We met the senior management of Exide Industries yesterday at its AGM in Kolkata to get an update on business environment and the way forward.

We held on to Exide as given high sales of new vehicles over last few years, the replacement market (major contributor to Exide's profitability) is supposed to be buoyant. Further the expected mean reversion in operating margins due to lead price correction (key raw material) could add disproportionately to the profitability and sustained growth in non-automovitive batteries (UPS and Industrial) can continue to be a bonus. Our channel checks and interaction with management over the last couple of years has supported this hypothesis.

However, the recent de-growth in OE segment which is getting steeper with every passing month has led to heightened competition in the replacement market. Now is the time for the operating margins to revert given on-going correction in lead prices, however shifting focus on market share protection/volumes in replacement market to fill capacities, may not let Exide reap the benefit of this.

While Q1FY20 results are encouraging, we think this change in strategy could derail the thesis. Though valuation continue to be very attractive given Exide's dominant industry position, technology advantage, balance sheet quality as well as investments in lithium/EV migration, in the light of these new developments and change in management thought-process (atleast for near term), we think it is prudent to exit this position. Given steep correction in broader markets, we see other opportunities where this could be put to better use.