Does anybody have access to their investor concall recording from 14th August? Couldn’t find it on their website or YouTube.
Amara Raja came with flattish results, with margins reviving YOY but being impacted QoQ due to higher traded sales of tubular batteries. They are confident of doing 750 cr. sales in new energy business this year, which will be a 3x scaleup over last year. Lithium ion validation plant will come onstream at end of FY25, and the 2GWh capacity in Fy26. Interestingly, at $100/GWh cell costs, they can do revenues of upto 3000 cr. which translates into asset turns of ~2x (investment of 1500 cr.). Given this space is evolving, its hard to estimate IRRs on the project, but directionally it seems to be going the right way. Concall notes below.
FY24Q1
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Lead acid battery: 4% YOY growth
o 70% contribution from 2-W, 4-W and inverters; 30% from industrial segment
o 4-W grew by 5%; after-market grew at 7-8%
o 2-W grew by 9%; both OEM and after-market grew at low double digit. Have seen significant market share gain in after market
o Inverter and other applications declined by (-20%) due to poor season and fire in tubular factory. This business was replaced by trading revenue (15-16%) and has impacted margins. Have maintained market share, but has failed to gain market share due to absence of self-manufacturing
o Export was muted partly due anti-dumping duty in Middle East markets. Expect export growth to recover in coming quarters from Western markets
o Industrial segment grew 15% YOY, telecom even higher - Capacity utilization
o Automotive: 74-75% (2-W: 80%)
o Industrial: 95-97% - New energy business: 107 cr. Supplying battery packs to 3-W (Piaggio is main customer) and battery chargers to 3-W OEMs and other stationary applications (Piaggio and M&M are main customers). Getting ready to launch battery packs for 2-W and certain high voltage applications. Also supplying lithium battery packs to telecom customers
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Lithium ion plant:
o Customer qualification plant will start in end of FY25 and GWh NMC line will deliver production in FY26. R&D lab + customer qualification plant + GWh line will cost 1500 cr. (200-300 cr. to be incurred in FY24)
o Depending on cell price (@$100/GWh) and 2GWh, fixed asset turns come between 1.4-1.5x
o Revenue contribution from 2GHh plant can be around 3000 cr. at full utilization (with 10-12% EBITDA margin) - Insurance cost increase (6-7 cr.) has also impacted margins
- Reduced power costs (10-15 cr.) due to solar plant coming onstream. Currently catering to 20% of power requirements. Total investment behind the solar power plant and rooftop facility will be 300 cr. (59.1MW currently + 7.5MW to be done in FY24)
- For any greenfield expansion, optimum size of plant will be 7-7.5mn batteries. If they put up a facility, it will be at a different location and the capacity will be added in phases
- Tubular plant will be reinstated in 18-20 months
- At lead prices of 150-170/kg, can do 15% EBITDA margin
Disclosure: Invested (position size here, bought shares in last-30 days)
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is it a good diversification? … if EV is coming, would oil and lubricants also not be in less demand??Would’nt it have been better if they rather invest capital and time in scaling the EV battery space?
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If you read through the notice, you may appreciate the fact that lubricants, oils and greases have use in industrial applications as well, which is a big market by itself
Again, EVs are much hyped, and the evidence lies in the sales quantity compared to general ICE engine 2-wheelers. India still lacks the infrastructure and reliability in terms of offering EVs that can disrupt the market like it did in China. So, at least for the next 2 decades, ICE engines will co-exist and this may be one of the reason for this diversification
Disc: not invested
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Those of you following up Amar Raja Battery, do you have any info on Li ion battery start of production at the company.
I know they are putting up a Li ion batteries on their own ( they did not get PLI scheme from Govt for their brown field project )
What I wanted to know do they have plans for lithium ion batteries for EV only or they would be manufacturing Li ion batteries for BESS ( Battery Energy storage systems). There is a huge requirement/ opportunity coming up for storage of renewable solar energy / wind energy since hydrolyser capacities are lagging behind in our country. And at a later date , even if hydrolyser capacities come up, BESS -Li ion will have its own demand all through out this renewable energy boom.
If not Amar Raja, is there any other battery manufacturer who makes / plan to make Li ion batteries for BESS.
If you are following Green hydrogen thread , may be you would be understanding what I am talking about.
BESS batteries are supposed to be larger in size and comes as a large pack.
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check log9 materials. They have a lot of good things that they keep sharing
Amara raja has strategic stake here.
Am a little wary of just having strategic stake unless the company itself does something in the area.
Case in point is Hero’s strategic stake in Ather Energy which was amongst the 1st to gain success. However the below stat paints a not so rosy picture for Hero-Ather. And TVS and Ola which built technology inhouse are leading. Specially look at TVS’s growth MoM from July to August 2023
To be fair, they have announced 10K Cr investment in creating Lithium Ion cells at their Gigafactory. Would be interesting to read if there is any update on the same… India's Largest Li-Ion Cell Manufacturing Facility: Amara Raja Lays Foundation Stone For Rs 9,500 Crore Gigafactory In Telangana
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They already have access to the distribution network in this area. The retailers selling aftermarket Amaron batteries for 2-wheelers are the same people selling engine oil, gear oil and lubricants. Maybe just capitalising on this advantage.
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Agree, and maybe its good thing from short term profitability standpoint, i was just wondering if its worth the distraction and distribution of resources in the long run…
Btw they do realize and are anyways investing in building the future, rebranding of the firm is also a good step in creating the future vision.
“Officially rebranded itself as Amara Raja Energy and Mobility Limited (ARE&M). This move marks the culmination of a two-year journey aimed at transitioning from a battery manufacturer to a comprehensive solutions provider in the Energy and mobility sector.”
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Complete exit of Clarios ARBL (Johnson Control) - Is the hangover or selling pressure over. How would market perceive going forward. Personally, I am sensing a strong break out in near future
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Hi everyone, how does one make sense of the related party transaction the promotors have?
I am talking more specifically about fixed assets purchased from related party, & then eventual outright buying of the company/ division.
Like Purchase of FA of 242Crs from Amara Raja Power systems in FY22, followed by 40Crs in FY23 & now buying the stake at seemingly reasonable valuations.
Same with Mangal Industries buying FA worth 57Crs & 45 Crs in FY22&23 respectively followed by now buying of the plastics division of Mangal Industries
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good quries. if any one follwoing this closely pls share your input.
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With Deloitte being their statutory auditor, personally I dont see related party transactions as much of a concern. The promoters / company are here for longer run and looking at much larger picture rather than impacting their goodwill with smaller gains by unethical means.
Buying of plastic division with almost 65 cr PAT at Rs 800 cr is 12x PE multiple - which is not unreasonable. This deal is also a mechanism to increase promoter stake - as ARBL is not paying cash for this acquisition. Promoter increasing their stake inspires more confidence.
Nalanda Capital (repuited Private equity) holding almost 10% stake gives strong comfort and clears checklist in terms of corporate governance and management.
Disclaimer : I am invested hence maybe biased.
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For me the stock looked attractive at first, given its P/E of around 14-15, FY23 RoE of 15% and RoCE of 20%. Also the fact that Nalanda is holding a significant stake was also a comforting factor.
However, when I looked at a deeper level the following points made me rethink:
- The trajectory of RoCE is downward trending in the last decade. This period also saw significant capex, meaning they had to do more and more capex but RoCE kept going down. The capex did result in increasing sales though as the demand was there so good decision to keep adding capacity.
- The OPM after reaching a high of 18% kept trending down. The business does not have pricing power, they do pass on high lead prices occasionally though. The auto OEM business is notorious for not letting its suppliers make good profits. The telecom business also goes up and down due to its own dynamics. Aftermarket business is the only segment which has some pricing power.
- One point which caught my attention was that the company always bought lead, it never backward integrated (but Exide did), and still its OPMs have been better then Exide (it could also be due to business mix) indicating efficient operations. Now that they are investing in a lead recycling plant, there should be some support to margins.
- Coming to the big investment for the new business, its a huge capex, the OPMs wont be any better than the existing business, meaning overall OPMs going forward will remain stagnant or trend downward. RoCE will also follow similar trend.
- They are going to be dependent on China for raw materials for cells in the new business, which will be influenced by the relations between the 2 countries which isn’t great.
- While the traditional Lead Acid business will grow, the new business is going to take time to find its feet. They are trying a lot of things. Further, I read comments of the mgmt. that many auto companies want to make their own battery packs, so this may limit Auto OEMs business coming to battery manufacturers. Further, the company will have more competition as many players will come in for lithium battery manufacturing, Reliance being one of them. Given that there will be more competition, the margins will be subdued in lithium battery business. Having said this, the target addressable market will also expand, as the company will cater to more industry segments, ex. Storage solutions attached to renewable energy projects, but this will be an evolving space.
What are the factors that will improve margins, profitability, cashflows?
Disc: tracking position
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I started reading up on this company in recent months and it seems to be an interesting case given the frenzy in the small/mid cap space. Few things which interested me are:
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Reasonable valuations. When most of the things are trading at 25-30 PE, I was surprised to see a large branded consumer facing company available at about 12-15 PE
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It seems the de-rating could have been due to risk of EV on the core business. However, few months back, Amara raja announced aggressive plans to foray into this segment. Though it needs to be seen if what will they do and what will be their edge.
Interestingly they already have created this new energy segment and are growing rapidly on a small base
- They do intend to keep growing the lead battery business too and are targeting exports etc. They are also looking at data centres etc.
Risks - 1. EV foray - don’t know what will be their value proposition 2. Political risks
Ayush
Disc: Invested in family and client acs
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View on ARBL’s Lithium Play
My only problem with Amara Raja’s Lithium ion optionality is that they are not aggressive in building relationship with the OEMs / TIER-1s. The difference between a Lead acid battery and Lithium ion battery is that Lead acid batteries can be bought from anyone and fitted in your car. Lithium ion batteries cannot be treated that way. The vehicle level controller ( VCU - think of the brain of an EV ) needs to know details about the battery - State of charge, state of health , resistance buildup etc. The VCU is mostly designed and owned by the OEMs and they ultimately will build the system with 2-3 suppliers.
Using a non OEM authorized battery can cause hazard and this is where ARBL’s relationship with the OEM deteriorates.
Knowledge of making lead acid battery at scale is not transferrable to making Lithium ion battery.
Lead acid battery is very simple and can be done in cottage industries ( un-organized sector ) The VRLA batteries are a bit more complex. But since lead acid batteries rarely pose a fire risk OEMs and Customers will not be too worried about the batteries. The Lithium ion battery is completely opposite and not knowing the characteristics of the cells and the chemistry in it can cause fire hazard. The process of producing Lithium ion is complicated with heavy upfront capex and wafer thin margins. The requirement of clean rooms are also crucial. The manufacturer will also be impacted with the commodity price fluctuation of Lithium which has become geopolitical in nature
Large Chinese, Korean OEMs will partner with Indian business houses India a part of the global supply chain
My experience says that if the volumes of an OEM is large, they will design the battery around the vehicle. E.g. OLA would provide requirements to their battery supplier to make them a custom battery. If the volumes are low, the vehicle is designed around the battery. Many Indian startups who had imported the batteries from China had to also import compatible, BMS, Motor with them ( this is why they were not able to keep the proportion of the indigenous components level to less than 40% ). My question is what stops a CATL, Panasonic to form JV with a non automotive business house flush with cash to set up a shop to serve the fragmented market.
Jindal for example will partner with LG. Tata, Mahindra’s might have similar partnership. Globally Mercedes has partnered with CATL
Silver Lining
What might act as a good trigger for me is that if ARBL is able to absorb LOG 9 within itself as I see LOG9 aggressively partnering with 3W and 2W startups. Maybe LOG9 will be able to supply a 2W and 3W powertrain on which EV startups can build their vehicles.
Disc : Held the stock, exited 3 months back.
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Hi Gourab,
Yes, what you are saying is correct and the concern. EV battery is expensive and a large part of the vehicle and hence OEMs would like to keep it in-house or have strong control. So don’t know how Amara Raja will be able to grow in this but perhaps at these valuations, I would like to have some exposure and watch…I’m not paying for growth…and a company like this with investments to be made from internal/past cash flows, they are usually sane about the investments they make…they won’t make a large investment just for the sake of it. If one observes, they have created a large R&D setup and team to work on these areas and decide how they want to go ahead.
So let’s see how it evolves.
Also there is a large difference in valuations of Exide vs Amara Raja while story is similar
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