Transition To In-House Manufacturing Will Benefit Future Performance

Key Takeaways

• Transitioning to manufacturing tubular batteries and localized recycling enhances margins, reducing material costs and boosting earnings.
  
• Expansion in exports and new energy business, including lithium-ion cells, supports long-term revenue growth through geographic and production capacity increases.
  
• Delays in EV and ESS battery business and reduced telecom volumes harm margins, while government levies and lithium volume thresholds pose further profitability risks.

Catalysts

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

• The company's efforts to transition from trading to manufacturing its own tubular batteries, expected to commence in early 2025, could lead to significant improvements in operating margins by 4% to 5%, impacting overall earnings positively.
  
• The commencement of operations at the Tamil Nadu recycling plant will enhance lead recovery and reduce material costs, potentially improving margins by 1.5% to 2%, aiding net margins.
  
• Robust export growth, particularly in the aftermarket of 4-wheeler batteries, is expected to continue driving revenue growth, supported by geographic expansion into American and European markets.
  
• Plans to increase capacity and optimize costs in their new energy business, including manufacturing their own lithium-ion cells, could provide long-term earnings growth once the operation scales above 8 gigawatt hours.
  
• The strategic shift towards localized production of chargers and potential product advancements signals future revenue stability and margin enhancements, impacting both revenues and net margins positively.

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 7.9% today to 8.5% in 3 years time.
• Analysts expect earnings to reach ₹13.0 billion (and earnings per share of ₹70.63) by about February 2028, up from ₹9.8 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 ₹10.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 36.4x on those 2028 earnings, up from 19.9x today. This future PE is lower than the current PE for the IN Electrical industry at 43.8x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.32%, as per the Simply Wall St company report.

Amara Raja Energy & Mobility Future Earnings Per Share Growth

Risks

• The new energy business, particularly EV and ESS batteries, has faced delays and decreased turnover, impacting earnings and margins due to OEM scheduling changes and a slowdown in charger revenue.
  
• Margin dilution of 1% on a consolidated basis is occurring due to increased expenses in the new energy segment and dependence on trading revenue rather than manufacturing, affecting overall profitability.
  
• Telecom volumes in the industrial battery segment decreased by 30%, resulting in a 10% overall decline in industrial volumes, potentially impacting revenue growth.
  
• There is a risk of additional expenses from government levies in Andhra Pradesh, which could further increase financial liabilities by ₹10 crores to ₹15 crores, putting pressure on net margins.
  
• The profitability of the lithium business is dependent on reaching significant volumes, as it is unlikely to be profitable until 8-gigawatt hours. This creates a risk of prolonged negative EBITDA impacting overall earnings.

Valuation

• The analysts have a consensus price target of ₹1412.533 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 ₹2000.0, and the most bearish reporting a price target of just ₹685.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹153.2 billion, earnings will come to ₹13.0 billion, and it would be trading on a PE ratio of 36.4x, assuming you use a discount rate of 14.3%.
  
• Given the current share price of ₹1069.1, the analyst price target of ₹1412.53 is 24.3% 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.