This is Google's cache of https://m.economictimes.com/prime/money-and-markets/are-ev-ready-indian-markets-punishing- exide-and-amara-raja-stocks-for-being-old-school/primearticleshow/87967947 cms, It is a snapshot of the page as it appeared on 29 Nov 2021 01:50:32 GMT. The current page could have changed in the meantime, Learn more. Full version Text-only version View source Tip: To quickly find your search term on this page, press Ctrl+F or 38+F (Mac) and use the find bar. SHARE THIS NEWS Close Font Size 8 Ecoyomic Times © AbeSmall * AbcNormal © AbcLarge Close Welcome \BETPrime Are EV-ready Indian markets punishing Exide and Amara Raja stocks for being old school? (Are EV-ready Indian markets punishing Exide and ‘Amara Raja stocks for being old school? Getty Images Concept by Kankana Roy Choudhury and Muhabit ul hag Synopsis A few years ago, both Amara Raja and Exide were the favourite stocks of fund managers. However, over the past five years, the Nifly Auto has returned almost 23%, while Amara Raja and Exide have fallen 32% and 3%, respectively. Reason: lithium-ion batteries are replacing traditional lead batteries in EVs. And investors are concemed if these companies can adapt. By VARSHA SANTOSH9 Mins Read, Last Updated: Nov 29, 2021, 12:10 AM IST SHARE THIS NEWS Close Font Size * AbcSmall + AbeNormal + AbcLarge Close When the cyclical auto sector was going through a slump before Covid-19, Amara Raja Batteries and Exide Industries were facing the heat too. Their stock prices crashed. However, despite a revival in the sector — with the Nifty Auto Index logging one-year returns almost on par with the Nifty 50 — Amara Raja and Exide are plummeting further each day. Even mutual funds (MFs) that once had high stakes in these companies have reduced their holdings (Originally published on Nov 29, 2021, 12:00 AM IST) When the cyclical auto sector was going through a slump before Covid-19, Amara Raja Batteries and Exide Industries were facing the heat too. Their stock prices crashed. However, despite a revival in the sector — with the Nifty Auto Index logging one-year returns almost on par with the Nifty 50 — Amara Raja and Exide are plummeting further each day. Even mutual funds (MEFs) that once had high stakes in these companies have reduced their holdings to a minimum. In the case of Exide, MF holdings have steadily declined since June 2019. Last quarter, Clarious ARBL, formerly Johnson Controls, the ex- promoter and now a public sharcholder, sold 10% stake in Amara Raja. A few years ago, both Amara Raja and Exide were the favourite stocks of fund managers, who often played one over the other depending on the growth rates of these companies. In general, both these companies were dependent on the robust growth of the auto sector, which has done very well in the past. However, over the past five years, the Nifty Auto has returned almost 23%, while Amara Raja fell 32% and Exide Industries is down 3%. What could be the reason for the tumbling investor sentiments and returns? The answer is simple. Lithium-ion batteries are replacing the traditional lead batteries in electric vehicles (EVs) like two-wheelers, three-wheelers, and energy-storage applications in, say, telecom towers. There is a race to manufacture and recycle low- cost lithium-ion batteries for EVs. And investors have a genuine concern: Can these companies adapt to the changing technologies demanded by the sector? While some analysts feel the stocks are undervalued on the basis of the growth in four-wheelers for the next three-five years, the long-term future is still a big question. Getting future-ready Both companies understand that they need to operate at high gear. Amara Raja has announced plans to invest USD1 billion in the next seven years to manufacture lithium-ion batteries under the PLI (production-linked incentive) scheme of the government. Ideally, this is the news that should have a positive effect on the stock. But as of now both stocks are languishing. The manufacturers want to take a balanced approach in making lead and lithium batteries. In January 2019, Isro (Indian Space Research Organisation) announced transfer of lithium-ion technology to 10 companies with Amara Raja being one of them. But a substantial development is awaited. In August 2021, the company acquired an 11.36% stake in Log9 Materials, company offering fast-charging batteries to last-mile deliveries. The benefits of this stake purchase for Amara Raja is hard to quantify at this moment. The stock is not inching up and major shareholders and MFs are selling their stakes. Even the news of their participation in the recently announced PLI scheme for li-ion battery manufacturing has not spurred the stock price. Markets wonder if these companies can be credible players in lithium-ion batteries. Until then, it may look down on the two stocks. Jyoti Budhia, a technical and derivatives analyst, says she would not prefer Amara Raja or Exide as lithium- ion battery is the future and companies that do not participate in it may be left behind, “Just looking at the charts may not give the complete picture about a company. I may not look into the annual reports or the balance sheets, but I do give importance to the prevailing trends in the market and EV is currently the trend,” she states. According to MK Research, EV sales in the first half of 2021 has doubled from 2020 numbers globally. A major portion of that demand came primarily from Europe, followed by China and the US. So clearly, EVs are the future. India also witnessed its EV registrations, as of July 2021, already surpassing the 2020 figures. Even though the EV market is very small in India, with e-cars being just 0.2% of the total passenger-vehicles registration in 2020, JMK Research estimates the share of e-cars to grow by 12% by FY26 at a CAGR of 152.94% from FY21. Alok Singh, CIO, BOI AXA Investment Managers, points out the implications of staying away from EVs. “Owing to the chip issue and the supply constraints during the pandemic, the capacity utilisation has been low at 40%-50%. Post unlocking, a spurt was observed in sales due to pent-up demand. But after that also demand remains high. That could be one of the reasons. Also, EVs are the future and companies that are not taking it seriously may not be rewarded by the stock market,” he says. Adaptability vs. traditional technology With the increasing EV penetration in the automobile sector, adapting to the changing landscape has become a necessity. Auto-ancillary companies that do not rely on building engine components may not be severely affected by the lithium-ion batteries. Amara Raja and Exide are established lead-acid battery manufacturers. The companies strongly believe that the traditional technology is here to stay. Afiermarket sales ate a major revenue generator for these companies. In FY21, the aftermarketsales accounted nearly 44% and 51% for Exide and Amara Raja, respectively. Both Exide and Amra Raja are trading at a P/E (price to earnings) of 16x. “For a short-to-medium-term investment perspective, I think these are good buys because they are relatively undervalued. They have a long run to go before the lead batteries get phased out completely. If I need to change my battery, I have to buy one either from Exide or Amara Raja, So that's the reality that's going to continue for a very long time, Because the number of cars sold is increasing, the commercial demand is inereasing, So, there will be growth, Bul if you're looking at a futuristic growth, as to what will happen when the EVs will be the norm, that remains a question mark. Nobody knows,” says Sudip Bandyopadhyay, group chairman, Inditrade Capital. Amara Raja believes that even after the auto shift to EVs, lead-acid batteries will find an application as an auxiliary battery. Jayadev Galla, chairman of Amara Raja group, mentioned in the FY21 annual report that the current output of the company is at 15GWh while the global demand is at 490 GWh. “Even as India transitions to e-mobility, lead-acid battery demand will continue to grow alongside the ICE vehicle. Moreover, the growing traction of EV will further enhance volumes for lead-acid batteries. This is because it will have a new application — as an auxiliary battery in the EV,” he wrote, “The need for an auxiliary battery stays in electric four-wheelers. As some applications (two-wheeler, three-wheeler, power storage) shift to li-ion batteries, one could see demand shrink leading to underutilisation of capacity.” Exide has partnered with Advance Battery Concepts (ABC), USA to develop bipolar lead-acid batteries that could be used as an alternative to li-ion batteries. This, the company believes, would be its long-term disruption. But final developments on this front are awaited, and brokerage houses have not been kind to the stock. ‘Taking into account the expectations of a shrinking share of the lead-acid battery segment and sub-par returns from new investments in lithium batteries in the initial years, we retain our ‘hold’ rating on the stock. OurDCF derived (discounted cash flow) target price for December 2022 stands at INR775 (INR830 earlier), based on 14x December 2023-estimate EPS (15x earlier),” Emkay Research stated in its November 2021 report on Amara Raja. The bottom lineThe transition to EVs will take time, But how far these companies would go to adopt the technology of the future is the question investors have, Both companies are looking to manufacture li-ion battery packs, but the valuation driver is still going to be li-ion cell manufacturing, To manufacture 1GWh of li-ion cell, about USD100 million capex is, needed. So, it does not make sense to invest in small scale. And to invest extensively in battery management services (BMS), the companies must have high customer base to be able to pass on the cost, They will need volumes, With Indi small market share of EVs, this seems unattainable at least in the next five years, “So even with the most optimistic penetration scenarios, the battery industry in India would be around 30GWh by FY25. This is too small a market for large- scale cell manufacturing to be feasible in India,” a July 2020 report by Avendus noted. The report also highlights the raw- material costs that domestic manufacturers will have to incur for li-ion manufacturing. This is because lithium and cobalt, the major raw materials, are not available abundantly in India. They would have to be imported from Chile and China which would in tun increase dependence on imports. Moreover, battery material needs huge industrial-scale production, capacity to be viable, which India will take time to develop. Jinesh Gandhi, auto analyst at Motilal Oswal, says finding a credible technology partner is the key to unlocking big opportunities. “Effectively, we need to look at companies that can find a credible partner. So, investments are going to be large, but opportunity is also equally big.” Nature magazine, in a recent story, said that lithium batteries are 30 times cheaper as compared to the 1990s when they first entered the market. It is projected that prices of these batteries will fall 20% by 2023 to USD100/KW-hour. This is expected to also bring down the cost of EVs on a par with traditional ones by the mid-2020s. There is a lot going for Amara Raja and Exide in the future. If, and only if, they can successfully build a lithium-ion battery business, the stocks will fly. In that case, these companies are a big value buy at their current PEs, At present, there are some investors who are optimistic about them, but only for a short term. The rest is wait and watch. (Additional inputs from Rajiv Ghosh; graphics by Sadhana Saxena) (Originally published on Nov 29, 2021, 12:00 AM IST) 's The latest from ET Prime is now on Telegram. To subscribe to our Telegram newsletterclick here Busines: ETPrimeMarketsAre EV-ready Indian markets punishing Exide and Amara Raja stocks for being old school? Hot on Web lew Covid Variant Coronavirus New Variant © Covid India News LIVE * Sensex Today * Tio News * Dogecoin Price