With the auto sector booming, it seems rather surprising that India’s largest battery maker, Exide Industries Ltd, should report a steep drop in profitability and a lower-than-expected growth in sales. Exide’s net sales in the December quarter grew 15% year-on-year (y-o-y) to Rs1,050.2 crore, which was substantially lower than consensus estimates. Just as in the September quarter, capacity constraints kept a check on volume growth.
But the biggest negative surprise was the 880 basis points plunge in operating profit margin (OPM) last quarter. One basis point is one-hundredth of a percentage point.
Also See Shrinking Margins (PDF)
This was primarily because of the soaring price of lead, which accounts for about three-fourths of the firm’s materials cost. The price of lead has scaled new highs, and is now around 35% higher compared with the end of the June quarter. Consequently, raw material cost, as a percentage of sales, jumped y-o-y from 57% to 68%, while other expenses grew marginally.
According to Exide’s management, it was “ultra-cautious” in passing on the high lead costs to the competitive replacement market of the automotive segment. This is despite the fact that it enjoys a share of nearly two-thirds in this market segment.
Besides, due to capacity constraints on the one hand and booming demand from the original equipment segment on the other, there was some diversion of production from the more lucrative replacement market.
Another reason for the firm’s lower-than-expected performance is the weakening industrial battery market. This constitutes around 35-40% of Exide’s sales. All these factors contributed to the large drop in profit margins. Net profit fell by 5% to Rs124.4 crore, much lower than consensus estimates of Rs165 crore.
It’s little wonder that the firm’s shares plunged 11% following the announcement. As a market leader with a high brand equity, Exide shares enjoyed a 30-40% premium in valuation over its competitor, Amara Raja Batteries Ltd.
After the sharp dip in margins, its OPM is now in line with Amara Raja’s September quarter margin. If the latter is able to maintain margins in the December quarter, the valuation premium of Exide could narrow further. At the same time, Exide’s capacity ramp-up should give it the operating leverage and an ability to cash in on the replacement market. As a result, its margins may improve in the ensuing quarters, lifting the beaten down stock price.
Graphic by Naveen Kumar Saini/Mint
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