Exide Industries: A 52-Week-High Lie

As EVs gain traction in the Indian economy, batteries have taken the forefront of attention for the market. In the current state of technology, batteries comprise around 40-50% of the cost of manufacturing an EV.

So far, batteries would power a subsystem in a vehicle, but with EVs, batteries serve as the major power source for the vehicle’s locomotion. To power the electrical subsystem, lead-acid batteries are primarily used.

Lead-acid batteries suffer the shortcoming of not being able to hold a larger charge. A replacement is found in Li-ion batteries, which are very costlier than lead-acid batteries but last longer and perform better.

Exide Industries, a company that recently made it to the 52-week-high list, has recognised the need for this change and has shifted its focus from lead-acid to Li-ion batteries.

Now, 52-week-high might look like a medal on Exide’s chest, and you might go on to charge your portfolio with it, but Insider is here to tell you otherwise.

Exide Industries

Formed in 1946, with its first factory in Shamnagar, West Bengal, Exide Industries is one of the oldest battery manufacturers in India.

This market leadership is achieved by holding a 60% share of the overall market in the lead-acid battery segment. Although Exide Industries supplies to both industrial and automotive industries, it has a significant leaning towards the latter.

The company currently holds an 86% market share in the two-wheeler segment, and the majority of its revenue comes from the automotive industry.

This position does not amount to a whole lot, however, as Exide is leading a dying industry. Running and winning a race is great, but it means nothing when the world has moved on to, say… hockey.

Exide has been trying to establish a position in the Li-ion space as well. To achieve the same, it has planned to establish a manufacturing unit in Karnataka. Exide forecasts the first phase of this ₹6,000 crore project will achieve completion in the next 25-28 months.

The battery company has also entered into a multi-year technical collaboration agreement with SVOLT Energy Technology Co Ltd, a European subsidiary of the Chinese company SVOLT. The agreement will allow Exide to use SVOLT’s technical know-how in the manufacturing and distribution of Li-ion batteries in India.

Yet, Exide is in deep water as Li-ion might be failed attempt to revive itself.

Exide’s Risk Analysis

Exide Industries might have hit the 52-week-high mark, but here are a few reasons why it might struggle to stay at these highs or even perform well in the future.

● Lithium supplies are a limiting factor for the battery industry. Although the metal is more suitable as a raw material for manufacturing high-capacity batteries, its global reserves are very low.
India itself has around 14,400 tonnes of lithium, found in Karnataka, but these reserves are far from being well-utilised. Currently, India imports lithium cells/batteries manufacturers that source the metal from South America, Africa, and Australia.
This dependence on imports makes it so that Exide, as a supplier of Li-ion batteries, becomes a price taker instead of being able to set the price based on demand.

● Since a majority of lithium is sourced from international sources, it attracts taxation in the form of Import duty. This, in turn, increases the cost of using Li-ion batteries in the manufacture of EVs.
Currently, EVs are priced at a more premium point due to Li-ion batteries increasing the costs of manufacturing them. As auto manufacturers try to reduce costs to increase market penetration, a natural way to cut costs may be to switch battery chemistries.
Na-ion (sodium ion), is seen as an immediate alternative to Li-ion batteries. Sodium is far more abundant than lithium, thus, it is readily available. Reliance Industries Ltd has already started making headway in this direction by acquiring Faradion Ltd, a British Na-ion battery startup, for ₹1.09 thousand crore. Exide Industries, on the other hand, has made no such moves.
Hydrogen-powered fuel cells are also seen as an alternative, and Reliance is paving a path in this direction as well.

● The inability to diversify is also a threat that Exide is exposed to. While Exide has established and maintained a dominant position in the lead-acid battery market, and it is making headway in the lithium industry too, the majority of its funds are sunk in the dying lead-acid battery business. Attempts at diversifying need significant fund reallocation.
As mentioned above, lead-acid batteries serve as an auxiliary power source to traditional combustion-based vehicles. With the introduction of Li-ion batteries, the need for lead batteries will go down.

● Owing to the increased cost of buying Li-ion batteries, major players are choosing to develop in-house batteries for their automobiles. Thus, Exide’s switch to Li-ion may not help in its maintenance of lead in market share as prominent buyers of the lead batteries like Mahindra & Mahindra, Hyundai Global Motors Company and Ola Electric Mobility choose to develop their own power sources.
The aforementioned buyers have also applied for PLI schemes that have been fully or partially awarded to them to facilitate the production of Li-ion batteries.

● Lack of technical expertise takes Exide’s lead away from it too. Previously, Exide was selected as a supplier of batteries due to its long-standing experience in the field. The introduction of Li-ion power sources made the battery market an even playing field for all interested parties.
Adding to the previous point, transferring expertise is not easy with changes in battery chemistry. Since developing expertise would have to begin from the ground up for all users, automobile companies are choosing to give themselves the advantage of cost reduction by developing in-house batteries.

Exide Industry’s Financials

Due to its exposure to the aforementioned risks, Exide’s financials have seen growth, but at a staggered rate. Let’s take a look at its numbers.

As you can see, Exide’s revenue has seen a significant increase of 23% if compared to its performance for the previous year. However, the growth hasn’t been as significant if compared to its financial performance during its heyday. The CAGR in the company’s revenue from FY18 has only been about 6%.

The Bottom Line

While this article is in no way confirming the fall of Exide Industries, people should be wary of the stock's future. 52-week-high is often seen as an equivalent to a buy signal for some investors. It definitely should not be seen as concrete evidence of a company’s performance and future prospects.

Exide might have created a significant market lead so far, but it needs to seriously consider developing with the times if it wants to stay “powered”.