Amara Raja Batteries Ltd has laid out a strategic initiative to transform into a new energy and mobility solutions provider. Under this plan, it aims to maximize value in its core lead-acid battery business and double its revenue CAGR to 15-17% in the next five years. CAGR stands for compounded annual growth rate.
Also, it would foray into the new energy business by investing in lithium-ion battery technology and related solutions like electric vehicles (EVs) charging products. The company is looking at a global technology partner to set up a lithium-ion plant under the production-linked incentive (PLI) scheme.
For investors in this stock, lower investments in research and development, and expertise in lithium-ion technology has been a key concern. Given the increasing penetration of EVs, demand for lithium-ion batteries is likely to outpace lead-acid batteries by 2025. Against this backdrop, analysts said, the company’s intent is right, but there are risks, particularly in the new energy segment, that could weigh on the success of its plan.
“Despite the company looking for a partner in the lithium-ion technology space, it is far behind in terms of scale and technological know-how versus the big global players,” said analysts at Kotak Institutional Equities in a report on 15 June. “We see limited benefit for global players to partner with the firm for jointly setting up giga factory and sharing expertise,” they said.
For lithium cell manufacturing, the management said it was targeting 8-10 gigawatts capacity to attain global competitiveness. This will require investments of $0.8-1 billion over 5-10 years. The management does not expect challenges to fund this capex and would meet the requirement via free cash flows from its core business and debt.
Note, to remain cost-competitive, it may see higher capacity addition in lithium batteries in the initial years than demand due to the PLI scheme, and this may impact the company’s utilization levels. Large investments for setting up battery manufacturing capacities could also lead to dilution of return on equity.
Furthermore, the management said the biggest concern is demand risk in India, so it wants to remain globally competitive to keep its export options open.
“It is unlikely that Indian players will be cost competitive on a global scale, where industry leaders make very low margins and costs are much lower in markets like China. Thus, there is a risk that return ratios can get depressed even though the lead acid business may continue to perform well,” analysts at Nomura Financial Advisory and Securities (India) Pvt. Ltd said in a report on 15 June. Nomura has not built in any upsides for the stock from the lithium-ion business as the management has so far given a broad overview of its intent. Meanwhile, reacting to these developments, the stock fell nearly 2% on Wednesday. So far in 2021, it has fallen 16% underperforming peer Exide Industries Ltd’s stock, which is flattish on a year-to-date basis.
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