Amara Raja Batteries: A Neutral Outlook from Motilal Oswal
Amara Raja Batteries Ltd., one of India’s leading battery manufacturers, recently met with the management team of Motilal Oswal to discuss the company’s business updates. The meeting provided valuable insights into the company’s lead-acid business, gigafactory plans, and the factors driving its growth. In this article, we will delve into the key takeaways from the meeting and analyze why Motilal Oswal maintains a neutral stance on the stock.
Lead-Acid Business: A Mixed Bag
The lead-acid business of Amara Raja Batteries has witnessed a mixed trend. On the one hand, the Original Equipment (OE) demand has picked up after the GST rate cuts, which is a positive development for the company. However, the replacement demand is yet to pick up, which could be a concern. The company’s management team attributed this to the current market conditions and the ongoing transition to newer technologies.
Lead Costs: Stability is Key
Another important aspect of the lead-acid business is the cost of lead. According to the management team, the lead costs, excluding currency depreciation, remain stable on a quarter-on-quarter (QoQ) basis. This stability in lead costs is crucial for the company’s profitability, as fluctuations in lead prices can significantly impact the company’s margins.
Tubular Battery Plant: A Margin Booster
The tubular battery plant is expected to drive a 300-400 basis point (bp) margin improvement for the company’s tubular battery segment. This is a significant development, as the tubular battery segment is a key contributor to the company’s revenue. The management team is optimistic about the plant’s potential to enhance the company’s profitability and competitiveness in the market.
Recycling Plant: Cost Savings Ahead
The recycling plant is another important initiative for Amara Raja Batteries. The plant is expected to help the company save costs by 30-40 bp, which will have a positive impact on its profitability. The recycling plant will enable the company to recycle its own waste and reduce its dependence on external suppliers, thereby reducing its costs.
Gigafactory Plans: A New Chapter
Amara Raja Batteries is planning to set up its first gigafactory with a capacity of 2 GWhr NMC chemistry. The gigafactory is expected to commence operations by the first half of CY27. The company plans to invest Rs 25 billion in the gigafactory, with most of the investment coming from the parent company and some leverage, if required. The gigafactory will mark a new chapter in the company’s growth story and will enable it to tap into the growing demand for lithium-ion batteries in India.
Power Costs: A Short-Term Concern
The management team expects the power costs to remain elevated for one more quarter before stabilizing. This could be a short-term concern for the company, as high power costs can impact its profitability. However, the company is taking steps to mitigate this risk and is exploring ways to reduce its power costs.
Why Motilal Oswal Maintains a Neutral Stance
Despite the positive developments in the company’s lead-acid business and the gigafactory plans, Motilal Oswal maintains a neutral stance on the stock. The brokerage firm cites the current market conditions and the ongoing transition to newer technologies as the reasons for its neutral outlook. Additionally, the company’s valuation multiples are already factoring in the expected growth, which limits the upside potential for the stock.
Conclusion
In conclusion, Amara Raja Batteries is a company with a strong track record and a growth-oriented strategy. While the company’s lead-acid business and gigafactory plans are positive developments, the current market conditions and valuation multiples are factors that need to be considered. Motilal Oswal’s neutral stance on the stock is a reflection of these factors, and investors should exercise caution before making any investment decisions.
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