Amara Raja's (AMRJ) Q1FY19 revenue grew ~19% year-on-year, ~2%-4% ahead of our/consensus estimate.
Amara Raja’s (AMRJ) Q1FY19 revenue grew ~19% year-on-year, ~2%-4% ahead of our/consensus estimate. However, Ebitda margin at 12.4% disappointed (Nomura: 14%, consensus: 14.5%) on a ~280bp quarter-on-quarter decline in gross margin. This was impacted by: (a) higher OEM and trading mix; and (b) 70-80% higher sulphuric acid costs due to closure of Sterlite’s plant.
Going forward, management will try to develop alternative sources to lower costs. Management indicated that volume growth in 4W automotive was ~30% y-o-y with replacement at ~18-19% y-o-y and 20% y-o-y in 2Ws. However, industrial revenue was flattish, impacted by a decline in revenue for the telecom segment. Other segments in industrial had double-digit growth.
We maintain our view that AMRJ can deliver a healthy 14-15% FY18/20F volume CAGR in the 4W replacement segment, led by market share gains in the unorganised segment post GST. However, the telecom segment (~15% of FY18 revenue) remains a concern though it seems to have bottomed out.
We think AMRJ can offset some of this through other segments, eg, e-rickshaws and solar. We expect 5%-9% volume growth in this segment in FY19/20F. With current lead prices lower by ~10% from the Q1FY19 average, we expect AMRJ’s Ebitda margins to improve. We estimate margins to improve further to 14.5-15.4% over FY19/20F (from 15.3-15.7% previously).
Overall, our FY19/20F EPS estimates are down by 3%/2%. We maintain our target multiple at 23x average FY20/21F EPS of Rs 41.8 to arrive at our TP of Rs 960 (Rs 981 earlier). Our target multiple is in the middle of the expected trading range of 20-25x to factor in a weaker industrial business outlook. The stock currently trades at ~21.3xFY20F EPS of Rs 38.7, which we think is attractive as we expect a strong ~18% EPS CAGR over FY18/21F.