost investor sentiment as both companies reported earnings that fell short of analysts' expectations, contributing to the ongoing decline in their stock prices.

At current levels, Amara Raja Energy's stock is trading at ₹1,303 per share, which represents a 27% decline from its recent peak of ₹1,775. Similarly, Exide Industries' shares are priced at ₹437, down 30% from their high of ₹620, which they hit in July.

The performance of both companies during the reporting quarter was impacted by excess channel inventories for auto OEMs, which dampened demand across the automotive sector. For the first time in more than two years, sales of cars to dealers declined in Q2FY25 as manufacturers scaled back dispatches to reduce high levels of unsold inventory.

Automakers' sales to dealers fell by a cumulative 1.8% YoY to approximately 10 lakh units in the second quarter.

Despite this, both companies experienced healthy demand in the aftermarket division, which includes replacing original equipment batteries as well as strong demand for two-wheeler batteries.

Looking at the Q2 numbers, Amara Raja reported a net profit of ₹236 crore, up from ₹226 crore a year earlier. However, this marks the slowest quarterly profit growth in a year. Its revenue from operations grew by 10% YoY to ₹3,251 crore in Q2 FY25, but this was its slowest growth since the December quarter.

Similarly, Exide's revenue from operations in Q2 grew by 4% YoY, reaching ₹4,267 crore. However, profit after tax for Q2 FY25 declined to ₹233 crore, down from ₹287 crore in the same period last year.

Analyst trim target prices post Q2

For Amara Raja, domestic brokerage firm Kotak Institutional Equities has kept its 'Sell' rating on the stock due to expensive valuations and revised its target price downward to ₹1,050 per share from an earlier target of ₹1,075.

The brokerage has lowered its FY2025-27 standalone EPS estimates by 6-7% due to assumptions of a lower EBITDA margin, reduced other income, and higher interest expenses. While the brokerage expects the company’s lead-acid business to remain stable over the medium term, it also highlighted risks in the long term as the industry shifts towards the lithium battery business, especially in the telecom segment, where competition is intensifying.

Motilal Oswal also retained its 'Neutral' rating on the stock with a target price of ₹1,310. It said the company's foray into the lithium-ion battery market is seen as strategically sound given the segment’s opportunities and the risks facing its core business.

However, it pointed out challenges such as limited market opportunities due to existing OEM partnerships, the low-margin nature of the lithium-ion business potentially diluting returns, and the long-term viability of the technology, despite the large capital investment required.

On the other hand, Elara Capital raised its target price for Amara Raja's stock to ₹1,573, while maintaining its 'Accumulate' rating.

For Exide Industries, global brokerage firm Citi revised its price target to ₹540 per share, down from the earlier target of ₹610. Kotak Institutional Equities also lowered its price target for Exide to ₹300 per share, from ₹315, while maintaining its 'Sell' rating.

Kotak believes the company’s lithium battery (LiB) business will scale up in the coming years, however, profitability and return ratios are expected to remain under pressure due to higher capital expenditure requirements and the commoditised and B2B nature of the business. 

Nuvama Institutional Equities has also reduced its target price for Exide to ₹460 per share, down from the previous target of ₹550, while maintaining a 'hold' rating on the stock.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.