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MOSL: AMARA RAJA BATTERIES (Buy)-Mix, lower lead price drive margin beat-telecom segment market share at 55%

Amara Raja Batteries: Mix, lower lead price drive margin beat; telecom segment market share at 55%

(AMRJ IN, Mkt Cap USD1.8b, CMP INR741, TP INR855, 15% Upside, Buy)

 

• Strong volume growth in aftermarket/telecom/exports: Net sales grew 9% YoY (-3% QoQ) to INR16.9b (our estimate: INR17.6b), led by healthy volume growth in the auto aftermarket (4W: +12% YoY; 2W: +20% YoY) and exports (+40% YoY). Industrial segment volumes grew by just ~2%, led by 12% YoY growth in Telecom. AMRJ did not take price hike in the aftermarket segment in 3QFY19, but passed on lower lead prices in the OEM/telecom segments.
• Product mix, lower lead price drive EBITDA margin outperformance: Gross margin improved 190bp QoQ (-30bp YoY) to 32.8% (our estimate: 31.4%), led by a favorable product mix and lower lead prices, partly offset by INR depreciation. EBITDA margin, thus, expanded 140bp QoQ (-70bp YoY) to 14.9% (our estimate of 13.9%). Adj. PAT declined 2.6% YoY (+8.9% QoQ) to INR1.3b (our estimate: INR1.2b). For 9MFY19, revenue/EBITDA/adj. PAT grew 16.7%/5.5%/0.7%.
• Takeaways from management interaction: (a) Market share in telecom segment recovering (~55% in 3Q v/s lows of ~40% in 2HFY18). (b) Realized lead prices at INR150-152k/ton in 3QFY19 (v/s INR160-164k in 2QFY19). (c) Share of trading batteries was nil in 3QFY19 as it is now manufactured in-house. (d) Increasing 4W capacity by 2-2.5m to 13.5m units (by Apr-19) and 2W capacity by 3m units to 17m (by Sep-19). (e) Expanding tubular battery capacity by ~30k units/month to ~110k/month by 2QFY20. (f) Lithium ion: Invested INR100-150m for BMS for e-rickshaw and low voltage batteries, but is yet to decide on battery assembly plant. (g) Capex guidance of INR4b each in FY19/20.