At a time when new vehicle sales are few and far between, auto component players with a sizeable presence in after-market sales are better-placed to tide over the slowdown. Battery and tyre manufactures are among such companies.

Investors with a one- to two-year perspective can buy the stock of Exide Industries. Exide is the market leader in the automotive battery segment.

Demand for replacement of batteries in existing vehicles is expected to keep volumes afloat for the company until new vehicle sales pick up.

This apart, presence in industrial batteries is a positive.

The company is also a market leader in almost all the segments it operates in, such as UPS, solar, railways, power and traction applications. Its inroads into sale of batteries for electric vehicles, too, is a shot in the arm.

Taking cue from the rally in the broader market, the stock has gained about 25 per cent from the one-year low of ₹121.90 it touched in mid-March.

The stock currently trades at 15.7 times its trailing 12-month earnings. This is at a discount to peer Amara Raja, which trades at 17.6 times.

Replacement demand

New vehicle sales, which was already facing multiple challenges since mid-2018, has further been hit due to Covid-19.

Overall, volume growth for the auto industry, which stood at 5.15 per cent in 2018-19 (over the previous fiscal), dropped by about 18 per cent in 2019-20.

This fiscal, too, has been a near wipe-out so far, with the Covid-19 outbreak forcing production and dealership shutdowns. Companies have restarted production to an extent and reopened most dealerships, but demand still remains a wild card.

Vehicles are big-ticket consumption items and predominantly financed purchases.

Job losses, pay cuts and income uncertainty are dampeners to purchases at this juncture.

Besides, commercial vehicle sales are faced with bigger challenges due to the overall economic slowdown decreasing demand for freight carriage. The permit for existing vehicles to carry higher loads (new axle load norms) have also been a big blow to new truck sales.

While companies expect some green shoots only from the second half of this fiscal, CRISIL expects the auto industry to record a 21-28 per cent fall in volumes in 2020-21.

A meaningful recovery in new vehicle sales could be possible only in the next fiscal.

In such a scenario, battery and tyre manufacturers are better-placed to tide over the slowdown as they have a sizeable presence in after-market sales as these components need to be replaced every 3-4 years in existing vehicles. Over the past few years, Exide has initiated measures to strengthen its market share in the automotive replacement segment.

These include increased 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.

Exide has the widest distribution in the industry with a combined direct and indirect network of over 48,000 dealers.

Over the long term, 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 segments. Currently, the unorganised segment garners a 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.

It is also the sole supplier to recent and successful launches such as Kia Seltos, MG Hector and Hyundai Venue as well as the upcoming Tata Gravitas.

The company has also taken measures to tackle the shift to electric vehicles, which require lithium-ion batteries rather than the lead-acid ones currently in use. It has entered into a joint venture with Switzerland-based Leclanché to build lithium-ion batteries for India’s electric vehicle market. A lithium-ion module and pack assembling plant for various vehicle segments will be set up for the same.

The firm has already introduced Exide Neo, a battery-powered e-rickshaw to showcase its lithium-ion capabilities.

Financials

Tepid demand from the auto manufacturers as well as disruption due to the lockdown saw the company clocking weak numbers in the quarter ended March 2020. Revenues and profits dropped 20 per cent each over the same period last year, to ₹2,055 crore and ₹168 crore, respectively. Lack of operating leverage weighed on the margins. Operating margins came in at 13.1 per cent, lower than the 14.3 per cent achieved in the March 2019 quarter.

However, the price of lead — the key raw material — which hovered around $2,000 a tonne in January, has cooled off to $1,700-1,800 now. Given the global slowdown, raw material prices are not expected to inch up sharply this year.

The company is debt-free.

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