Recycling Plant And Giga-Factory Developments Set To Improve Future Operations

Key Takeaways

• Localizing production and expanding offerings could boost revenue and net margins by improving capacity and market reach.
  
• Export growth and recycling plant efficiencies are expected to significantly enhance revenue and margins, contributing to long-term earnings growth.
  
• Rising electricity costs, declining lead-acid battery demand, and currency depreciation are pressuring Amara Raja Energy & Mobility's operating margins and revenue growth.

Catalysts

Manufactures and sells lead-acid storage batteries for industrial and automotive applications in India and internationally.

• The company aims to recover revenue losses in its New Energy business through the localization of charger production and by expanding offerings, which is anticipated to positively impact future revenue.
  
• The commencement of operations in the newly reinstated tubular battery plant after a fire accident, supported by an insurance claim exceeding its book value, should enhance the company's production capacity, thus potentially boosting revenue and net margins.
  
• The ongoing expansion in the export market is expected to achieve double-digit growth, which could significantly contribute to the company's revenue.
  
• The first phase of operations at the recycling plant has begun, with full capacity expected by the next quarter, potentially improving net margins through increased efficiencies in raw material procurement.
  
• The localization of new products like portable chargers for 2-wheeler and 3-wheeler applications and the development of the first giga-factory are underway, which are likely to enhance revenue figures and contribute to long-term earnings growth.

Amara Raja Energy & Mobility Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Amara Raja Energy & Mobility's revenue will grow by 7.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.0% today to 8.2% in 3 years time.
• Analysts expect earnings to reach ₹12.8 billion (and earnings per share of ₹69.78) by about March 2028, up from ₹10.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹14.4 billion in earnings, and the most bearish expecting ₹10.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 28.0x on those 2028 earnings, up from 19.2x today. This future PE is lower than the current PE for the IN Electrical industry at 33.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.96%, as per the Simply Wall St company report.

Amara Raja Energy & Mobility Future Earnings Per Share Growth

Risks

• The rising electricity costs and the necessary provision for future adjustments are negatively impacting operating margins by approximately 1% to 1.2%, with more potential impact in future quarters, affecting net margins.
  
• The lead-acid battery segment is facing decreased demand in the telecom sector due to the shift to lithium-ion batteries, resulting in a revenue decline of about 25%, which could impact overall revenue if not offset by growth in other segments.
  
• The New Energy business experienced a 20% decrease in revenue due to changes in OEM offtake, indicating volatility and unpredictability in revenue from this segment.
  
• Delays in the commercial operation commencement of the NMC and LFP battery plants, due to sector headwinds and challenges in demand ramp-up, could result in delayed revenue realization and cash flow pressures from continued capital expenditures.
  
• The depreciation of the currency is creating additional cost pressures due to higher lead procurement costs, which, if persistent, could erode operating margins and affect earnings.

Valuation

• The analysts have a consensus price target of ₹1284.733 for Amara Raja Energy & Mobility based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1680.0, and the most bearish reporting a price target of just ₹950.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹155.7 billion, earnings will come to ₹12.8 billion, and it would be trading on a PE ratio of 28.0x, assuming you use a discount rate of 15.0%.
• Given the current share price of ₹1060.0, the analyst price target of ₹1284.73 is 17.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.