Battery stocks have regained their footing; Will they maintain this momentum?
India's second-largest lead-acid battery manufacturer, Amara Raja Batteries, opened with a gap up of ₹3 in yesterday's trade and touched an intraday high of ₹541.45 on the BSE. The stock finally settled at ₹539.50, up by ₹29.45 or 5.77%.
The stock has been an underperformer in the last 1.5 years. After hitting a high of ₹1006.75 in January 2021, the stock started moving down and it continued the same trend till June this year and has corrected by almost 55 percent. The stock has lost nearly 18% of its value since the beginning of the year.
Similarly, Exide Industries, a market leader in storage batteries, ended in the green on Monday. During Monday's intraday, the share price opened on a positive note and touched a high of ₹173.40 on the BSE. It then closed nearly 8.15% higher at Rs. 172.40.
Exide started 2022 on a higher note. The stock price increased by nearly 4% in January, rising from ₹168.35 to ₹175.05. But since then, the stock has fallen 22% in five months and touched 52-week low on July 20. But the stock quickly recovered after hitting its bottom and has gained 32.67 percent to date.
Meanwhile, Exide Industries outperformed Amara Raja batteries in terms of stock returns over the last one year. Exide batteries were only down 8%, while Amara Raja batteries was down 25%.
Battery makers posted solid Q1 numbers thanks to a low base and cost-cutting measures
Profit margins of battery manufacturers in the March 2022 quarter were hit by the rise in commodity prices caused by the Russian-Ukraine war. However, they have managed to post better results for the June ending quarter. The cost-cutting measures, price hikes, and low base year have aided them the most.
Exide's revenue increased by 57% to ₹3,899 crore in Q1FY23 as against ₹2,486 crore in Q1FY22, primarily due to a lower base and strong growth from the Aftermarket, UPS, and Solar segments. It reported an over six-fold rise in its consolidated net profit at ₹202.44 crore for the June quarter as against a net profit of ₹31.81 crore in the corresponding quarter last year.
Total expenses during the quarter were higher at ₹3,771.75 crore compared to ₹2,420.79 crore in the same period of the previous fiscal.
Analysts at Geojit Financial Services expect Exide's revenue will increase by 28% year on year in FY23 due to strong sales in OEM and aftermarket volume. Lead prices have fallen 13% from their peak in the first quarter and are expected to fall further as global growth slows, according to analysts.
Exide is in a prime position to drive home its advantage. The company will be the direct beneficiary of any structural change in auto demand owing to its leadership position (60% market share) in the automotive battery and having an 86% market share in two-wheelers. "We factor positive growth for H2 owing to the festival season, a normal monsoon, and easing supply concerns," said analysts
Similarly, Amara Raja's revenues increased by nearly 39 percent year on year during Q1FY23, aided by last year's low base. On a month-to-month basis, growth increased by 20% as the automotive sector, including new and aftermarket business in general, improved.
Higher raw materials prices and an increase in freight costs have negatively affected the margin and, thereby, PAT grew by a marginal 6% YoY. The company's total expenditure during the June 2022 quarter jumped to ₹2,359.1 crore, compared with ₹1,786.2 crore in the corresponding period last year.
The company reported an operating profit of ₹260.9 crore for the June-ending quarter, a marginal increase when compared to the June 2021 quarter. EBITDA margin was at 9.96 percent, down 329 basis points from the same quarter last year.
Capex for lithium-ion battery cell
Exide Industries, through its subsidiary Exide Energy Solutions Ltd. (EESL), has executed a sales agreement in Bengaluru to set up a lithium-ion battery cell manufacturing facility. The plant would be used to set up a multi-gigawatt Li-ion battery cell manufacturing facility for the new-age electric mobility and stationary application business in India. The company reiterated that the first phase of Li-ion cell manufacturing is expected to commence by 2HFY25, according to the Geojit Financial report.
Similarly, Amara Raja Batteries has launched several strategic initiatives to capitalise on rapidly emerging new opportunities to accelerate growth in lithium-ion and other new-age chemistries that are enabling rapid transformation in renewable energy, electric mobility, microgrids, and so on. An outlay of Rs.1 billion dollars has been approved for the same, said Geojit Financial in its equity research report.
Currently, the pilot project about the technology transfer from ISRO is progressing as per the schedule and has started supplying lithium battery packs and chargers for 3W applications. The company is planning to set up a Giga factory in the near to medium term for lithium batteries and related products and has targeted Rs. 1 billion in revenue by FY23, the report said.
With the recent uptrend in these stocks and news from EV plans, investors may rush to buy battery stocks, assuming that they will play a significant role in the EV segment, but the reality is far from what has been predicted, as analysts expect the yields from Capex investments will take years from now. And the entire shift from combustion engine-based cars to electric vehicles will certainly take some long years.
Based on recent price corrections, a fall in commodity prices and the assumption that auto sales will be back on track ahead of the festive season, some domestic brokerages have recently turned bullish on these two stocks.
Geojit Financial Services has a 12-month target price of ₹615 on ARBL, which hints toward an upside of 14 percent from its latest close.
Further, Chola Wealth has also maintained a 'BUY' recommendation on ARBL with a TP of ₹700/share, implying a 30% upside from the current share price.
On the other hand, Geojit Financial Services is also bullish on Exide Industries and recommended a 'buy' rating on the stock with a target price of ₹191/share, which hints toward an upside potential of 11% from its previous closing price.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.