Analysts have been concerned about rising lead prices and slackening demand from the telecom sector adversely affecting battery makers’ revenue and profit. But the outlook seems to be changing for the better.
True, the telecom batteries segment, which grew at 30-40% until 2008, when mobile telephony was on an uptrend, slowed in fiscal 2010. Mobile service providers opted for sharing of towers resulting in lower battery offtake. As a result, both the leading battery makers—Exide Industries Ltd and Amara Raja Batteries Ltd (ARBL)—experienced pricing pressure in the last several quarters. Exide has little less than 10% of its revenue accruing from telecom and ARBL has around 30%.
Of late, however, growth estimates are being revised upwards. A report by Motilal Oswal Financial Services Ltd estimates 16-20% and 25% growth in volumes for Hero Honda Motors Ltd and Bajaj Auto Ltd, respectively, in the current year. New passenger car launches could see volumes grow around 20-25%, while the commercial vehicle segment is estimated to grow at 12-15%.
Graphic: Ahmed Raza Khan/Mint
In a nutshell, therefore, OE (original equipment) demand for both Exide and ARBL will expand in the coming quarters. In fact, both have lined up capacity expansion. In the March quarter, Exide, which commands a 70% share of the automotive OE segment, had said that capacity constraints had hindered growth.
Besides, high OE demand in the auto segment would boost sales in the after-market, albeit with a lag. Both companies have at least half their annual revenue accruing from the automotive segment.
The short point is that the buoyancy in the auto sector could offset the decline in telecom offtake. Batteries could register revenue growth of around 15% in fiscal 2011. ARBL’s revenue growth rate could be muted due to the high share of telecom in revenues. Of course, managements of both companies are de-risking the portfolio by looking at other areas of industrial batteries and the retail inverter and UPS (uninterrupted power supply) segments. ARBL may also explore opportunities in overseas markets.
Meanwhile, analysts’ consensus is that high lead prices could pull down the operating profit margin (OPM). During fiscal 2010, the average cost of lead purchased by battery makers was around $2,050 (Rs95,735) per tonne. OPM in the March quarter declined sequentially by around 2% for Exide and 4.5% for ARBL, on account of higher raw material costs.
Commodity watchers believe that lead prices will stabilize in a band of $2,100-2,300 per tonne for the next few quarters. Analysts feel that this could drag down the OPM by around 2-3 percentage points. For ARBL, pressure on margins could be higher due to pricing pressures in the automotive replacement markets and telecom. Exide might be better off as nearly 42% of the lead it uses is from captive smelters, where costs are lower.
Shares of both firms have been moving in a narrow band since January, depending on the lead price movement. Being the leader, Exide enjoys a higher discounting on its earnings. Its shares, at Rs120, discount the estimated fiscal 2011 earnings by 12 times, whereas ARBL’s price of Rs160 discounts future earnings by around eight times.
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