PremiumAmara Raja’s $1 billion investment plan for the new energy segment needs more clarity, not to mention incremental announcements on capital expenditure, said analysts at Edelweiss Securities
Cost inflation has been a key worry for companies across sectors. Amara Raja Batteries Ltd is no exception.
Lead prices have increased by around 25% on a year-to-date basis and analysts note that spot lead rates are almost 15-18% higher now than the Q1FY22 average. Consequently in the June quarter, gross margins contracted both sequentially and annually to 31.1%, which was also around 200 basis points lower than Street expectations. One basis point is one-hundredth of a percentage point. That said, the company has taken price hikes to protect margin erosion. It raised prices by 1.5-2% each in April, July and August. Yet, the pass-through has been slow compared to the pace of rise in raw material costs, analysts said.
Secondly, adverse product mix is adding to the margin compression. As the share of the high-margin replacement segment is declining, the product mix is likely to be adverse over the next one year, analysts added. Simply put, margin pressure is here to stay in the near term.
But that’s not the only problem. The management’s $1 billion investment plan for the new energy segment needs more clarity, not to mention incremental announcements on capital expenditure, said analysts at Edelweiss Securities Ltd.
Investors would reckon that recently, the company announced its plans to invest in new green technologies with focus on lithium cells and battery packs, chargers, energy storage systems and advanced home energy solutions, among others. For investors of this stock, lower investment in research and development (R&D), and expertise in lithium-ion technology has been a key concern. Given the increasing penetration of electric vehicles (EVs), demand for lithium-ion batteries is likely to outpace lead-acid batteries by 2025.
Analysts at Emkay Global Financial Services Ltd cautioned in a note that over the next few years, capacity addition in lithium batteries may outpace demand due to the product-linked incentive (PLI) scheme of the government. This is expected to impact utilization and profitability.
“There could be downside risks to our earnings estimates in the medium term if Amara Raja announces investments in lithium battery manufacturing capacities," said the Emkay report.
In the backdrop of these issues, both the domestic brokerage firms have reduced their price target for the stock.
As such, shares of Amara Raja have been underperforming close competitor Exide Industries Ltd for quite some time now. So far in this calendar year, the former’s stock has declined by 22% trailing the latter’s 8% decline. The pressure on the stock has escalated in recent weeks after the Andhra Pradesh high court suspended its units at Karakambadi, Tirupati and Nunegundlapalli village in Chittoor district for violating pollution control norms.
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