The demonetization move by the BJP led NDA Government at the Centre has led to a steep correction in the stock prices of most of the Automobile companies in India. It has given an opportunity for investors to buy stocks in many sectors from a long term perspective. One such industry which caters to the Automobile Original Equipment Manufacturers (OEMs) and the Industrial segment is the battery industry in India. The battery industry is almost a duopoly, with Amara Raja Batteries and Exide Industries cornering 60% of the market share by value in India.
The automotive and industrial battery segments are largely dominated by Amara Raja Batteries and Exide Industries, with a slew of niche players comprising a small share in the overall storage battery segment. Amara Raja Batteries trades at a price to earnings ratio of 31 and Exide Industries trades at a Price earnings multiple of 22x its earnings in the current scenario. The recent correction in the stocks of Exide and Amara Raja was mainly due to the fact that most of the replacement or aftermarket sales are in the cash mode in the battery industry.
The global battery market, according to Amara Raja’s 2015-16 annual report, is projected to grow at a CAGR of 4.15% to reach a market size of USD17.26 billion by the calendar year (CY) 2021. The market in Asia-Oceania is estimated to reach USD 9.51 billion by value terms during this period due to increasing vehicle production.
The global battery market is driven by growing integration of electronics, demand for transportation, fuel saving, government incentives for cleaner transportation, new hybrid and electric automotive models from original equipment manufacturers.
The Indian battery market is projected to grow at a CAGR of 16.5% till CY 2020. The lead-acid battery industry caters to two market categories: automotive and industrial. These batteries find wide application in the transportation, communication, energy and railway industries. The automotive and communications sector account for 90% of total lead-acid battery consumption.
The battery industry can be further segmented as organized and unorganized. Organized companies sell branded batteries with warranties, while unorganized companies provide no warranty or after-sales, sell recycled batteries and price them at 30-35% discount to branded ones. The organized battery segment accounted for 85% of the industry size by value in the fiscal ended March 2016 (FY 2016).
The share for the unorganized segment is quite high (50-60%) in the CVs, tractors and three-wheeler markets. However, the market share for the unorganized segment in the passenger vehicle market has fallen to 10-15%, and is mostly in the replacement segments.
The automotive space comprises the OEM market and the replacement market. According to estimates, the demand for the automotive start-stop battery and energy storage battery is expected to record a CAGR of 30%-40% and batteries for low-speed electric vehicle a CAGR of 25%-30% in the next few years.
Industrial battery products find extensive application in the telecommunication, infrastructure, IT & ITeS and UPS (OEM and replacement), Indian Railways, power, solar, oil and gas sectors among others.
There are various combination of metals that are used in the production of batteries all over the World. The Nickel Cadmium (NiCd) battery, Nickel-Metal Hydride (NiMH) battery, Lead Acid battery, Lithium Ion battery and Lithium Polymer battery.
From plug-in hybrids to vehicles equipped with “start-stop” technologies, lead-acid batteries are the ones most favoured by automakers for starting, lighting and ignition (SLI) functions. The vehicles simply will not start without them. The 12 volt lead-acid battery for more than 50 years has been a mainstay of motor vehicles and this will continue for many years to come. The lead acid battery is cost effective and feasible in delivering the required performance as compared to other types.
For high voltage “power assist” functions in hybrid electric vehicles, the nickel-metal hydride (NiMH) and Lithium-ion (Li-ion) systems are up to now the storage batteries of choice for automakers. But for the SLI function lead-acid batteries are clearly the necessary choice. The best-selling hybrid electric vehicles (determined by hybrid CARS) use lead-acid batteries for SLI functions.
The lead acid battery technology is also economically feasible from the point of view of recyclability, where most of the used batteries are recycled. The recycled materials used in the manufacture of new batteries are cheaper than batteries made only with new materials. This is because considerably less energy is required and less carbon dioxide is emitted to manufacture and recycle batteries than to make them from completely new materials. No other battery chemistry can make that claim and the lead acid battery advantage is expected to remain for a long time to come.
There are so many sectors where new technology is disrupting traditional business models but right now it looks like old is gold for the battery industry as the old technology is yet to be disrupted and is expected to remain competent in the near future.
Given the growth expected in the automobile industry and the industrial segment, battery manufacturers would have inherent demand for their products for a long time to come. The only question which begs an answer now is which is the best company to invest into at the moment?