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Batteries: Replacement demand to support quick recovery
* Amid the overall weakness in Autos in FY21, marginal growth is expected in the Lead Acid Battery (LAB) segment, driven by an upsurge in aftermarket demand (14%/6% growth in 2W/other vehicular volumes likely in FY21E) stemming from the replacement of old and discharged batteries post the removal of lockdowns.
* Lead, which is the key input commodity, constitutes ~70% of RM costs, and global lead prices have corrected by ~15% in the past three months. Despite the increase in competition and notable pass-through to customers, we expect an improvement of up to 50bps in FY21E gross margin for EXID and AMRJ. EXID is working toward a shift to a two-tier distribution model, as it will provide better reach and reduce costs. During the transition period, there could be a shift of some of EXID’s retailers from exclusive to multi-brand outlets, resulting in some market share losses.
* We expect revenue/EBITDA growth at 8%/10% for AMRJ and 6%/8% for EXID over FY20- 22E. Driven by expectations of a quick recovery, low fixed costs, margin support from benign lead prices and healthy liquidity position, we maintain Buy on AMRJ (TP: Rs624) and EXID (TP: Rs189).
* LAB: Marginal growth in FY21E; stable growth in FY20-25E: The LAB segment’s revenue is expected to grow marginally to Rs330bn in FY21E, driven by aftermarket volume growth of 14% in 2Ws and 6% in other vehicular batteries. In comparison, OEM, exports and industrial battery segments are expected to remain under pressure in FY21E. During lockdowns, several vehicular batteries are likely to get discharged due to non-utilization, and old batteries could get replaced, resulting in a quick recovery in aftermarket volumes. In FY21, the share of unorganized players is expected to slightly increase as the commercial segment (Taxis, CVs, Tractors and 3Ws) customers’ shift toward cheaper products due to slowdown in economic activity and shift in customer mindset toward cash conservation. However, over the medium term, the shift toward organized segment is expected to continue. The LAB segment’s revenue should see 8-10% CAGR over FY20-25E, led by: 1) stable growth in the aftermarket segment, as the service life of batteries are reducing due to higher number of starts per day and an increase in electronic content in vehicles; 2) pick-up in OEM segment from FY22E onward, driven by low base, pent-up demand and gradual improvement in economic activity; and 3) growth in industrial segments, led by UPS, e-rickshaw, solar and traction batteries.
* EXID plans to shift to a two-tier distribution model as it will lead to better reach and reduction in costs. Costs are expected to reduce due to the reduction in storage depots, manpower, freight costs and working capital needs. However, during the initial period of transition, there could be a shift of some of EXID’s retailers from exclusive to multi-brand outlets, resulting in some market share losses. Overall, we expect replacement revenue CAGR of 10% for EXID and 11% for AMRJ over FY20-22E.
Positive outlook on battery companies: We expect revenue/EBITDA growth at 8%/10% for AMRJ and 6%/8% for EXID over FY20-22E. Led by expectations of quick recovery, low fixed costs (11-12% of normalized revenue), margin support from benign lead prices (15% fall in past three months) and healthy liquidity position (net debt/equity of -0.1x for EXID and -0.04x for AMRJ in FY20E), we maintain Buy on AMRJ (TP: Rs624) and EXID (TP: Rs189). Although EV penetration remains a structural risk, it has been delayed due to the fall in global crude prices. Key downside risks include a delay in economic recovery, increase in competitive intensity, and adverse movement in currency/commodity prices.
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