An organized segment to gain share: The share of unorganized players is high at 30-40%, particularly in the replacement market. We believe that larger players will continue to gain a share of the LAB market, driven by (1) steady formalization of the economy (post introduction of GST), (2) advanced and more efficient production techniques introduced by organized companies (punched grid technology), (3) launch of entry-level brands/batteries with shorter warranty cycles to compete with the unorganized segment. Amara Raja currently is ~20% of the overall market.
Amara Raja’s revenues to grow in double digits: While industry growth is expected to moderate from the 10-12% levels earlier to mid-single digits in the next 3-5 years, we believe that Amara Raja’s revenue will grow in double digits, led by (1) sustained market share gains by the organized segment (as highlighted above), (2) focus on exports (10% of revenues), and (3) opportunities in the e-rickshaw/motive power category (new categories).
Lithium–opportunity or threat? The lead-acid battery segment is expected to witness a substitution threat from lithium-ion batteries, with the technology shift being driven by both the government and private sectors. The FAME-II scheme for automobiles envisages usage of 2.3 GWh/p.a. of battery capacity that will be required, based on the proposed subsidy amount. However, post the COVID outbreak, we believe the adoption of EVs will be delayed. Within the telecom segment (~10% of revenue), Jio is operating 100% of its towers with lithium batteries.
Prospective technology partnerships: After the exit of Johnson Controls, we await the new technology partnerships that Amara Raja will forge, including those on alternative battery chemistries.
Initiate with an ADD: We initiate coverage on Amara Raja with an ADD rating and set a target price of Rs 780, at 19x Jun-22E EPS, which is in line with its long-term P/E average. Key risks: Higher-than-expected market share gains on the upside and a sudden shift in technology on the downside.
The full version of the analysis including charts can be found in the attached PDF file: