Exide Industries EV battery pact is positive, but not without challenges
Exide Industries Ltd stock fired up this week, rising 20%, following the announcement on Monday of a memorandum of understanding (MoU) with Hyundai Motor Co. and Kia Corp. for supply of batteries.
The agreement, which entails the supply of batteries for electric vehicles (EVs) to be manufactured by the two automakers, highlights a significant step forward in domestic capability development within a burgeoning, albeit nascent, market.
As such, the market’s future, its capacity absorption, and the potential for adequate investment returns remain uncertain.
Exide, traditionally known for its lead acid batteries, has ventured into lithium-ion battery making, crucial for EVs, by beginning the construction of a facility equipped with technology from China-based manufacturer SVOLT. The facility would have a capacity of 6 GWhr in the initial phase, entailing an investment of ₹4,500 crore to ₹5,000 crore. Of this, it has invested over ₹1,800 crore by December. The MoU will help Exide find assured customers for its batteries.
The production capacity suggests potential sales of about 170,000 passenger vehicles, given an average battery size of 35 KWhr. Currently, Hyundai & Kia import EVs either as completely knock-down (CKD) or completely built unit (CBU) but have plans to start local production in the coming years. This deal is crucial for their strategy to localize production, especially as batteries constitute a significant portion of an EV’s cost.
While the Exide facility is expected to be commissioned by end of fiscal year 2025 (FY25), incremental sales in FY26, and beyond, would depend upon how soon Hyundai and Kia are able to start their local operations. Even then, since it is a “non-binding” agreement, the auto manufacturers retain the right to import batteries, which could affect the business accruing to Exide.
This is more plausible since battery manufacturing remains a commoditized market, despite the huge capex requirement, which means returns to Exide’s from this venture may remain limited.
As such, the business is at least two years away from producing any significant benefits. Also, EV adoption in India is currently low. Despite a large domestic automobile market, share of EV is just about 2% in PVs and 4% for two-wheelers, as per a Kotak Institutional Equities report.
Exide projects the Li-ion battery market to go up to 100-110 GWhr by 2030, from about 4 GWhr in 2023. This would require EV share to go up to 15% for PVs & CVs and to 40% for 2-wheelers. These projections seem like a tall order.
On a positive note, Exide’s zero debt status is promising, providing a solid foundation for funding the project. Exide’s shares have surged a massive 111% over the past year, indicating investor optimism for the company’s prospects, at least for the moment.
