A charged-up Amara Raja juggles margin pressure and lithium-ion ambitions

Amara Raja Energy and Mobility Ltd’s weak margin performance in the September quarter overshadowed its 12% year-on-year jump in standalone revenue.

The revenue, which was in line with analysts’ expectations, was driven by increased traction in three segments: two-wheeler and four-wheeler aftermarket, two-wheeler original equipment makers, and exports.

But rising input costs, particularly lead prices, and a higher proportion of lower-margin traded products hurt profitability. Standalone gross margin contracted by 100 basis points (bps) year-on-year to 32.4%, and Ebitda margins saw a slight year-on-year dip at 14.1%, lower than expectations.

Also read |Batteries included: Amara Raja's game plan

Despite this squeeze, the company’s management reiterated their near-term margin guidance of 14-14.5%, assuming lead prices remain stable around ₹200 k/tonne. This outlook is also bolstered by anticipated export growth and ongoing process improvements.

To protect margins, Amara Raja implemented a 1.5% aftermarket price hike.

Even so, earnings estimates were trimmed by some brokerages. Nuvama Research cut its Ebitda estimate for Amara Raja in FY 2025-27 by 3-4%, factoring in lower margin assumption.

A shift to lithium-ion batteries

The battery industry, meanwhile, is gradually shifting from lead-acid—the core of Amara Raja’s business—to lithium-ion batteries. Amara Raja has started assembling lithium battery packs and manufacturing chargers and is investing in building lithium-ion capacities to meet demand, mainly from electric vehicles.

In fact, the company has increased the investment limit for its cell manufacturing subsidiary to ₹2,000 crore from the ₹1,000 crore proposed earlier to set up a gigafactory.

Investment in the lithium-ion business (New Energy business) will reach ₹1,200 crore by the end of FY25, the management said during the company’s second-quarter earnings call.

Also read |Amara Raja’s lithium-ion pact powers the stock, but jerks likely ahead

While Amara Raja can fund the initial couple of years of the lithium-ion project through internal accruals, it would need to raise funds to finance the remaining project, Motilal Oswal Financial Services said in a report dated 6 November.

True, the Street is excited about the prospects of the company’s lithium-ion operations, but it remains a lower-margin, competitive business. Amara Raja must balance its partnerships with original equipment makers and capital returns, navigating challenges around the technology’s long-term viability.

Also read |India dialling China for its lithium-ion cell ambitions despite tensions

High capex, expensive valuations

Total standalone capital expenditure for Amara Raja in FY25 is expected to be around ₹500 crore, with about ₹385 crore already spent in the first half of the financial year.

Capex has increased relative to earlier expectations as the company had to advance its plans for expanding its 4W capacity plant, the management said. Higher capex requirements are feared to weigh on the company’s return ratios.

Meanwhile, in this calendar year so far, the Amara Raja stock has rallied nearly 60%, far ahead of larger peer Exide Industries and the Nifty500. The steep rally suggests that the Street is focusing on positives, but a slowdown in domestic OEM and replacement demand could lead to lower-than-anticipated revenue growth.

Plus, valuations are expensive. At FY26 price-to-earnings, the Amara Raja stock trades at 20.9 times, showed Bloomberg data.