Exide Industries: Charged for the run

After touching its one-year high of ₹250 in early May 2017, the share price of battery manufacturer Exide Industries has corrected about 18 per cent over the last three months. A rise in the price of lead, the key raw material, has been a major reason for the negative sentiment. But given its market leadership position in some of the segments it operates in, the company has been able to pass on a good portion of the price increase to customers.

In the near to medium term, strong replacement battery sales in the auto segment and a pick-up in new vehicle sales will help the company. Investors with a perspective of one to two years can buy the stock.

At the current price, the stock trades at about 25 times its trailing 12-month standalone earnings. This is much cheaper than Amara Raja Batteries, which trades at 30.5 times.

Historically, Exide traded at a premium to Amara Raja, given its market leadership position. But loss of market share and shrinking margins weighed down Exide’s performance until early 2015-16. With prospects getting better for Exide, the valuation gap has been narrowing. There is further scope for re-rating.

Exide derives about 60 per cent of its revenue from automotive batteries. With capacity crunch affecting the company a few years back in 2011, it had to forego some sales in the more lucrative replacement segment to cater to demand from vehicle manufacturers, as new vehicle sales were strong then. But later on, when new vehicle sales slowed, it had to cut prices to sell in the replacement market.

The additional capacity coming right when the economy slowed didn’t help, saddling the company with low utilisation and high costs. In the last two years, things have been getting better as the company began regaining lost market share in the replacement market for automotive batteries.

Apart from incentives to dealers and distributors through promotional schemes, the company revamped and upgraded its retail outlets to strengthen its position in the replacement market.

Besides, the Goods and Services Tax (GST) regime should benefit Exide on the replacement side as well. Compliance requirements under the GST will bring down the price advantage that unorganised battery makers enjoy currently.

This is expected to increase demand for organised players such as Exide, especially in the commercial vehicles and tractors segment. Currently, the unorganised segment garners 40 per cent share in the replacement battery market.

Accelerating new vehicle sales also bode well for Exide. After being impacted due to one-off events such as demonetisation, the BS-IV and GST transition, several tailwinds such as lower borrowing costs, good monsoon and Seventh Pay Commission payouts are expected to keep demand for cars and bikes robust in the next few months.

The company is the market leader and has a share of 60 per cent in the sale of batteries to auto manufacturers to be fitted into new vehicles. It counts almost all auto manufacturers such as Hyundai, Honda, Toyota, Volkswagen, Mahindra and Mahindra, Tata Motors, Maruti Suzuki, Hero, Ashok Leyland, Bajaj Auto, TVS, Royal Enfield and Honda two wheelers among its clients.

In 2016-17, the company commenced operations in the new state-of-the-art Haldia plant which manufactures next-generation automotive batteries using a new ‘punched grid’ technology. According to the company, this technology helps in longer battery life, as it is highly corrosion-resistant and exhibits structural rigidity. This apart, with the government upping the ante on electric vehicles, Exide is also working on batteries for e-rickshaws.

On the industrial batteries side, the home UPS segment has been facing some headwinds, and the company has introduced after-sales service in this segment to woo customers. However, the company has been doing well in the institutional segment where it is a market leader.

While the power situation in the country is expected to improve over the medium to long term, this segment may continue to show reasonable growth to meet back-up power requirements in the interim.

It has also launched advanced VRLA batteries for telecom applications last fiscal and has started supplying to private tower operators such as Bharti Infratel and Indus Towers. Some new products for telecom and solar applications, given the government’s thrust on renewable energy, are also in the works.

For the quarter ended June 2017, net sales increased by 4.6 per cent y-o-y to ₹2,102. 8 crore. While the company enjoyed double-digit growth in the topline in the last few quarters, lower volumes arising from transition to GST have probably been one of the reasons for the tepid growth in the June quarter. Operating margin came in at 15.4 per cent as against 15.6 per cent a year ago.

Though margins have reduced only by 20 basis points, the company has seen raw material prices increase sharply. International lead price, which was at about $1,700 a tonne in April 2016, hovers at around $2,200 a tonne now.

Following this, domestic lead prices moved up steadily from ₹110-120 a kg in the April-June 2016 quarter to ₹150 a kg now. The impact on the margin has been minimal due to price increases of 8-12 per cent in the last few months to pass on the input cost rise. However, higher depreciation and taxes impacted the bottom line. Profits dropped by 3.6 per cent y-o-y to ₹189 crore now.

Though further increase in lead prices and marketing efforts may pressurise margins, the company hopes to maintain it and take it to over 15 per cent in the medium term.

Towards this end, its pricing power in the replacement market will help. Cost-control effort will also do its bit.

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