Exide Industries: All charged for a comeback

Battery manufacturer Exide Industries has been an underdog in the last few years, with competitor Amara Raja Batteries making the most of its misfortunes. Loss of market share and shrinking margins weighed down Exide’s performance. But the tide has changed. Exide has consistently clocked profit growth of 25-35 per cent in the last few quarters and is well poised to gain from the recovery in both the auto and industrial battery segments.

At the current market price of ₹178, the stock trades at about 23 times its trailing 12-month standalone earnings. This is much cheaper than Amara Raja Batteries, which trades at 32 times. Historically, Exide traded at a premium to Amara Raja, given its market leadership position. The stronger prospects for Exide now give it more scope for re-rating. Investors with a perspective of one to two years can buy the stock.

Exide derives about 60 per cent of its revenue from automotive batteries and the rest from the industrial segment. With capacity crunch affecting the company around 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 one year though, things have been getting better.

The management has indicated that the company has regained its lost market share in the replacement market for automotive batteries. Volumes have grown 15-20 per cent in each of the last two to three quarters and Exide has been able to cut back on marketing spends in this space too.

Sale of inverter and UPS batteries have also picked up in the last few quarters. These two segments constitute almost half the sales of the industrial battery division for the company. While the power situation in the country is expected to improve over the medium to long term, the company expects this segment to continue to show reasonable growth to meet back-up power requirements in the interim.

Accelerating new vehicle sales also bode well for the company. In the first four months of this fiscal, car/utility vehicle and two-wheeler sales have grown 9 per cent and 14 per cent, respectively, over the same period last year. Lower borrowing costs, good monsoon and Seventh Pay Commission payouts are expected to keep demand for cars and bikes robust. The company is the market leader and has a share of 60 per cent in the sale of batteries to auto manufacturers.

Besides, the implementation of Goods and Services Tax (GST) in the next one to two years should benefit Exide. 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.

To meet the expected increase in demand over the next two to three years, the company has embarked on a ₹1,400-crore capacity expansion plan, to be funded by internal accruals.

For the quarter ended June 2016, net sales grew 11 per cent to ₹2,008 crore, while net profits moved up 26 per cent to ₹196 crore. Operating margin came in at 15.6 per cent, a percentage point higher than in the June 2015 quarter.

Exide’s margins are still lower than the 18-20 per cent levels it enjoyed a few years ago. But in the last one to two years there has been a gradual expansion over 10-12 per cent seen during the testing times beginning 2011. Exide is no longer focusing on cutting down on profitability to gain market share.

Secondly, benign prices of lead, the key raw material, and cost control efforts have also helped. From over $2,000 a tonne in end-April-early-May 2015, global lead prices have dropped to around $1,800 a tonne now. With adequate supply to meet demand, lead prices are not expected to move up sharply in 2016. While higher direct sales to auto manufacturers may dilute margins a bit in the quarters to come, cheaper lead and continued robust demand in the replacement market may help cushion margins.