MOSL: AMARA RAJA BATTERIES (Buy)-Above est.-Favorable mix, price hikes, manufacturing efficiencies drive margins

​Amara Raja Batteries: Above est.; Favorable mix, price hikes, manufacturing efficiencies drive margins

(AMRJ IN, Mkt Cap USD1.9b, CMP INR751, TP INR856, 14% Upside, Buy)

• Revenue below est. led by decline in telecom segment: Net sales grew 7.1% YoY (-4.7% QoQ) to INR14.3b (est. of INR15.4b), driven by growth in auto, inverters and solar, while industrial segment revenue declined. Auto performance was driven by double-digit growth in 2W/4Ws. However, a sharp decline in Telecom led to lower industrial segment revenue.
  
• EBITDA margin at 16.7% led by favorable mix, price hikes and efficiencies: EBITDA margin expanded 380bp YoY (-50bp QoQ) to 16.7% (est. of 13%), led by a favorable product mix (higher share of autos, inverter, e-rickshaw, etc.), optimal utilization and price hikes in replacement market. Lower other income and higher tax restricted PAT (-6.7% YoY to INR1.3b v/s est. of INR1.1b).
  
• Takeaways from management interactions: a) Undertaken price hike in automotive and industrial replacement segments; took 6-7 price hikes in last 12 months, adequately covering cost inflation. b) Intense competition in telecom led to a loss in market share to ~50% (v/s 65% earlier) and a contraction on margin. c) Lead cost for 2QFY18 was USD2,170 per ton (v/s USD2,270 in 1QFY18, USD1,750 in 2QFY17, spot rates of USD2,400-2,500). d) Capex of INR5b in FY18. AMRJ is adding 2W battery capacity of 4m (to 15m by Mar-18) and 4W battery capacity of 2.5m by FY19 (to 13m). e) ~80% of e-rickshaw battery replacement market is unorganized, with total e-rickshaw population of 0.8m-1m units. f) Lithium Ion technology is a priority area; it is evaluation option for technology, including Johnson Control. g) Expects lead acid battery industry CAGR of 8-10% over 2-3 years (steady state), with AMRJ growing at 13-15% CAGR. Industry EBITDA margin to sustain at 14-16%, with AMRJ enjoying margins closer to the upper end.