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MOSL : AMARA RAJA: Beats estimates; Cut FY23 estimates by 11%

.  AMARA RAJA: Beats estimates; Cut FY23 estimates by 11%

(AMRJ IN, Mkt Cap USD1.1b, CMP INR505, TP INR555, 10% Upside, Neutral)

Margin should see a recovery due to softening of lead prices

• AMRJ's 1QFY23 earnings were led by strong revenue growth across segments. High RM costs continued to impact margin. The recent moderation in lead prices will aid a margin recovery. Volumes should see good growth across segments in FY23.
• We lower out FY23 earnings by 11% due to a cut in margin, whereas we raise our FY24 earnings by 11% to factor in an upgrade in revenue and the lowering of depreciation. We maintain our Neutral rating with a TP of INR555/share (12x Jun'24E EPS).

Margin decline due to weaker mix offset by operating leverage

• Revenue/EBITDA/adjusted PAT grew 39%/4%/6% YoY to INR26.2b/INR2.6b/INR1.3b (est. INR22.6b/INR2.4b/INR1.1b). Blended volume growth is estimated at 27-28% YoY. Realizations are estimated to have grown by 11-12%.
• Overall 4W/2W/Industrial volume is estimated to have grown by 11-13%/38-40%/18-20% YoY.
• Gross margin decline of 4.5pp YoY and 130bp QoQ to 26.6% (est. 28.2%). The QoQ decline in gross margin was due to a weaker mix (higher OEM contribution and an increase in traded goods).
• EBITDA margin declined by 3.2pp YoY and 10bp QoQ to 10% (est. 10.5%) due to lower gross margin, but the same was offset by operating leverage. EBITDA grew 4% YoY and 19% QoQ to INR2.6b (est. INR2.4b).
• Adjusted PAT grew 6% YoY and 33% QoQ to INR1.3b (est. INR1.1b).

Highlights from the management interaction

• AMRJ witnessed robust Auto demand from the Aftermarket as well as 4W and 2W OEM segments. Industrial battery volumes have shown a healthy growth, especially in UPS and Telecom segments.
• Power and other input costs have risen, which resulted in margin pressures. The management is confident of mitigating the inflation in power costs through captive solar generation.
• It indicated that its immediate focus is on expansion of the pack and charger business for EVs. It soon plans to enter cell manufacturing through a customer qualification plant.
• Capex in FY23 is expected to be in the INR5-5.5b range, for which it will be investing in the Li-ion cell technology.
• AMRJ has made changes to the Articles of Association indicating it will be looking at other Auto-related products though specific details have not been shared.