MOSL: AMARA RAJA BATTERIES (BUY)-Below est-Product mix and lead inflation lead to miss on EBITDA margins

Amara Raja Batteries: Below est; Product mix and lead inflation lead to miss on EBITDA margins

(AMRJ IN, Mkt Cap USD2.3b, CMP INR830, TP INR958, 15% Upside, Buy)

• Auto, UPS, Exports drive revenues, Telecom laggard: Net sales grew 17.6% YoY (+1.8% QoQ) at INR15.8b (est INR15.1b), led by strong growth in auto and exports segments. However, on industrial side AMRJ’s revenues remain muted impacted by 10-15% decline in telecom segment revenues. AMRJ has not taken any price increase in either of segments during 4QFY18 and in Apr-May so-far.
• Product mix and lag in lead inflation pass-through dent margins: Gross margins shrunk 180bp QoQ (-70bp YoY) to 31.5% (est 33.3%). The management indicated that lag impact of lead price inflation (QoQ spot prices were stable) and unfavorable product mix (increase in proportion of traded goods) led to EBITDA margin decline of 230bp QoQ (40bp YoY) to 13.3% (est 15.4%).  PAT grew by 10.7% YoY (-18.3% QoQ) to INR1.09b (est INR1.21b).
• FY18 revenues grew 14% to INR60.6b, EBITDA grew 3.9% to INR8.8b. EBITDA margins contracted 140bp to 14.6%. Adjusted PAT declined 1.5% to INR4.7b. FY18 dividend at ~INR4.15/share (same as FY17).
• Takeaways from management interaction: a) Auto (including home UPS) grew 20-25% YoY with 2W, 4W segment grew 30% YoY and 25% respectively. Home UPS and E-rickshaw segment grew 20%, b) growth in E-rickshaw segment was better with the introduction of tubular batteries, c) Industrial segment growth remained muted YoY as 10-15% decline in telecom (in-line with industry) was offset by growth in other segments, d) Guided for capex of INR4bn in FY19, e) 2W capacity at 14m units while current 4W capacity is 10.5m units (expect 12m units by end FY19), f) guided for EBITDA margin range of 14%-16%.