Graphic: Mint
Graphic: Mint

Exide’s valuation zooms as it claws back market share lost to Amara Raja

The comeback in Exide performance is more pronounced since Amara Raja's margins have been under pressure in the last couple of quarters

Exide Industries Ltd’s shares have gained 20% since February’s low point on the Street. Finally, valuations of the market leader in batteries have made a comeback, after a long hiatus of about three years. The stock’s one-year forward price-to-earnings (PE) multiple that was hovering around 15 has almost caught up with that of the second-largest manufacturer Amara Raja Batteries Ltd, quoting at a PE of 23.

Exide’s PE expansion is powered by improved market share in the replacement market for automotive batteries. Recall that after ruling the roost for long, the firm lost nearly eight percentage points in market share, due to capacity constraints. At that point, demand was robust. Amara Raja quickly filled in the deficit supply to capture share in the replacement market. Consequently, revenue rose and profits soared. Its stock valuation raced miles ahead of Exide in 2015-16.

Cut to March 2018. Exide’s efforts to claw back lost share of the automotive replacement market paid off. Robust sales continue in the original equipment segment, where it dominates. Aggressive foray in new regions such as Spain, Italy, Germany, Vietnam and Zambia helped increase export revenue.

Importantly, Exide learnt from the precipitous fall earlier that right pricing is key to combat competition. According to a report from Motilal Oswal Financial Services Ltd, narrowing the price gap with competition, focus on service infrastructure and introducing value brands through the last two years pushed up revenue.

This percolated down to push up profitability that had fallen sharply during tough times. Over four to eight quarters, Ebitda (earnings before interest, tax, depreciation and amortization) margins inched up steadily. With revenue growth assured over next 12 months, Exide should post reasonable margin expansion.

The comeback in performance is more pronounced since Amara Raja’s margins have been under pressure in the last couple of quarters. Even in the March quarter, at 13.3% it was flat year-on-year (yoy). Perhaps a relatively high exposure to the telecom and industrial segments, where price expansion was restricted, dragged down margins.

This explains why Amara Raja’s valuations have been range bound between 23 and 24. Investors have quickly switched loyalty to Exide from Amara Raja. In the last three months, Exide’s market capitalization grew by 17% whereas that of Amara Raja receded by 4%. Apart from reinstating its market share, Exide’s strong focus on new age batteries such as lithium-ion, solar and e-autorickshaws will aid its valuation.

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