Cost inflation has been a key worry for companies across sectors. And Amara Raja Batteries Ltd is no exception. Lead prices have increased steeply by around 25% on a year-to-date basis and analysts note that spot lead rates are almost 15-18% higher than its 1QFY22 average.

Consequently, in the June quarter, gross margins contracted both sequentially and annually to 31.1%, around 200 basis points lower than expectations. One basis point is one-hundredth of a percentage point. That said, the company has taken price hikes to protect margin erosion. It raised prices by 1.5-2?ch in April, July and August. Yet, the pass-through has been slow compared to the pace of the rise in raw material costs, analysts said.

Secondly, adverse product mix is adding to the margin compression. As the share of the high-margin replacement segment is declining, the product mix is likely to be adverse over the next one year, analysts added. Simply put, margin pressure is here to stay at least in the near term.

But that's not the only problem. The management’s $1 billion investment plan for the new energy segment needs more clarity, not to mention incremental announcements on capital expenditure, said analysts at Edelweiss Securities Ltd.

Investors would reckon that recently the company announced its plans to invest in new green technologies with focus on lithium cells and battery packs, chargers, energy storage systems and advanced home energy solutions, among others. 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 electric vehicles, demand for lithium-ion batteries is likely to outpace lead-acid batteries by 2025.

Analysts at Emkay Global Financial Services Ltd caution that over the next few years, the capacity addition in lithium batteries may be higher than demand creation due to the product-linked incentive scheme. This is expected to impact utilization levels and profitability. "There could be downside risks to our earnings estimates in the medium term, if Amara Raja announces investments in lithium battery manufacturing capacities," said the Emkay report.

In the backdrop of these issues, both the domestic brokerage firms have reduced their price target on the stock.

Meanwhile, shares of Amara Raja have been underperforming close competitor Exide Industries Ltd for quite some time now. So far in this calendar year, Amara Raja’s stock has declined by 22% trailing Exide’s 8?cline. The pressure on the stock has escalated in recent weeks following the company’s ongoing case in the Andhra Pradesh High Court which has directed suspensions of its units located at Karakambadi, Tirupati and Nunegundlapalli village, Chittoor district in Andhra Pradesh on violation of pollution control norms.