MOSL: AMARA RAJA BATTERIES (Buy)-Below estimate-Adverse mix, competitive pressure dents profitability

​Amara Raja Batteries: Below estimate; Adverse mix, competitive pressure dents profitability; Cut EPS by 10-20%

(AMRJ IN, Mkt Cap USD2.2b, CMP INR823, TP INR986, 20% Upside, Buy)

• Revenues in-line led by healthy growth in Automotive and Inverters: Net sales grew 14.5% YoY (+11.4% QoQ) to INR14.9b (in-line), driven by growth in Auto and Inverters, while Industrial segment remained subdued. Auto segment growth could have been better if not for the GST impact (on inventory). Telecom segment declined ~10%, while UPS also witnessed marginal de-growth. Inverters segment, however, grew 150% on a lower base.
  
• Multi-quarter-low EBITDA margin at 12.9%: EBITDA margin contracted 450bp YoY (-250bp QoQ) to 12.9% (est. of 15%), primarily due to adverse mix (decline in Telecom), sub-optimal utilization in inverter batteries, and the lack of lead price pass-through in Telecom and UPS. Higher tax further restricted PAT, resulting in a decline of 24% YoY to ~INR1b (est. of ~INR1.3b).
  
• Takeaways from management interaction: a) Registered volume growth in Automotive segment, and continues to gain market share with OEMs. In Replacement segment, volumes could have been higher, but due to GST implementation, dealers restricted purchases. b) Took price hike in Automotive segment, while intense competition in Telecom and UPS led to no price pass-through. c) Lead cost for 1QFY18 was USD2,270; expects it remain stable for next six months. d) Capex of INR5b in FY18. AMRJ is adding 2W battery capacity of 4m (taking total 2W capacity to 15m by Mar-18) and 4W battery capacity of 2.5m by 2QFY18 (taking total capacity to 10.5m).