>INDIA BATTERY SECTOR: looks inopportune; top two battery producers i.e. Amara battery and exide industries

 The sector‟s capacity addition over the past two years now looks inopportune, especially given the current slowdown in the auto OEM industry, which is likely to post slower growth in FY13E after strong performances in the past three years.


 Unless replacement demand grows strongly, we expect the deceleration in OEM demand (constitutes one-third of total battery demand) to lead to sub-optimal utilisation levels.


 Rising competitive pressure may worsen pricing discipline in the industry.


 Maintain In-Line ratings on Exide and Amara Raja.


 We (Standard Chartered) advice investors to shift to other players in the ancillary segment such as Apollo Tyres and Bharat Forge.


 With the top two battery producers significantly increasing capacities in the auto segment (35% increase in the 2W segment and 19% increase in the 4W segment), we believe replacement segment demand would have to be extremely strong to offset subdued OEM demand.


 With Exide focused on regaining lost market share, we do not expect other players including Amara Raja to sit idle. In our view, such a scenario could lead to a price war in FY13, which may worsen pricing discipline, until market shares of key players stabilise.


 INR depreciation currently offsets the benefit from softening lead prices. Although price escalation is built into OEM contracts, battery producers would have to incorporate currency volatility into their pricing assumptions for the replacement segment. They may find it difficult to raise prices to fully cover costs, in our view, in a heightened competitive scenario.


 While Exide‟s operating performance has improved over the past few quarters, it has been below expectations. Tougher competition has substantially impacted Exide‟s pricing power. We had earlier valued Exide at a bear-cycle valuation of 13x one-year-forward earnings. Given the steady improvement in margin and market share, we now value it at 14.5x Sep ‟13E earnings – a 20% discount to its long-term average of 17.5x – to arrive at our revised price target of Rs139 (Rs127 earlier).


 FY12 was one of Amara Raja‟s best years – it gained 250bps market share in the auto-replacement segment and reported strong margins, leading to strong 52% earnings growth. Nevertheless, we expect operating margin to decline on adverse product mix, tougher competition and currency fluctuation. Hence, we expect muted earnings growth of 6% in FY13. Given this, the stock appears fairly valued at 11x FY13E earnings and 6.7x FY13E EV/EBITDA. We maintain In-Line with a revised price target of Rs305 (Rs172 earlier).


 Given rising competitive intensity and likely lower capacity utilisation, we advise investors to shift from the battery segment to other opportunities in the auto ancillary space such as Apollo Tyres and Bharat Forge.


To read report in detail: INDIA BATTERY SECTOR
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