Amara Raja Energy & Mobility Limited: Powering Ahead

Made a presentation on Amara Raja in the VP Kolkata Meeting in December. Attaching the presentation below for more information and my investment rationale in ARE&M.

Presentation - Amara Raja v1.pdf (5.9 MB)

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What is the source of your information in the PPT?

Thanks for sharing the presentation.

What are your views on the New Energy Business?
The way I am thinking about this is:

  1. It will call for significant amount of CAPEX, in fact, this business will demand CAPEX much more than legacy business.
  2. This business does not seem to be margin accretive, I gather that margins will be lower than legacy business.
  3. At some point they will have to take on debt.
  4. Scaling up Li-ion cells have been a challenge with many giants, Amara Raja would be no exception I believe.
  5. Raw materials sourcing could also be potentially challenging given the relations with China who is controlling much of the raw materials.

Based on these thoughts, I feel long term profitability is going to be challenging. Will appreciate your views.

Thank you!
Ketan

Disc: tracking

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Be careful about the companies investing huge amount of money focusing on Electrical Vehicles growth.
This might be a boomerang for these companies if EV trend dies away instead of growth -

Read few articles -These articles are gives sense of unsustainable EV future growth due to safety issues and economics-
(1) https://www.cnbc.com/2023/10/25/gm-honda-scrap-plans-to-co-develop-affordable-sub-30000-evs.html
(2) Disaster for EV drivers as their cars risk becoming 'uninsurable'

Next growth will be Hydrogen based instead of EV. Hydrogen based trend will be more sustainable. Indian government are focusing more on green hydrogen.
https://innovation-village.com/gm-and-honda-partner-to-begin-mass-production-of-hydrogen-fuel-cells-for-diverse-applications/

https://www.autonews.com/mobility-report/gm-and-hondas-hydrogen-fuel-cell-jv-reaches-production#:~:text=General%20Motors%20and%20Honda%20have,for%20hydrogen%20fuel%20cell%20systems.&text=The%20production%20start%20comes%20as,the%20cold%20saps%20battery%20power.

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Mostly outdated articles around EVs future. Flex fuel - different sources of powering the vehicle should exist. CNG came into being but has not been able to impact a lot. So tech is ever changing.

Hydrogen fuel is upcoming and should find a lot of space. Given the underlying elements or starting elements are mostly commodities and are more or less unevenly spread. So may be europe and its stakeholders find oppurtunities in Hydrogen but Amara seems confident that they can pivot and are not looking to be the first one to get slaughtered. Being the 2nd one is also fine as TAM would be good for every one.

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The sense one gets from listening to Amara Raja Management is that they are well aware of the margin, ROE and changing tech landscape challenges in the Li-ion cells segment. However, they have made a modular plan for venturing into the business because lead acid will get replaced incrementally by newer batteries in one form or the other over the next few decades and if they don’t act now, the terminal value of the business will keep declining. However, they are quite cautious about their approach, first setting up a customer qualification plant, then a 2GwH line for 2Ws and then expanding to 7-8 GwH once this stabilizes. They face a difficult, uncertain situation wrt the future of Li-ion technology and viability but I like the way this management is going about it. They aren’t going all in but at the same time they are not failing to act.

Having said that, the economics of Li-ion business are definitely nowhere close to their existing business. But hopefully what they will lose in valuations due to lower ROEs, a part of it will get made up via higher terminal valuations. Also, with the 2 sons involved heavily and the promoter apparently giving up politics to focus on the business, investors can hope they will try will try their best to steer the ship as best as it can be steered in such choppy waters. Over the medium and long term, I would trust Amara Raja to execute better than its Indian peers in this area. I may be biased.

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28.06% to 32.86% Shareholding promoters Risen

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