Revenue growth to decelerate for battery makers: IIFL Capital Services

31 Jan 2023 , 10:53 AM

The decline in revenue growth will be driven by softening in replacement demand (fall in first-time replacement), lower growth in OE segment and lack of ASP growth. Industry EBITDA margin was at a 20-year low in FY22 and Q1FY23. Since then, margins have moved up substantially (Q3 margin +330 bps versus Q1). However, price of lead has moved up in recent months; this may hurt gross margin from Q4. 

Overall, analysts at IIFL Capital Services expect earnings growth to come off sharply from FY23 levels. Meanwhile, both Exide and Amara Raja would need to make significant investment in Li-ion battery manufacturing, as it is inherently capital-intensive. Analysts at IIFL Capital Services see the following risks:

• Lack of visibility on EV adoption and revenue off-take
• Uncertainty on margin profile of Li-ion batteries
• Strain on cash flows and return ratios till the projects turn profitable

They have downgraded their recommendation on Exide from Buy to Add and have retained Add recommendation on Amara Raja.

First-time replacement demand to fall in FY24

The sharp fall in vehicle retails in FY21 is likely to hurt first-time replacement demand for batteries in FY24. Batteries typically have a well-defined 3-year replacement cycle. Analysts at IIFL Capital Services understand that organized players/brands have a higher share in first-time replacement, but drop off in subsequent battery replacements. As a corollary, a fall in volumes of first-time replacement segment will drag down growth in the overall organized replacement demand.

OE segment to also see sharp deceleration

In FY23, MHCV, LCV, PV and 2W would grow 45%, 27%, 27% and 18% respectively. In FY24ii, analysts at IIFL Capital Services expect growth rate to taper down to 15%, 5%, 10% and 12% respectively. MHCV is the only segment, for which there is an upside risk to FY24 growth estimates of IIFL Capital Services. FY23 growth benefited from low base, pent-up demand and chip shortage in FY22. These effects would wane in FY24.

Industry revenue growth to moderate to sub-10% in FY24

The battery industry is set to report 20% revenue CAGR over FY21-23 with strong replacement demand, rebound in OE volumes and price hikes. Starting FY24, analysts at IIFL Capital Services expect revenue growth to decelerate to sub-10%. In addition to sharp fall in growth rate of auto OE and replacement segments highlighted earlier, the inverter segment may also see weakness in FY24 due to high base effect (power shortage in H1FY23).

Sharp improvement in margins in last two quarters; but see risk from here

Industry EBITDA margin was at a 20-year low in FY22 and Q1FY23. Since then, margins have moved up substantially (Q3 margin +330 bps versus Q1). This was led by price hikes (with a lag) and fall in price of lead. However, price of lead has moved up in recent months; this may hurt gross margin from Q4. In addition, weak revenue growth is also likely to create negative operating leverage. Overall, analysts at IIFL Capital Services expect earnings growth to come off sharply from FY23 levels.

Investment in Li-ion batteries to weigh on cash flows/earnings

Exide is setting up a greenfield plant to manufacture Li-ion batteries (including cells). Phase-1 would involve a capex of Rs40 billion and would become operational in late-FY25. Similarly, Amara Raja has announced plans to invest Rs95 billion over the next 10 years. These projects have long gestation periods (at least two years to commissioning). Even after plants are commissioned, there is uncertainty on cash flows given lack of clarity on pace of EV adoption and low visibility on margins. Analysts at IIFL Capital Services believe initial positive news-flow with regard to this project may come in CY2024, when battery makers announce tie-ups with OEMs for battery supplies.