Exide charged to accelerate; improvements in products to help market share

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Given the ongoing recovery in automobile sales, gains from the replacement market, technology upgradations and tie-ups, Exide Industries is on a strong wicket. Which is why its stock has over the past year done better than smaller peer Amara Raja by a wide margin (17 per cent return to a 13 per cent loss, respectively), as well as the benchmark S&P BSE Sensex (up 14 per cent).

With the steps it is taking, the company is expected to stay ahead. Last Wednesday, for instance, it announced a joint venture (JV) with Swiss company Leclanché to make lithium ion batteries. It will initially import the products from Germany but plans to set up production facilities in India. The company will initially target fleet vehicles and scale up gradually to meet the potential shift to electric vehicles.

Analysts at Motilal Oswal Securities estimate the potential for lithium ion batteries at $42 billion a year (Rs 2.9 trillion), nine times the automotive lead acid battery market. Amara Raja is expected to get the same technology from its JV partner, Johnson Controls, which makes batteries for both hybrid and fully electric automotive applications.

This places Exide well to tap future opportunities. In the medium term, revenue and profit growth are expected from the conventional lead acid battery segment. The company dominates with a 60 per cent or more market share, both in the new car and two-wheeler markets. Demand growth from higher rural and urban consumption is expected to boost volumes, ensuring higher utilisation of its units.

The company has also been taking steps to improve its service network (both products and turnaround time) in the replacement market. A little over 60 per cent of Exide’s revenue comes from here and the margin is are at least 500 basis points more than the overall margin, now 13.5 per cent. Market share gains could come from the commercial vehicle and tractor segments, where the unorganised segment share is half the overall market.

At the consolidated level, Exide’s margin is expected to move up to 15 per cent. Ongoing capacity addition, technology upgradation and automation are expected to improve efficiency, bring down service costs and personnel expenses. Operating leverage should also play a part —both the battery supply market to automobile makers and the replacement segment are expected to grow in double-digits, a first in many years.

Ajay Shethiya and Aditya Iyer, analysts at Centrum Capital, believe the recent effort at addressing issues in the replacement segment will boost market share. Exide is also expected to grow its net profit by 19 per cent annually in the next two years.

While the stock is trading at a discount of 10 per cent to Amara Raja on FY18 earnings, this is likely to be bridged as the Exide stock gets re-rated further.