Exide’s humdrum battery business hides a couple of facts that should excite investors. First, that operating in a duopoly, Exide is the market leader with a market share of 55-75 per cent in the different OEM categories, and 55 per cent in the replacement market. Its nearest competitor, Amara Raja, has a market share of only 25 per cent in the OEM market and 30 per cent in the replacement market. Second, between 2007-11, Exide’s cash from operations has grown by a remarkable 250 per cent — this, despite auto sales slowing down in recent times.
Exide derives its moat from its relationships with OEMs, branding, its in-house smelters (that lower its cost of lead) and an unmatched distribution network (38,000 outlets offering replacement batteries). By contrast, Amara Raja is present in only 18,000 outlets.
Current outlook
In spite of the slowdown in the auto sector, the OEM battery market is expected to grow by 13.5 per cent (CAGR) till FY14. The replacement market is expected to grow strongly owing to robust auto sales between FY09-FY11. During this period, four-wheelers grew at a CAGR of 28.5 per cent and two-wheelers at 25.9 per cent. Sales made during that period should come up for replacement by FY13. The replacement market is expected to grow by around 14-18 per cent between FY11-14.
Concerns
In the replacement segment, Exide faces stiff competition from unorganised players, which account for 42 per cent of the domestic automobile battery market. At the lower end of the market the share of unorganised players is as high as 70 per cent. Besides lower prices (around 25-30 per cent lower than branded rivals), unorganised players have now also started offering higher-quality products. To combat this segment, Exide has gone in for price cuts. It took an 8-10 per cent price cut in September 2011 and raised dealer margins by 1-2 per cent.
Input cost inflation also plagues the industry. Lead and lead alloys account for 80 per cent of total raw material cost and plastic resins for another 17 per cent. Prices of both these inputs are highly volatile and any increase directly impacts Ebitda margins. While Exide has a pass-on clause with OEM players for higher lead prices, hiking prices in the replacement market is more difficult.
The auto ancillary sector, whose fortunes are closely tied to those of the auto sector, is cyclical in nature. Despite this, Exide has managed to hold its own. In the last five years, its revenue has grown at a CAGR of 29 per cent. Tighter cost controls have helped cash profits grow 38 per cent annually. The extra cash generated has enabled the company to hike investments by 3.5 times over this period. Exide is a debt-free company. Its ROCE has improved from 21 per cent in FY07 to 38 per cent in FY11.
Valuations
The current price-earnings (PE) multiple of 16.5 is just over half its five-year median PE of 29.62. While earnings have fallen, the fall in price has been steeper. Exide’s earnings per share (EPS) has grown at a CAGR of 43 per cent over the last five years, which translates into an attractive price-earnings to growth (PEG) ratio of 0.5. Dividend yield stands at 1.2 per cent. The price to book value of 4.4 is at a discount of 25 per cent compared to its five-year average of 5.43. Long-term investors may accumulate this stock.
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