Margin normalization to drive EPS of battery makers: IIFL Capital Services

20 Sep 2022 , 10:51 AM

Battery industry — back on growth path after two tough years

Using EXID and AMRJ as a proxy for the industry, battery industry revenue saw its first decline in 20 years in FY20, and then remained flattish in FY21. In FY22, the industry bounced back with 23% revenue growth. The growth was driven by strength in both auto and industrial segments. FY23 is off to a decent start. Analysts at IIFL Capital Services expect revenue growth to remain strong in FY23, with sharp revival in Auto OEM segment and continued strength in auto after-market.

AMRJ’s growth/margin converging with EXID after years of outperformance

Over FY07-17, AMRJ outgrew EXID by almost 10% CAGR, growing at 24% CAGR versus EXID’s 15% CAGR. Over the past 5 years, AMRJ’s revenue growth has converged with that of EXID. AMRJ’s margin lead over EXID has also gone away in recent years. Historically, AMRJ has traded at a significant premium to EXID due to higher growth, higher margins and concerns of EXID’s capital allocation due to investment in Exide Life.

Managements optimistic on demand

Managements are positive about sustained demand momentum across both auto and industrial verticals. Within Automotive, OEM segment should benefit from cyclical rebound in volumes and replacement market should also stay robust. The outlook for industrial vertical is healthy across most sub-segments, given the buoyant macro environment and broad-based pick-up in economic activity. Managements also expects strong export traction to continue going forward.

Industry margins at 20-year low; fall in lead price to support normalization

The battery industry (EXID + AMRJ) has operated at an average EBITDA margin of 15% in the past 20 years. However, FY22 saw deviation from norm, due to sharp rise in price of lead (+22% YoY in Rupee terms). Lead price has come off sharply in recent months with the cool-off in global commodity prices. As a result, analysts at IIFL Capital Services expect margins to gradually revert to mean. This should drive a 20%+ EPS CAGR over FY22-24.

Li-ion batteries — Exide has an advantage

Both companies started their journey in Lithium-ion (Li-ion) battery space 3-4 years back, with assembly/manufacturing of battery packs. Now, they are preparing to enter Li-ion cell manufacturing, which is the most critical and value additive process in the Li-ion value chain. EXID appears to be ahead compared to AMRJ in Li-ion battery opportunity, as it has already formed a technical collaboration with an established global firm for Li-ion cell manufacturing, announced a concrete plan to set-up cell manufacturing plant, and has a relatively stronger balance sheet.

Retain Buy on Exide, Add on AMRJ

At CMP, both EXID (10x FY24) and AMRJ (11x FY24) are significantly cheaper versus historical multiples. As highlighted earlier, EXID’s market-share loss to AMRJ seems to have paused and margin deficit has narrowed. With the sale of Exide Life, EXID has ~Rs50 billion worth of stake in HDFC Life. This is far more liquid compared to its earlier 100% ownership of Exide Life. In effect, EXID has a war-chest to invest in Li-ion batteries if and when the need arises.