Stock To buy: Top Brokerage Bullish On This Midcap Battery Stock, Sees Robust 44% Upside

Stock Outlook & Returns

The current market price of Exide Industries' stock on NSE is Rs 189.55/share. Its 52-week high is Rs 194.20 and its 52-week low is Rs 130.25, respectively. It has a market capitalization of Rs 16,111.75 crore. 

In the past 1 and 3 months, the stock surged 4.06% and 13.23%. In the last 1 year, the has given 16.32% positive returns. In the last 3 years, it has given 3.02% positive returns However, in the last 5 years, it gave 7.45% negative returns. 

1. Investment Rationale

Recovery in the Auto market: Exide earns around 60% revenue from the OEMs in the automotive segment. The company got enough traction from replacement market even during slowdown in the auto space. As now demand recovery in the Auto market is visible, demand from the OEM segment is also likely to come back.

New launches: Exide has been chosen as battery partner of Maruti new age Baleno, Hyundai Alcazar and MG Motors' Astor. There are big pipelines of new launches by various auto OEMs. Exide, being the market leader is likely to be beneficiary for new launches of various models.

Industrial vertical is bringing opportunities for the company: For the industrial vertical demand for UPS batteries remained strong. Pick-up of commercial activity post pandemic led to more orders from offices and industries in the later half of FY22. Verticals like Solar, Railways and Infrastructure also registered excellent volume growth in Q4FY22. The scenario is likely continue as Indian industrial activity is gaining momentum with various Government of India (GOI) schemes and rollover of GOI and private sector Capex.

Divestment of Life Insurance business: During FY2001 Exide entered in the Life Insurance business which is very much different from the company's core area of business. This new line of business never turned out to be lucrative for the company & finally in Q2FY22 Exide divested its life insurance business. It seemed to be a relief for the company and helps them to concentrate only in the core and related business.

2. Investment Rationale

Shift in the Battery Market Dynamics: Absorbed Glass Mat (AGM) batteries have long been accepted as the preferred option for start-stop vehicles, But a newcomer to the market is Enhanced Flooded Batteries (EFB) . EFB battery is superior in heat handling. A study revealed that EFB battery is able to handle a temperature increase at 50°C and absorb 52 percent more energy than a comparable AGM battery. Hence, EFB has started gaining publicity.

EFB might be new to many countries, but the technology has been used in the European market since 2008. There is clear cut switch from AGM to EFB visible in Europe & at this point of time EFB has captured around 50% of the market share in Europe. With the assistance of Brazilian collaborators, Moura Batteries, Exide has successfully introduced the first M3 level compatible 'EFB' battery for use in Volkswagen and Skoda's most strictly emission-controlled cars. So, Exide is well poised to this changing dynamics in the battery market.

Foray into Lithium Ion Battery business: Currently in India, domestic and international battery companies are focusing on making lithium-ion battery packs and modules. Lithium-ion cell manufacturing on a commercial scale has not started and therefore, cells are imported. To encourage lithium-ion cell manufacturing in India, GOI has announced the Production Linked Incentive scheme and various State GOIs are offering incentives for setting up cell manufacturing plants. In 2018, Exide entered a partnership with Leclanché S.A based in Switzerland, for production of lithium-ion battery packs and modules. Exide is supplying Lithium-ion battery modules and packs through its subsidiary Exide Leclanche Energy Private Limited (known as Nexcharge brand). Exide has invested INR277.23 crore and holds 84.9% stake in the subsidiary as on 31st March 2022. The plant is a stateof-the-art 1.5 GWh facility.

Cell manufacturing is a critical stage of the Lithium-ion battery manufacturing chain process and constitutes more than two-thirds of the total value of the lithium-ion battery. Through its wholly owned subsidiary Exide Energy Solutions Ltd, Exide plans to set-up a multi-gigawatt green field project for manufacturing lithium ion battery cells in multiple formats. The facility will also manufacture, assemble and sell battery modules and packs. The total project capacity will be 12 GWh and the first phase of the project is likely to be completed by end of CY2024. Exide has already procured 80 acres of land for the project at Haraluru industrial area near the Bengaluru International Airport and inauguration of the project has been done in Q3FY23. Exide has entered into a multi-year technical collaboration agreement with SVOLT Energy Technology Co. Ltd (SVOLT), Jigasu, China for lithium-ion cell manufacturing. As part of the agreement, SVOLT will grant Exide an irrevocable right and license to use, exploit and commercialize necessary technology and know-how for lithium-ion cell manufacturing in India.

3. Investment Rationale

Venture into Submarine Battery business: Exide has received an order from the Indian Navy to build submarine batteries along with a full set of accessories and spares for a nuclear submarine. During FY22, the Company secured an order for one set of mini-submarine batteries for export, which was executed and delivered on time.
The company has planned to use surplus capacity to produce and deliver submarine batteries to the Indian Navy. Exide plans to ship one set of Type-I submarine batteries, complete with all accessories and spares, in FY23.

Inverter for solar grid: The company is foraying into Solar- Rooftop Market with Exide SUNDAY Brand. The company is launching MPPT Based Solar Off-Grid Inverters and Grids. Tie Inverters (Exide ADITYA) to further strengthen its presence across solar product categories.

Battery Energy Storage System: To address the operational challenges faced by distribution utilities, such as intermittency due to integration of renewable energy, Exide offers the Battery Energy Storage System (BESS). In this segment, Exide secures a contract for 120kWh energy storage system for creation of a microgrid at one of CESC's substation near Maheshtala, West Bengal. Before this the company has successfully completed 315kWh pilot project with CESC.

Enough traction from the Export market: Exide has doubled its growth in last two yrs. The company has reported higher exports to West Asia, Africa, America and other regions. Company's exports through its collaborator East Penn, has received encouraging responses from customers. This has enabled expansion in the North American markets (United States and Canada) and helped increase its market share. Exide has successfully started penetrating new geographies like France and South Korea.

Stabilizing Lead prices: There was a significant ~30% price surge of lead in the period of Sep-20 to Sep-21 Lead being a key raw material impacted the margin of the company. However, post sep-21 Lead price has been stabilized up to a certain extent. Further correction in the lead prices may improve margin profile of the company which is expected over the period of longer time frame.

Valuation

The brokerage said, "Based on mentioned rationale we have valued core lead acid battery business and upcoming lithium ion battery business together using discounted cash flow method and separately valued company's 4.1% stake in HDFC Life Insurance using holding company discount. Finally we have done SOTP to arrive at a price target of Rs 272."

Disclaimer

The stock has been picked from the brokerage report of Wallfort Financial Services. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to consult with certified experts before making any investment decision.