Exide Industries: A battery of positives

Presence in replacement market and good outlook for batteries benefit the market leader

Volatility in the broader markets, coupled with dwindling new vehicle sales, has seen battery-maker Exide Industries’ stock lose sheen in the last few months. The stock is down 30 per cent from the one-year high of ₹301 it touched in late August 2018. But at a time when new vehicle sales are stuck in first gear, battery-makers such as Exide that have a sizeable presence in after-market sales have an edge over other auto component makers selling only to new vehicle manufacturers. Thus, this fall is a good opportunity for long-term investors.

Apart from its strength in the replacement market, good outlook for UPS and industrial batteries, as well as the company’s inroads into sale of batteries for electric vehicles are added positives.

The stock now trades at 21 times its trailing 12-month standalone earnings, cheaper than peer Amara Raja batteries that trades at 23 times.

Historically, due to its market leadership position, Exide has always been trading at a valuation premium to Amara Raja. It was only for sometime during 2013-16, when Exide faced capacity constraints and lost market share in sales to auto manufacturers as well as in the replacement market that its valuations slid below that of Amara Raja’s. With Exide trading at a valuation lower then Amara Raja’s once again now, there is enough scope for re-rating over the next few months.

Investors with a one to two-year perspective can buy the stock.

Support from after-market

The domestic auto industry, which began 2018-19 on a high note, ended the fiscal with a subdued 5.15 per cent growth in overall sales volumes, steeply lower than the 14.22 per cent growth recorded in 2017-18.

A host of factors such as rising fuel costs, patchy monsoons, crash in farm prices, higher insurance outgo due an increase in premiums on third-party cover and the liquidity challenges among finance companies, following the IL&FS crisis, dented sales.

This fiscal, too, has begun on a sombre note. Though borrowing costs are going down, uncertainties due to elections and a drying up of private investments and government spending have nearly washed out vehicle sales in April. The trend is expected to continue over the next few months.

In such a scenario, battery and tyre manufacturers are better placed to negotiate the slowdown as they have sizeable presence in after-market sales. This is because tyres and batteries need to be replaced every three to four years in existing vehicles.

Over the last few years, the company has initiated measures to strengthen its market share in the automotive replacement segment. These include higher support to dealers, improvement in after-sales service, faster turnaround in warranty claims, launch of new products and a marketing push of brands such as Dynex, which is targeted at the lower value segment.

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.

Exide is well-placed to catch up when new vehicle sales pick up, too. 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.

The company has also taken measures to tackle the shift to electric vehicles which require lithium-ion batteries, rather than the lead-acid batteries that are currently in use. It has entered into a joint venture with Switzerland-based Leclanché, to build lithium-ion batteries and provide energy storage systems for India’s electric vehicle market and grid-based applications.

A module and battery pack assembly line is expected to be operational by the September 2019 quarter, and a lithium-ion cell production plant is expected to be in operation by mid-2020. Exide has already introduced batteries for e-rickshaws.

Beneficial raw material costs

The price of lead on the London Metal Exchange (LME) dropped from about $2,500 a tonne in January-March 2018 to about $2,000 a tonne in the three months ended March 2019, and has fallen further since then. In the near term, global demand for lead is expected to remain benign, predominantly due to a slowdown in Chinese consumption.

Also, going by the outlook for the full year 2019 put out by the International Lead and Zinc Study Group in October 2018, the supply of refined lead metal is expected to be adequate to meet demand.

For these reasons, prices are not expected to move up sharply this year. This bodes well for margins in the coming quarters.

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