Geojit recommended 'buy' the shares of Amara Raja Batteries Ltd for a target price of Rs 615/share. According to the brokerage's estimated target price, investors buying the stock of the company at the current market price could witness potential gains of 20%. The company is a small-cap batteries company having a market cap of Rs 8.719.12 crore.
Amara Raja Batteries Ltd is India's second largest Lead-acid battery manufacturer. Its segment includes 70% from automotive & rest from industrial with market leadership in the Telecom segment. During Q1FY23, Amara Raja Batteries' revenue grew by 39%YoY on the back of robust demand from aftermarket, OEM and industrial businesses. Amara Raja Batteries Ltd is a formidable player in the battery industry with strong balance sheet. The stock has corrected 34% from its 52-week high and trading below its historical avg.
Stock Outlook & Returns
The current share price is Rs 514.20 apiece. Its 52-week low is Rs 438.05/share and the 52 week high is Rs 781.60/share. It is currently trading at Rs 76.15/share above the 52-week low and Rs 267.4 below the 52 week high level, respectively.
Amara Raja Batteries share in the previous week, ending Friday, moved up 1.9%%. In the past 1 month, the shares gained 10.31%. In the past 3 months, the shares moved up by 2.82%. Over the 1 year, the share has fallen 29.51%. Whereas, in the past 3 years it has fallen 18.06% and 35.82% in 5 years, respectively. The long-term performance of the shares was poor with negative returns.
Strong growth across segments
During Q1FY23, revenue grew by 39%YoY led by robust demand from Aftermarket, OEM and Industrial businesses. Volume growth was stable in the UPS & Telecom business and registered double-digit volume growth. Though, higher raw materials price, supply constraints and increase in freight cost in select export markets have negatively affected the margin and thereby, PAT marginally grew by 6% YoY. Currently, the lead price is trading at 19% lower to its high of Rs.175/kg in April 2022 comparing to an average of Rs. 142/kg. Margin for the quarter came at 10.0% (-329bps YoY). The demand signal is positive across all segments and we believe respite in the commodity price and cost optimisation to limit margin de-gradation.
Strategy to power newer mobility
Amara Raja Batteries Limited's investments in capacity expansion is in line with the future demand for 2/3W and 4W. The company has launched several strategic initiatives to take advantage of fast emerging new opportunities to accelerate growth both in the lithium ion and other new age chemistries that are enabling accelerated transformation in renewable energy, electric mobility, microgrids etc. An outlay of Rs.1 billion dollar has been approved for the same. Currently the pilot project with regard to the technology transfer from ISRO is progressing as per the schedule and started supplying lithium battery pack and charger's to 3W applications. The company is planning to set up a giga factory in the near to medium term for lithium batteries & related products and targeted Rs.1billion revenue by FY23.
Delay in synergies posing threat for expansion
Despite increase in lead price globally, faster than expected progress in Li-ion cell in automotive and industrial segments is posing threat for expansion. There is no use of lead acid battery in e-2W and e-3W as an auto component, As a result it will impact the lead acid battery makers. Additionally, growing environment problems due to increase in the presence of lead in blood samples has also raised serious issue for lead acid battery manufacturers. However, the electric vehicle is also on a slow lane and demand for lithium ion could get delayed.
Valuations & Brokerage's comments
According to the brokerage, despite pressure in margin due to higher material cost, cost control initiatives and price hike will offset further decline. "We believe the auto sector is likely to show pick up in H2FY23 owing to strong rebound in sales numbers. In a duopoly market, Amara Raja Batteries hold 40% market share in the organized sector. However, the stock has corrected 34% and underperformed the benchmark index in the last one year due to weak OEM sales, legal issue with Andhra Pradesh Pollution Control and trailing behind global competitors in R&D for lithium ion cell manufacturing. Currently the stock is trading at its historical low and not expecting any further downside due to correction in the material cost. We value Amara Raja Batteries at 14x FY24E EPS with a target price of Rs. 615/share and maintain our buy rating at Current Market Price," the brokerage has said.
The stock has been picked from the brokerage report of Geojit. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decision.