Battery makers charged up for next leg of growth on replacement demand

Pick-up in industrial consumption, relatively benign lead prices point to improved earnings prospects

Strong demand in the replacement market, pick-up in industrial consumption and relatively benign lead prices point to improved earnings prospects of battery makers Exide Industries and Amara Raja Batteries. Not surprisingly, Street sentiment too has improved in the past two months.

Channel checks conducted by Sharekhan indicate that dealers are witnessing strong replacement demand in the two-wheeler and four-wheeler segments. Higher mobility on road has increased battery demand in replacement markets, which is a positive for the two companies as replacement demand accounts for nearly 70 per cent of their total automotive business.

The driving force behind this growth is the shift of demand from unorganised to organised players. The Indian lead-acid battery industry is estimated to be worth close to $5 billion as of FY20. Of this, the unorganised sector holds roughly 40 per cent market share. Supply issues and liquidity crunch have forced several unorganised players to shut shop. This has aided the two companies to capture incremental market share as was witnessed with volumes growing by 13 to 15 per cent during the May to November period, say analysts at Prabhudas Lilladher in a report.

 

Sales to automobile manufacturers, too, have shown positive momentum, particularly in the 2-wheeler segment, as factory gate dispatches recover to pre-Covid levels for most players. The industrial segment, which accounts for 25 to 30 per cent of their total revenue, is also seen recovering as economic activity gradually picks up. Telecom is one of the largest sub-segments within industrial and also commands the highest margins. Revival in this space is particularly positive for Amara Raja as it holds close to 60 per cent market share.

Moreover, while lead prices on the London Metal Exchange (LME) are up 30 per cent from lows of $1,575 a tonne seen in May to $2,060, they are marginally up on year-on-year basis. In India, average lead prices for Q3 are down 0.4 per cent over the previous year to Rs 138.4 per kg. Improving product mix coupled with benign raw material costs are likely to keep margins steady, says Prabhudas Lilladher.

 

Analysts have subsequently upped their earnings estimates for FY22 by over 20 per cent, according to data from Bloomberg.

Despite gaining 30 – 40 per cent in the last six months and the stocks now near or at 52-week highs, valuations too are relatively less expensive. Amara Raja and Exide (ex-insurance business) trade at a discount of 10 per cent to their 5-year average price-to-earnings multiple. Yet, given the recent gains, a correction could offer a good entry point.

Investors though should note that while both the companies have made early moves into lithium-ion batteries, any sudden shift to the new technology, which requires high capex, is viewed as a medium-term headwind. Resurgence in competition from unorganised sector and adverse lead prices are some other risks, say analysts.