Four-wheeler replacement volume (32% of revenue in FY16) grew by 17% y-o-y, vs the industry growth of 10-12%.
We estimate AMRJ will deliver a 16% volume CAGR over FY16-18F in this segment. However, there is a risk that the overall industry growth may slow to a 7% CAGR over FY16-18F (vs 10% in FY16) due to flat PV sales over FY12-15. Competition will remain tough as the market leader Exide (EXID IN, Neutral) has been selectively correcting prices by up to 3% to compete more effectively. Exide brand batteries are now priced 5% ahead of Amaron and 3% below Amaron for the Sonic brand.
We lower our FY17-18F EPS estimates by 7-8% to factor in a weaker FY16. We expect margins to expand by 90bps to 18.5-18.8% over FY17-18F as in-house inverter manufacturing ramps up in FY17F. We lower our TP to `800, which is based on 20x FY18F EPS of `40. Valuations at 21.2x FY18F EPS are less demanding with the stock having corrected 14% since 28 September 2015 (vs Sensex down 2%). Hence, we upgrade the stock to neutral. The likely implementation of the goods and services tax (GST) from Apr-17 can be an upside risk. The higher lead price in 4QFY16 is a near-term downside risk to EBITDA margins.