Analyst corner | Amara Raja: Margins to improve to 15.7% in FY20

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Published: May 18, 2019 12:26:30 AM

Revenues were lower y-o-y due to a 13% y-o-y decline in lead prices that was passed on in all segments ex-Replacement. Given the slower OEM growth, we think Replacement 4W battery volume may slow to 6% y-o-y in FY21 from 10% y-o-y in FY20.

Amara Raja: Margins to improve to 15.7% in FY20Amara Raja: Margins to improve to 15.7% in FY20

Amara Raja (AMRJ) reported a 1% y-o-y revenue decline for Q4 with revenue 9-10% below consensus /Nomura estimates. Ebitda margin of 15.5% beat estimates (Cons: 14.8%, Nom: 15.2%) helped by a strong 200bp q-q gross margin improvement. This was driven by lower lead prices and a better mix.

In Q4, volume growth in 4W was 5% y-o-y (Replacement up ~10% y-y, Exports up 40% y-o-y, OEMs down 10% y-o-y). 2W segment growth was 7-8% (Replacement up 18% y-o-y, OEM down 20% y-o-y). Industrial segment volume growth was flat y-o-y due to a decline in the telecom segment and positive double-digit growth in other segments.

Revenues were lower y-o-y due to a 13% y-o-y decline in lead prices that was passed on in all segments ex-Replacement. Given the slower OEM growth, we think Replacement 4W battery volume may slow to 6% y-o-y in FY21 from 10% y-o-y in FY20.

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We lower our FY20-21 auto sector volume estimates by 3-5% to mainly build in the OEM slowdown. We now build in 10%/8% volume growth in the Replacement 4W segment over FY20-21. With benign lead prices, we expect margins to improve to 15.7%/15.8% over FY20-21 from 14% in FY19, though this may deflate revenue growth.

We lower our target P/E multiple to 18x from 20x, in line with our target P/E for Exide (EXID IN). As Johnson Controls is no longer a JV partner of AMRJ, we believe AMRJ will trade in-line with EXID’s long-term P/E multiple. Key upside risk is success in new segments like E-rickshaws.

We prefer Minda (MNDA IN, Buy) to AMRJ in the sector. We estimate industry volume growth in the 4W automotive Replacement battery segment to slow down to 6% in FY21 (from 10% in FY20). This is based on the past OE volume trends, assuming a three-year replacement cycle for PVs and two years for MHCVs/ LCVs and tractors.

AMRJ was able to sustain healthy 11% volume growth in the 4W Replacement segment in FY19, leading to market share gains in the segment. We expect the healthy momentum to continue and hence expect ~10% 4W Replacement volume growth in FY20 for AMRJ.

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