Amara Raja Energy & Mobility - Soft Show; Upgrade To BUY On BESS Prospects And Attractive Valuation

Amara Raja Energy & Mobility reported a soft operating performance in Q2FY27. Missing our estimate, the company’s standalone EBITDA declined 5% y/y to Rs3.86bn, mainly due to lower-than-expected revenue and higher other expenses (spending on Amaron Assist/Factory of Future initiatives; 100bps). As the outlook for automotive and industrial demand continues to remain bright in lead acid batteries, we believe the company will gain market share further, going forward. Despite near-term challenges in the form of higher alloys, Sulphur and plastic input cost, the company’s margin is expected to expand in the medium-term led by new tubular batteries, recycling plant and cost pass-throughs. It also plans to set up a lithium-ion cell manufacturing plant (NMC 2GWh), which is expected to commence operations from H1FY28e. Further, 10GWh BESS solutions plant will commercialize operation from FY27 end and visibility of 50% utilisation (out of 5GWh) within 6-7 months of plant commercial production. We expect revenue potential of up to Rs45bn by FY30e (SOP from Q4FY27). BESS can be notable opportunity considering boom in renewables and strategic lever for cell capacity. Introducing our estimate for FY29e, we expect a revenue/EBITDA/PAT growth of 9/11/12%. At CMP, the stock seems to be reasonably valued at 13/12x on FY28/29e, close to -1std. Hence, we upgrade our rating to BUY with lower TP of Rs990 (from Rs1,080 earlier), valuing the parent entity at 11x Sep-28e EPS (vs. 12x Mar-28e EPS previously), ARACT NPV (new lithium energy unit) at Rs222 and BESS at Rs155.

In-line Performance: Revenue grew by 13% y/y to Rs38.4bn vs. our estimate of Rs41.8bn. EBITDA fell 5% YoY to Rs3.86bn vs. our estimate of Rs4.87bn, mainly due to lower-than-expected revenue and higher other expenses. EBITDA margin contracted by 190bps YoY to 10.1% vs. our estimate of 11.6%. Other expenses grew 10% YoY and 2% QoQ to Rs5.31bn. Accordingly, APAT grew 4% YoY to Rs1.88bn vs. our estimate of Rs2.66bn, mainly due to lower operating profit. New energy revenue grew 37% YoY to Rs2.3bn. It incurred Rs416mn EBIT loss in Q2FY27 vs. Rs487mn EBIT loss in Q2FY26. Its board has approved an LFP prismatic cell gigafactory (~5GWh) plus pack assembly with ~Rs23.2bn capex and to be completed within 30 months. It will serve stationary applications first, then mobility.

Outlook and Valuation: We trim our EPS estimate by 8-13% for FY27/28e, due to higher input/interest cost and lower other income. We upgrade our rating on the stock to BUY with lower TP of Rs990 (from Rs1,080 earlier), valuing the parent entity at 11x Sep-28e EPS (vs. 12x Mar-28e previously), ARACT NPV at Rs222 (from Rs210 earlier) and BESS at Rs155 (vs. Rs146 earlier). Increase in TP for ARACT and BESS is attributable to rolling over our valuation to Sep-28. Expecting ARACT’s revenue/PAT at Rs43.2/2.16bn by FY31e, we assign 25x multiple on discounted PAT. Further, we expect BESS revenue/PAT at Rs44.8/1.34bn by FY30e, we assign 25x valuation multiple on discounted PAT.

Key Risks: (a) Weaker growth in lead batteries; (b) lower orders for lithium-ion cell/BESS plant; and (c) adverse commodity prices.