For me the stock looked attractive at first, given its P/E of around 14-15, FY23 RoE of 15% and RoCE of 20%. Also the fact that Nalanda is holding a significant stake was also a comforting factor.
However, when I looked at a deeper level the following points made me rethink:
- The trajectory of RoCE is downward trending in the last decade. This period also saw significant capex, meaning they had to do more and more capex but RoCE kept going down. The capex did result in increasing sales though as the demand was there so good decision to keep adding capacity.
- The OPM after reaching a high of 18% kept trending down. The business does not have pricing power, they do pass on high lead prices occasionally though. The auto OEM business is notorious for not letting its suppliers make good profits. The telecom business also goes up and down due to its own dynamics. Aftermarket business is the only segment which has some pricing power.
- One point which caught my attention was that the company always bought lead, it never backward integrated (but Exide did), and still its OPMs have been better then Exide (it could also be due to business mix) indicating efficient operations. Now that they are investing in a lead recycling plant, there should be some support to margins.
- Coming to the big investment for the new business, its a huge capex, the OPMs wont be any better than the existing business, meaning overall OPMs going forward will remain stagnant or trend downward. RoCE will also follow similar trend.
- They are going to be dependent on China for raw materials for cells in the new business, which will be influenced by the relations between the 2 countries which isn’t great.
- While the traditional Lead Acid business will grow, the new business is going to take time to find its feet. They are trying a lot of things. Further, I read comments of the mgmt. that many auto companies want to make their own battery packs, so this may limit Auto OEMs business coming to battery manufacturers. Further, the company will have more competition as many players will come in for lithium battery manufacturing, Reliance being one of them. Given that there will be more competition, the margins will be subdued in lithium battery business. Having said this, the target addressable market will also expand, as the company will cater to more industry segments, ex. Storage solutions attached to renewable energy projects, but this will be an evolving space.
What are the factors that will improve margins, profitability, cashflows?
Disc: tracking position
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