MOSL: AMARA RAJA BATTERIES (Buy)-Below est.; strong revenue growth, EBITDA margin of 12.4% at decade-low

Amara Raja Batteries: Below est.; strong revenue growth, EBITDA margin of 12.4% at decade-low

(AMRJ IN, Mkt Cap USD2.0b, CMP INR824, TP INR946, 15% Upside, Buy)

• Strong revenue helped by growth in Auto, Inverter segments: Net sales grew 18.8% YoY (+12.5% QoQ) to INR17.8b (est. of INR16.8b), led by healthy growth in Auto OE & aftermarket and ~60% growth in Inverter segment. Further, higher exports to South East Asia and Middle East countries also aided revenue growth. However, Industrial segment witnessed a small decline YoY (marginal growth QoQ), as demand from Telecom segment remained muted. AMRJ took a price hike of 4-5% in Auto OE and replacement to offset lead price inflation.
• EBITDA margins at decade-low due to adverse mix, non-lead inflation: Gross margin shrunk 150bp YoY (-280bp YoY) to an all-time low of 28.5% (est. of 31.5%) due to RM cost inflation (lead, plastic and sulphuric acid), a higher share of traded batteries (due to capacity constraint) and higher 4W OEM contribution. EBITDA margin, thus, shrunk 50bp YoY (-90bp YoY) to 12.4% (est. of 14.6%). Adj. PAT grew 13.2% (+3% QoQ) to INR1.1b (est. of INR1.3b). 
• Takeaways from management interaction: (a) Inverter segment grew 60%, driven by industry growth and market share gains. (b) Telecom segment volume declined in 2Q due to low spend by operators. Competitive intensity is easing, but price increase has not happened yet. AMRJ gained market share QoQ. c) Guided for capex of INR5.5b in FY19 for the 2W plant (balance capex of INR2b), INR800-900m for inverter, initial capex for 4W and maintenance capex. It will be investing INR7b to increase 4W capacity by 6.5m (to 17m in 18-24 months). 2W capacity stands at 15m; planning to add further 10m by FY21-22.