Exide Industries and Amara Raja Batteries, two of India’s largest battery manufacturers, have seen their stocks plummet 11 per cent and 33 per cent, respectively, over the last twelve months.

Investors appear to have two major concerns that led to the decline in the stocks – the risk of technological obsolescence and a slowdown in the automotive sector.

Battery Industry is facing a Slowdown

For Exide and Amara Raja, the automotive sector remains the largest revenue generating segment. These companies sell lead-acid batteries to automobile manufacturers and on the replacement markets.

However, growth has been quite slow for the automobile sector as a whole for the last three years. The slowdown began around 2018, and since then, has been aggravated by the pandemic. The four-wheeler sector has seen a slump due to the lack of semiconductors for chip manufacturing.

According to a report by an industry association, the automobile industry sold 26.6 per cent lesser goods over the October 2019 period (pre-pandemic).

While vehicles used for business purposes – two-wheelers and commercial vehicles, have seen increased growth, other segments such as passenger vehicles and two-wheelers continue lagging behind, with two-wheelers having inventory pile-ups. As a result of these inventory pile-ups, several two-wheeler companies have initiated production cuts to balance the supply-demand situation.

Thus, investors expect companies such as Exide and Amara Raja to report lower sales and profit growth going ahead. Nevertheless, the growth of electric vehicles, especially two-wheelers has increased multi-fold over the past year.

Both high-speed and low-speed two-wheelers have been exceptionally good performers over the years. Three-wheelers too, have seen increased traction as electric vehicles account for 45 per cent of the sales. Automotive manufacturers have indicated that they would be looking for external investors who could inject capital into the EV business.

Is the battery sector prepared for the shift to EVs?

Given the heavy investment required in setting up new lithium-ion battery plants, and the continuing demand for lead acid batteries, battery companies have been slow in taking action so far. The EV market is still nascent, and the technology is still evolving. Therefore, moving in too quickly to capitalise on the opportunity could mean low returns for years, before EVs become mainstream.

A telling figure about the stock markets obsession with EVs is the fact that Tata Motors has more than doubled investor money over the last twelve months. In contrast, Maruti Suzuki’s share went nowhere during the same period.

So far, Maruti has been quite sceptical of the EV wave, and has continued focusing on its core businesses. However, the entire Tata Group appears to have taken the EV segment quite seriously, even raising a billion dollars from external private equity investors.

The high returns from Tata Motors stock indicate that the markets are likely to punish companies that aren’t investing in the EV segment.

Battery Companies Remain Cautious

While battery companies have accepted the shift to EVs, they still remain cautious about moving in too early.

“Lead acid batteries have been in the market for 100 years and Exide has operated for 75 of those years. So I do not think that lead acid batteries would be scooped out by lithium-ion one fine morning,” Exide’s chief executive officer Subir Chakraborty had said in May.

Amara Raja’s management too, highlighted the long runway for lead batteries in the annual report for financial year 2021.

“We are convinced and confident about the future of the lead-acid technology at least for the next couple of decades. Our optimism is based on one reality - as long as there are IC engine cars or electric vehicles on the road, there is going to be a market for lead-acid batteries,” said the company’s annual report.

Nevertheless, the annual report went ahead to highlight the technological changes taking place in the sector, and the company’s plans to capitalise on these changes.

The Initiatives Taken So Far

Exide has partnered up with Leclanche SA, and has begun manufacturing Lithium-ion batteries in India. Further, the company has sold off its non-core insurance business, and has focused on its battery business. Just before the sale of the insurance business, the company had also announced its plans to build a giga-factory for Li-ion batteries. Exide has been exploring alternatives to lithium batteries as well, such as bipolar lead-acid batteries.

Amara Raja, on its part, has initiated a pilot project for Li-ion battery development. In addition, the company has reached an agreement with the India Space Research Organisation, under which ISRO would transfer technology to private players. The company hopes that these initiatives would help it develop a strong technological base that it can build on later, as it moves into mass-manufacturing.

However, writing off these companies as obsolete could be unfair. The pace of EV adoption, though rapid, is not enough to warrant a large scale manufacturing base in the country. Large investments would require an appropriate rate of return that would only come from high volumes. Building up these volumes would take some time.

“For demand scale in the battery industry to pick up, large scale adoption in passenger vehicles is critical but that is a remote possibility till FY25,” said an Avendus Report on the Indian EV industry.

The report further highlighted that EVs still remain costlier than ICE vehicles in some segments, incentivising people to stick with traditional cars, rather than shifting to EVs. The Total Cost of Ownership (TCO) Analysis takes into consideration several factors such as operating costs, salvage value, new battery cost and several other factors. Unless TCO is in parity, the industry would require governmental push for mass EV adoption.

In addition, there are several competing alternate battery technologies that could be adopted by the sector. Therefore, to expect immediate establishment of a large scale manufacturing base would be over-optimistic. Unless there is better visibility of demand, it is unlikely that manufacturers would risk significant capital on the sector.

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