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Going strong

Exide Industries (Exide) is India’s largest lead-acid storage battery manufacturer in India. It is the market leader in all automotive applications in the domestic market. Its battery portfolio spans 2/3/4 wheelers, e-rickshaws, inverters, gensets and home UPS systems. In the industrial segment, it provides reliable energy storage solutions to all industrial applications. It caters to all the leading OEMs and marquee players in the industrial segment. It also manufactures high-end batteries for different classes of submarines and is the sole supplier to the Indian Navy for more than three decades. Further, the company also exports its products to over 50 countries worldwide. Exide has nine factories strategically located all over India out of which 7 factories are dedicated to batteries and the other 2 factories manufacture Home UPS Systems.

Investment Rationale

* Recovery in the auto industry bodes well for Exide: The domestic auto industry has witnessed several challenges over the past two years largely due to liquidity issues amongst NBFCs, changes in regulatory norms, and lastly the COVID-19 pandemic. However, the demand has picked up meaningfully over the last several months led by easing restrictions, strong pent-up and festive season sales and easing liquidity conditions. While we expect the demand could remain muted in the near term due to the ongoing second wave, nonetheless we expect the growth trajectory to continue especially in the 2-wheeler and PV segment led by normal monsoons, higher rural income, and increased preference towards personal mobility, low-interest rates and easing liquidity conditions. The automotive battery market is largely a duopoly wherein Exide is the market leader with ~60% OEM market share. The anticipated recovery in OEM volumes augurs well for Exide due to its commanding market share and strong relationship with OEMs. Moreover, it enjoys a 100% market share in some of the major launches in 2019 which have done considerably well despite industry headwinds (Kia Seltos, MG Hector, Hyundai Venue).

* Exide’s smart recovery in the replacement market to continue: The organized players constitute 60% share in India’s replacement battery market whereas unorganized players have a 40% market share. Exide is the largest player in this market with a 50% market share of the organized market. Over the last three years, Exide has managed to regain its lost market share by filling in product gaps, increased focus on quality improvement and after-sales service. A similar trend is likely to continue going forward as we expect the shift from unorganized to organized to accelerate driven by GST implementation and lower corporate tax rate. Further, the ongoing economic recovery bodes well not only for the automotive replacement market but also for the industrial segment where Exide is the market leader in most segments.

Outlook & Valuation:

We expect Exide to further strengthen its position in India’s battery market driven by its healthy relationship with OEMs, strong focus on technology up-gradation, and faster shift towards organized players. Further, the company has two lead smelting units for captive consumption from which it meets ~40% of its lead and lead alloy requirements from recycled lead. This would reduce the volatility in margins caused due to movement in lead prices. Therefore, strengthening leadership position, constant focus on improving technology, product & service, debt-free status, expanding return ratios makes it one of our preferred picks in the sector. We recommend a Buy on the stock with a target price of Rs. 229 valuing the core business at 15x FY23E EPS and life insurance business at Rs. 25.

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