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MOSL: AMARA RAJA BATTERIES (Buy)-Above est.-Lead price deflation hurts sales but boosts margins

AMARA RAJA BATTERIES: Above est.; Lead price deflation hurts sales but boosts margins

(AMRJ IN, Mkt Cap USD1.6b, CMP INR654, TP INR790, 21% Upside, Buy)

•  Volumes grew 7-8%, but price pass-through of lead deflation has resulted in revenue decline of 3% YoY to INR17b (v/s est. INR18b). Volume growth was driven by strong growth in aftermarket, exports and UPS, but diluted by decline in OEMs and telecom. Auto volumes grew 7-8% while Industry volumes grew 6-7%. Average spot lead prices in 1QFY20 (since impact with 3 months' lag) were lower by ~8.5% QoQ and ~18% YoY, which hurt revenue growth.
• Lower lead prices, favorable mix benefit diluted by operating deleverage: Gross margins improved 500bp YoY (+350bp QoQ) due to lower lead prices and better mix (lower OEM contribution). However, operating deleverage diluted EBITDA margin expansion to ~350bp YoY (+190bp QoQ) at 17.2% (v/s est. 15.6%). PBT grew ~26% YoY. This coupled with lower tax boosted adj. PAT growth to ~80% YoY to INR2.2b (v/s est. INR1.3b).
• 1HFY20 revenue/EBITDA/PAT grew -1%/25%/54%. CFO improved ~264% in 1HFY20 to ~INR8.7b, driven by improvement in operational performance as well as substantial savings in working capital. While capex increased ~24% YoY, FCFF improved to ~INR5.6b (v/s -INR97m).