Amara Raja Stock Declines Following Underwhelming Q2 Earnings

On November 5, 2024, shares of Amara Raja Energy & Mobility Ltd. witnessed a decline of nearly 5%, following the announcement of its Q2 FY25 results that failed to meet market expectations. This performance has raised concerns among investors regarding the company's near-term growth prospects.

Quarterly Performance Overview

In the quarter ending September 30, 2024, Amara Raja reported a net profit of Rs 240.7 crore, reflecting a 6.3% increase year-on-year (YoY). Additionally, the company’s revenue from operations grew by 11.6% YoY, reaching Rs 3,135.8 crore. However, despite these positive figures, the results were deemed insufficient against analyst forecasts, leading to the drop in stock prices.

At the operational level, the company achieved an EBITDA of Rs 440.7 crore, marking a 7.5% increase YoY. However, the EBITDA margin contracted to 14.1% compared to 14.6% in the same quarter of the previous fiscal year. This reduction in margins, coupled with missed profit estimates, prompted a reassessment of the company’s future performance.

Analyst Insights and Growth Forecast

According to analysts at Nuvama, Amara Raja's core business, particularly its old-line auto and industrial batteries, is projected to experience a compound annual growth rate (CAGR) of 9% and 10% respectively from FY24 to FY27. Nuvama has retained a 'buy' rating on the stock with a target price of Rs 1,580, citing the company’s strategic direction towards electric vehicles (EVs).

Amara Raja is making significant investments in lithium cell production, with plants for NMC/LFP chemistries expected to commence operations in FY26E/FY28E. The company is also increasing its commitments to its subsidiary, Amara Raja Advanced Cell Technologies Private Ltd (ARACT), with the board approving a capital infusion limit increase from Rs 1,000 crore to Rs 2,000 crore.

Risks Facing Amara Raja

Despite the growth prospects, several risks could hinder Amara Raja’s performance:

• A slowdown in domestic original equipment manufacturer (OEM) and replacement demand may negatively impact revenue.
• Slower growth in industrial demand could also lead to reduced revenue projections.
• Increased competition in the lithium business might delay utilization ramp-up and pressure margins.
• A sharp rise in input costs could further strain profitability.
• Changing battery technologies necessitate ongoing investments, potentially yielding low internal rates of return (IRR) on existing investments.

Market Performance and Conclusion

As of 11:05 am on November 5, Amara Raja shares were trading nearly 4% lower at Rs 1,321.50 on the National Stock Exchange (NSE). Despite this decline, the stock has shown remarkable growth over the past year, surging approximately 110% compared to a 23% increase in the Nifty index. The company’s commitment to expanding its EV segment and enhancing its battery technologies indicates a forward-looking strategy, although immediate concerns regarding profitability and market conditions remain.