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In a highly competitive Automobile market in India, with over 30 brands fighting for market share, it comes as a shock to see that the market for car batteries is essentially a duopoly between Amara Raja and Exide Batteries. Almost every OEM player in the Auto market relies on Amara Raja to source their lead-acid batteries from. As such, the Battery segment constitutes around 66% of Amara Raja’s revenue.
However, it is the new energy business which the company is focusing on, and what the management expects to be their growth engine. The emergence of Lithium as an alternative energy storage technology has opened a door of opportunities. The demand for lithium is only expected to grow in the coming years, with expectations of around 150 gigawatts in demand predicted by 2030. The company is focusing on Lithium Cells making process & battery pack assemblies and Electric Vehicles (EV) Charger portfolio for battery charging & swapping solutions as well as AC charging for residential applications.
In December 2020, Amara Raja launched the Advanced Lithium-ion Technology Hub, where they were able to simulate the cell making process. The company wants to have a presence across the entire value chain in Electric Vehicle batteries segment. EV development should get a boost of around 18,000 crore rupees in subsidies from the Government. That sum of money will go towards advance cell chemistry, in an attempt to bring 50 gigawatts of Lithium-ion batteries to the market.
The company benefits greatly from being debt-free, with a cash surplus of almost 420 crore rupees as of September 2021. Strong management team is leading the company with a focus on Research and Development and Quality Control.
However, Andhra Pradesh state pollution board has 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 waste water into the drains and untreated sewage into the storm water drains, and causing soil pollution.
So, what is our view on company valuation?
Amara Raja trades at a Price to Earnings Ratio (TTM) of 17 times vs Exide Industries at a multiple of 18 times. EV/EBITDA (TTM) wise both the companies trade at around 8-9 times. Company looks fairly valued at current market price, investors having a long-term outlook can buy after getting clarity on pollution board stand on the company’s operations.
As for the risks to the analysis, the failure of management’s measures to address the lead contamination leading to severe health issues in employees & factory staff has raised some questions on its ESG credentials. Moreover, India’s dependency on overseas suppliers for automobile semiconductor is likely to pose a challenge for the next 3 to 5 years to the sector's growth.
So, would you invest in Amara Raja Batteries?
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