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Amara Raja Batteries Ltd – A Turnaround Story In The Making?

Company Name – Amara Raja Batteries Limited (Amara Raja)

Current Share Price – INR 598 (February 6, 2023)

Market Cap – INR 10,211 cr


1. What is interesting about the stock?

"Shutting off the thought process is not rejuvenating; the mind is like a car battery - it recharges by running" --- Bill Watterson

Investing meets Batteries.

In a highly competitive Indian Automobile market where there are over 30 brands in operation, the battery segment is effectively a duopolistic business. Amara Raja and Exide Batteries are the two dominant players ruling the mobility battery business for many decades in India. Every major auto OEM in India relies on Amara raja for its Lead-Acid battery sourcing. The auto battery segment constitutes a big chunk (66%) of the Company's business, the other segment being Industrials (29%) which includes Telecom, UPS, Railways, Power, Oil & Natural Gas sectors.

However, what makes Amara Raja’s case interesting is its focus on the new energy business, which the management expects to be their growth engine. The emergence of Lithium (Li) as an alternative energy storage technology has opened a door of opportunities. The overall lithium demand over the next five years is expected to be about 30 GW demand coming up by 2025, and close to 150 GW in 2030. Company has signed a memorandum of understanding (MoU) with the Telangana government to set up a gigafactory (cell manufacturing capacity of up to 16GWh and assembly capacity of up to 5 GWh) for manufacturing lithium-ion batteries in the Mahbubnagar district of the state. The company aims to invest INR 9,500 crore in the facility in the next 10 years. Amara Raja has also hived off new age business into a subsidiary that could look for external funding.

Amara Raja has started a pilot scale facility for manufacturing Li battery packs, to support two & three-wheeler customer requirements, this unit can be ramped further. In December 2020, they launched the Advanced Lithium-ion Technology Hub, where they were able to simulate the cell-making process. Concisely, the company wants to enter the entire value chain in the Electric Vehicle batteries segment.

EV development in general and lithium-ion batteries, in particular, should get a boost with INR 18,000 crore of government subsidies under the INR 1.6 lakh crore local production-linked incentive (PLI) scheme announced in November 2020. The PLI scheme has earmarked INR 18,000 crore towards advanced cell chemistry, which aims at bringing online at least 50 GW of lithium-ion batteries to the market.

The Industrial battery business has also seen a big uptick in performance in FY21 and FY22. The pandemic forced people to stay indoors & shop online, this led to e-commerce companies restocking their warehouses, increasing their capacities & streamlining their supply chains. This translated to an increased usage of forklifts for efficient warehousing activities. With the imposition of lockdowns in urban agglomerates, Work from Home (WFH) culture grew & so has the demand for Home UPS & Inverters. This increased sales would translate to healthy replacement demand shortly. The ‘WFH’ trend required telecom companies to ensure 100% tower uptime for uninterrupted connectivity not only in urban areas but also across the nation. As a result, the demand for storage batteries from most tower companies increased substantially.

Data Centers are the new sunrise sector that is attracting huge global attention and investment. This is owing to the impact of data protection laws, the increased shift from captive to co-location data centers, and the implementation of new technologies like 5G, edge computing, and the internet of things (IoT) which is expected to drive sustained investor demand for this asset class over the next five years. Currently, data centers in all of India need only 400 MW (megawatt) power capacity. That is less than Singapore and just 10% of the capacity of Northern Virginia, the largest data center market in the world. Since 2014, India’s Data Center market has grown by 520% (against a global average growth of 100% over the same period), albeit on a smaller base.

Recently, telecom companies have been rolling out 5G networks providing a tailwind to the Company.

Key Strengths

  • Debt-free company with net surplus cash of ~INR 550 cr as of September 30, 2022

  • A strong focus on R&D, process improvements, business excellence, quality controls

  • Strong and experienced management team leading the way to a new-gen leadership team (Promoters Ramchandra Galla & Jaydev Galla giving way to young members Harsh Gourineni & Vikram Gourineni)

  • Government of India’s push for faster adoption of EVs through FAME-II policy by providing subsidies to buyers

Key Weaknesses

  • De-growth in auto battery business due to lockdowns in COVID 1st & 2nd waves

  • Supply chain disruptions (shortage of key components) owing to uncertainties could affect auto sales and in turn impact battery sales

  • Andhra Pradesh high courts interim suspension extension of Andhra Pradesh Pollution Control Board’s (APPCB) plants closure orders. The state pollution board charged the battery maker with polluting air, which resulted in the presence of high levels of lead in the blood of almost all its employees and people of the surrounding villages, discharging untreated wastewater into the drains and untreated sewage into the stormwater drains, and causing soil pollution. The matteras been pending since 2021

  • A fire broke out in the unit at Nunegundlapalli village of Chittoor District in Andhra Pradesh on January 30, 2023. Management expects that there will be an impact on production and supplies from the said unit in the interim period. The revenue from this unit in FY 22 was around INR 700 crore. The potential impact of ~ INR 50-60 cr in quarterly EBITDA

2. Key Historical Financials

  • Revenue growth has been poor in FY20 and FY21 but picked up in FY22

  • Company EBITDA margins have increased back to 15% in Q2FY23 as the raw material pressure has eased

  • Cash flow conversion (CFO/EBITDA) has been poor - 61% in FY22

  • ROCE and ROE fell in FY22 due to a fall in EBITDA/PAT margins

3. What is my view on company valuation?

Amara Raja’s stock price has had no return for the last 1-year period. The stock has been in an oversold position with FIIs & DIIs paring down their stakes (Clarios which is a strategic investor sold a 10% stake).

Amara Raja trades at a P/E (TTM) of 16x vs Exide Industries at a multiple of 20x. The long-term average P/E (5 years) of Amara Raja is around 23x & for Exide around 19x. EV/EBITDA (TTM) wise Amara Raja trades at 7.8x vs Exide at 9.6x.

Management expects growth of 15-17% in the next 5 years vs 10% delivered in the last 5 years.

Company looks fairly valued at the current market price, and investors having a long-term outlook can evaluate after getting clarity on the high court ruling on the APPCB issue. However, the matter could drag on as the losing party may file in the Supreme Court of India to review High Court's decision.

4. What are the risks to the investment analysis?

Key risks to investment analysis are:

  • Failure of management’s measures to address Lead contamination led to severe health issues in employees & factory staff

  • Increased competition to invest from other conglomerates like Mahindra, Reliance, and Hyundai Motors in India’s Advanced Cell Chemistry (ACC) battery scheme

  • India’s dependency on overseas suppliers for automobile semiconductors is likely to pose a challenge for the next 3-5 years


About the Author

I have over 7 years of work experience in the Automobile Industry & Technology sectors in India. Currently, I am working as a Research & Development Engineer at a Global Automobile major helping them scale their Electric Vehicles ambitions.

I hold Master’s & Bachelor’s degrees in Engineering from the Indian Institute of Technology, Madras (IITM).

I am an insignificant public investor & have an avid interest in Trekking, Photography, and Cybersecurity.


I have had no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.

I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.

I have used publicly available information while writing this article.


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