Amara Raja Energy & Mobility Limited analyst Q&A

Thank you very much. We will now begin the question and answer session. The first question is from the line of Kapil Singh from Nomura. Please proceed.

This is Kapil from Nomura. My first question is on the margins. You mentioned that the target is 14%. Could you give us some details in terms of how those margin levers will work? How much price hike you have taken? And are you facing any further cost pres sures in the coming quarters? Just some thoughts around it. Also, I think our tubular battery plant is about to start as well as the -- apart from the tubular battery plant, we have the lead recycling plant also starting, I think, in the next 3 months or so. So what will be the contrib ution -- positive contribution to margins from these?

Yes. Thanks, Kapil. As I have mentioned already, the cost of some of the alloys as well as power- related costs will continue into the next quarter as well. And we'll have to see how they will play out in the subsequent quarters. And clearly, once the tubul ar factory is up and running, we replace the trading mix part of it will get solved because we'll be able to use our own manufactured batteries as well. So I think considering these one -off issues and also the additional margin, fixed cost leverage that's going to come up with the tubular battery being operational, while I have mentioned earlier also that at this lead level,, while 13% kind of a margin is what we have seen earlier, our internal target is definitely to reach our originally stated position of 14% margin. So between these two initiatives of the tubular battery as well as the lead being recycled by ourselves, while lead recycling may take some more time because the battery breaking operations are going to come into operation only during second or third quarter of this financial . The refining operations have commenced at this point of time. So we hope that with these new manufacturing facilities coming up. And also, as Harsha was mentioning, some of the throughput enhancement, for example, you would have seen in the presentation th at we have placed in the domain as well that we are almost able to add 6 million battery capacity over and above our existing capacities without adding much of a capex. So all this should give us more help in the coming period, we'll be able to meet higher demand requirements without much of a capex getting invested in some of these areas. So this should help us in the coming quarters to improve our margins, while some of these headwinds on costs may persist for at least a couple of quarters.

Sir, on the pricing, can you also mention how much increase we have done?

2%.

Okay. All right. The second question is on New Energy Business and particularly the cell business. Is there a shift in the timelines of the commencement of operations? If you could just let us know what is the reason for that? And also in terms of the imported battery price, is there any change that you observed in the market from last time or they are operating around the same levels?

The first gigafactory, which I shared about earlier that we broke ground on, I think barring a plus or minus a few quarters, it's largely in line with what we've been sharing up till now. So that capacity should be coming online more or less as planned, la rgely catering to our light electric mobility business. Further capacity, while the ultimate goal of this facility about 20 gigawatt hour plus is still -- we are still fully committed to it. It will really go as per firm -- customer contracts that we signed. So while those are in the works, I think I don't want to commit on any specific date. As for pricing, definitely, I think everybody would have observed that the pricing coming out of China right now is quite aggressive. The cell pricing, the ESS pricing. So definitely, that's been on a downward trend. We're waiting to see if that's stabilizing anytime soon. And obviously, our investment decisions will also be much hinged -- further investment decisions are much hinged on our confidence in being able to meet these prices.

I think LFP, we have seen the best price in some cases was seen around $50 per kilowatt hour, but it is still around that $55. But we have also seen based on the import data, one-off case where there was even sub-$50 level as well. NMC, I think considering the lower quantity that we are buying, it is still around $60 or so. But both are on a downward trajectory, at least in the last two, three quarters.

I think that while we observe certain range of, let's say, LFP prices, the ranges could drastically vary. It depends what cell you're buying, what quality -- it can vary very quite drastically. So I think we can only comment based on the cells that we purchase and for the applications that we are in the market today.

Sure. Thank you. That’s it from my side.

Thank you. Th e next question is from the line of Raghunandhan NL from Nuvama Research. Please proceed.

Sir, firstly, in terms of the lithium cell project, what has been the investment so far? And what is the plan for FY '26 and '27?

Raghu, so far, about INR850 crores is invested into ARACT of that during the current year, almost INR250 crores has been spent on the facilities that are coming up. Next year, the overall plan for the New Energy Business in terms of capex will be around close to INR1,000 crores, considering all three facilities are going to go full pace. So there could be some delays in terms of equipment arrival and then the how vendors are going to give timelines. It may change by maybe about 15%, 20% in terms of cash flow. But I think New Energy Business would require at least INR1,000 crores capex for the FY '26.

Got it, sir. And EV launches has become a focus area for several OEMs. How are the discussions progressing with OEMs for becoming one of the suppliers? Any progress? Or how are they looking at local sourcing versus imports, your thoughts on that?

I think there's definitely some challenge. There's several OEMs that are quite keen to get localized cells in India. Obviously, the challenge comes from setting up a brand-new ecosystem in India of cell manufacturing, but while also expecting some of the p revailing prices that are coming out of China and other more mature cell markets. So we continue to discuss with them. We still maintain that at least in the initial period that manufacturing takes off in India. And probably this delta would be even higher in some other parts of the world. But we believe that we're going to definitely be paying anywhere from 15%, 20% penalty to make cells in India on day 1. And over a period of 5 to 10 years, we see that gradually coming down with several other developments coming into place like the local supply chain, local vendors coming up for the cell ecosystem. And obviously, our own cell makers, our capacity is ramping up and getting the right efficiency and yield as well.

And at what level of capacity and utilization can you achieve, say, EBITDA of $5 per kilowatt? How are you looking at profitability?

Raghu, as I mentioned earlier also, I think, however, if we are able to get over and above the material cost, if we are able to get $20 to $25 per kilowatt hour, then I'm sure an EBITDA of $4 to $5 is possible. That is something much will depend on the sca le efficiency. At this point of time, we believe, as I mentioned earlier as well, considering the current capex costs that are coming in and the line capacities that are coming in. It may still need about 8 to 10 gigawatt hour of capacity for us to achieve those kind of numbers. But a significant part is also going to be coming in how do we get the right supply chain in place because that is going to play a very vital role in determin ing what kind of margins we will accomplish. So there is no as such big change in terms of the cost equation like what we have discussed in our earlier calls as well.

And just a clarification. For Q4, 4-wheeler, you said OEM growth is 15%, aftermarket 8%, export minus 10%. Would that be right, sir? Just reclarifying.

Yes.

Got it. How much would be the UPS growth?

Industrial UPS?

Yes, sir. Home inverter, you said 17%, UPS 15% and overall industrial?

Overall industrial is muted because the lead acid on the telecom side has shown a similar degrowth.

Got it, sir. Just a last question. In one of the slides in the presentation for the Indian lead acid battery market to go from $4.6 billion to $5.8 billion over the next 5 years, that represents only a 5% CAGR in terms of growth. So would that be a conserv ative estimate? Or are you looking at growth rates coming down to mid-single digits?

Yes. See, considering the higher base, that is on the overall lead acid market. So you know that we are already seeing migration of some of the storage segment batteries to other chemistries, right? So if you take both storage as well as automotive segment s put together, the growth rate could be what it is. Obviously, our estimates are a bit conservative at this point of time, but that is more to do with the Indian scheme of things alone. But our overall growth and then the plans are not only looking at the Indian market alone, but it is also looking at what we can do elsewhere in the globe. So that way, the business plans definitely will take into account what's happening in the Indian market. And considering that being the overall market demand that has been projected, while the automotive will still have substantial growth headroom from her e. So that way, it may not be the complete reflection of how we are going to plan our business. But domestically, when we put together all the segments, both storage as well as mobility, that's how the numbers have panned out. I'm sure we have definitely been conservative with whatever numbers we put out there.

Got it, sir. Very helpful. Thank you.

Thank you. Th e next question is from the line of Rushabh Shah from Buglerock PMS. Please proceed.

I just wanted to know how will your cash flow plan out in the next couple of years? And like what will be the payback period of the new -- of the capex in the new business?

The New Energy Business at this point of time to put a payback number around it would be difficult because it is a strategic move. The capex that we are currently incurring is not only for the immediate business, but it is for a long -term capability development. Both our customer qualification plant and our e-positive research lab, which is going to consume close to INR1,000 crores of capex are more of capability enablers for us to scale up the New Energy Business significantly going forward. So at each cell project level, currently, the payback periods are definitely on a higher side. But I think we have to wait and see –to get a benchmark numbers around this until we reach a minimum capacity levels of, like I was mentioning earlier, 8 to 10 gigawatt hour. From our cash flow management point of view, we believe the first phase would require in the New Energy Business close to INR2,000 crores to INR2,500 crores, which we believe we can easily meet with our existing lead acid business cash flow generation, maybe some bit of leverage that we have to take on the balance sheet of the holding company. Thereafter, we have to see when the further capacities when they have to be added, that's when we will think about other means of raising finance because by that time we would have stabilized the -- at least our first giga lines very clearly, we would have definitely had some of the customer accounts getting established. So we'll be in a better position to really go and then get the money at the right value. And then we are confident that we'll be able to source money for the expansion of the New Energy Business.

Sir, my next question is in terms of gross margins as compared your competitor is bit better than us. So just wanted to know the reasons why is it better than -- is it because of the raw material procurement or the lead acid -- lead recycling? Just wanted your thoughts on that?

See, historically, our gross margins are better because of two major reasons. One definitely is the mix because our aftermarket mix is favorable as against the OEM mix. And secondly, considering our facilities being located at the same location, there is a huge amount of scale advantage we derive in terms of whether it is employee cost or whether it is through the other manufacturing expenses, etcetera. And we also had the distribution model being pretty robust so that's where we had better realizations as well as lower manufacturing costs and the employee cost. That's where we had the advantage and then the gross margin being better. And we hope we'll be able to continue that going forward as well.

And so just a follow-up on this one. Is it the reason for the inventory days also? Because on an average, your days for inventory for a 5-year average around 60 days. For a competitor, it goes up to 75 days. So what could be the reason for that?

No, I think I can only comment on our numbers. Our idea is that our DOH levels cannot go beyond 56 or 57 days. There could be some seasonal impact of it because of the tubular factory, generally, we create higher inventories towards the end of the year to meet the upcoming season in the summer. So that's where you will see on the balance sheet day, the inventories being a little higher. But otherwise, we generally try to maintain a 55 -day kind of an average and then run the business that way. So but that's been the required DOH days for the business.

Okay. My last question is in the new plant of lithium-ion.

Sorry to interrupt Mr. Rushabh.

Just last one, just -- its a small one. The new lithium-ion plant...

There are several participants waiting for their turn.

It's a small one. The new plant of lithium -ion, which is going to come up, is it going to cater both auto and industrials?

Yes. At the lithium it is -- the packs, we are currently supplying both to the auto segment as well as storage segment. And it goes the same way even for the cell facility.

Okay. Thank you so much, sir.

Thank you. The next question is from the line of Mukesh Saraf from Avendus Spark. Please proceed.

My first question is on the margins this quarter. The other expenses, I think last quarter, you had mentioned that there was a INR37 crores kind of an impact -- kind of a one -off impact, which probably would be lower this quarter. We expected about 40 bps impact because of the fuel cost going up. But we've seen that the numbers broadly flat Q1, about INR440 crores. So is there higher-than-expected impact of these -- the fuel costs that you had mentioned in the other expenses, the surcharge?

Yes, Mukesh. In addition to this fuel purchase cost that got loaded, this quarter also, there is a regulation change that has happened in terms of how we transmit the power that is coming up from our ground -mounted solar plant. Some of the settlement that has to happen at a cheaper rate because the cost of power coming out of our ground-mounted solar plant is much lower than what we buy from the grid. So since those settlements got stopped, that's where I think we had to incur higher power cost during the current quarter. We are now working with the regulators to see how we can get back those monies in the coming quarters. So it together, again, we created a similar impact even in this quarter as well.

Okay. And so I mean, one is this the solar thing that you need to get back from the regulator, but the other costs that we saw last quarter, that will come off from, say, 1Q?

No. I think now with the way we hope, I mean based on the regulatory commission's decision in the next year is when we'll have the visibility. But for now, we assume that may continue in the similar lever, and then we are creating those provisions in the b ooks. So if at all next year, regulatory commission decisions goes the other way, then we'll be able to get some relief out of it. But otherwise, I think those costs are going to persist even in the next year.

Okay. So in light of this, the price hike that you have taken and you mentioned that you might have to take more, you've taken this 2%. So how much more would we have to take to offset some of these costs that are hitting up?

No...

Both I think margin, the gross margin level as well because antimony as well has gone up. So how much more do we have to?

No. I don't think price hikes, we will simply base it on all costs being passed on to the market because we also have to look at how the competitive dynamics are also. So I don't think I can give you a number at this point of time. We may have to wait for another couple of months before we take a decision around whether there is a need for a further price rise or there are opportunities for us to save some of these costs and then still maintain the current prices.

Okay. And just lastly, how much was the traded revenue this quarter?

About 15% of the revenue is from trading.

15%, okay. All right, sir. Thank you. I'll get back.

Thank you. Th e next question is from the line of Abhishek Jain from Alfaccurate Advisors Private Limited. Please proceed.

Sir, are you facing any supply issues on the critical materials of antimony from China, which can hurt the productions in the coming quarter? Is there any supply constraint also because of the regulate -- change in the regulation or anything?

No, there is no supply constraint per se, but definitely, the prices have gone up. We are able to source the material that is required for our production, but the prices have definitely have gone up. I think partially because of some export restrictions that we hear that the Chinese government has put in. But I think as of now, we don't have any supply constraint as such.

Okay. And sir, in this quarter, we have seen a sharp jump in the purchase of the traded goods items. So what was the reason or will it reduce going ahead?

Yes. As you know, the Q4 generally is the time where we buy those batteries for the summer season for that inverter business. Going forward, obviously, once we start our manufacturing activity, the amount of trading that we do will come down, but we will still need some batteries through the vendors because our requirement will be higher than what the capacity that we have put up.

So that means after this plant, most probably that Q1 and Q4 requirement will go down and that's where the margin will improve?

Yes, that's the expectation.

Thank you, sir. That’s all from my side.

Thank you. Th e next question is from the line of Nitin Shakdher from Green Capital Single Family Office. Please proceed.

This is Nitin Shakdher from the Green Capital Single Family Office. So my question is more from as an investor in the company rather than an analyst. So what are your conversations happening with your large automotive clients in terms of Tata, Mahindra, Suzuki, Ashok Leyland, Hyundai? How are they seeing production pan out demand for 4-wheelers, 2-wheelers, commercials? And how will that get impacted in terms of order book versus vehicle production for the company. Just wanted to get a management perspective on the conversations happeni ng with OEMs for this year?

See, from the overall, generally, OEMs do share with us what's their plans on a monthly or a quarterly basis. As of now, based on the production plans that are being shared with us, we see that the 4 -wheeler growth is kind of flattish. Because - our market share in the 4 -wheeler is about 35%, 36% on the OEM segment. We are seeing the volume projections to be a bit flattish, but we expect that during Q2, there could be some uptick in the volumes. As far as 2-wheeler is concerned, yes, Q1 of this financial year has been a little and the volumes are on a downward trajectory. We hope that there will be an uptick in the OEM demand in the next quarter. That's what we are seeing based on the supplies that what we are doing today.

Okay. That's sort of helpful. And a follow -up to that. So I do understand that there's a bit of an export OEM structure which the company might interface with in terms of tariffs and specifically for export demand from the automobile manufacturers and then obviously putting demand to yourself. So what is the conversations on tariffs and export demand from the company? I mean any conversations on that?

No. See, our exports is predominantly to aftermarket. We don't supply to any OEMs per se in our export business. We only cater to the end consumer. But at this point of time, there could be two impacts on account of these tariffs. Number one, the U.S. customers are kind of wait -and- watch mode to see how to balance their supply chains in terms of ensuring that they are getting at the right cost. So we are seeing some changes in the order flow from some of our U.S. customers. But the larger impact possibly could be if countries have differential duties, I mean, if for example, if India were to have a lower duty structure as against, let's say, some country in Southeast Asia, then obviously, their capacities in order to fill, they may start looking at elsewhere market. So we may see some changes in the competitive intensity in some of our export markets, and we have to see how this whole thing is going to get settled. But at this point of time, it is still a bit of a flux situation today, maybe one month or maybe two mon ths down the line, how based on these trade agreement discussions, how they pan out might give us an idea which way this is going.

Okay. Sure. Thank you. That’s very helpful and that’s all from my end. All the best for this financial. Thank you.

Thank you. T he next question is from the line of Ravinder, an Individual Investor. Please proceed.

This is Ravinder. I'm an individual investor. I am a long time investor in Amara Raja and I started investing in this for the last 10 years, maybe 2015, '16. Yes, I commend the company's consistent operational performance. Yes, but it is disappointing to s ee the stock price over the last 10 years. I know that companies, I mean management -- I mean the stock performance is not in the management hands. But see, we are doing many investments, we are doing capex into the gigafactories and partnerships with many new tech firms. And if we sees our revenue growth from 2015 to '16, revenue growth has grown more than 3 to 4x and our bottom line also growing in the similar lines. But the investors are not rewarded in the same line, even if you take our competitors, right? So in every aspect, we are better than our competitors, but our competitors are valued more than us. So I request the management, I mean I don't know how to -- I mean you have to provide some confidence to the investor community. That's my concern?

Yes, point taken. I think even our effort is to communicate and then engage with all the stakeholders with respect to what's happening in the business, how we are moving ahead with respect to the strategic direction that we have set up. Our communication h as been now made streamlined, and then we are engaging with all the investors as and when required, and we are communicating in terms of how the company is doing. But only one submission is whenever you look at any competitor's share price, please also have a look at their balance sheet because there are other assets sitting in their balance sheet, which give a substantial value why those shares are being valued at that level. I understand your point from a PE point of view. But as you said, there is only so much that we, as a company, can do in terms of providing that comfort and confidence to the shareholders and the investor community at large. And we are happy that some of the shareholders like you are with us for a longer duration. We thank you for that. But I'm afraid we are trying our level best to do to create that confidence in the market. Then we'll see how it pans out from here.

Thank you, sir and all the best.

Thank you. L adies and gentlemen, due to time constraints, I take this as the last question and would now like to hand the conference over to the management for closing comments.

Thank you, all of you for your time.

Thank you, everyone.

Yes. Thanks, everyone for your questions and the opportunity to interact. I hope we've been able to answer all the questions to the fullest and looking forward to the next time. Thank you.

On behalf of Elara Securities India Private Limited, that concludes this conference. Thank you for joining us and you may now disconnect your lines.