Will Exide’s market share improve at the cost of margins?

Operating margin at 11.3% is 170 bps lower from a year ago and 110 bps lower from the preceding quarter
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First Published: Tue, Jan 22 2013. 08 24 PM IST
Fierce competition constrained the ability to pass on cost pressures in the face of rising lead prices and resulted in gradual and small price hikes. Photo: HT
Fierce competition constrained the ability to pass on cost pressures in the face of rising lead prices and resulted in gradual and small price hikes. Photo: HT
Updated: Wed, Jan 23 2013. 12 13 AM IST
More often than not, regaining market share lost to competition comes at a price. This is well illustrated in the performance of lead-acid battery maker Exide Industries Ltd over the last few quarters. The firm is relentlessly striving to regain lost market share in the automotive battery segment—one reason, among other factors, why profitability seems to be at stake.
In an analysts’ conference call following the December quarter results, the management stated that its market share in the automotive battery replacement market rose from 27% to 32%. In spite of this segment generating higher profitability than the original equipment (OE) business, operating margin for the quarter fell by 170 basis points (bps) from a year back and 110 bps from the preceding quarter to 11.3%. Fierce competition constrained its ability to pass on cost pressures in the face of rising lead prices and resulted in gradual and small price hikes. Meanwhile, an increase in advertisement spending kept sales ticking. Note that lead price increased by around 10% from the preceding quarter, with rupee depreciation adding to the woes.
Further, price hikes in the industrial battery and automotive OE segment come after a lag. Analysts also point out while Exide commands a 69% share in the OE category (albeit down from its earlier 74%), the gross margin is wafer thin. December quarter sales volumes in the OE category contracted and may take time to improve. Sales in the home inverter segment are likely to be subdued at least in the near term, till summer months and power cuts translate into higher sales.
Hence, while the sales outlook looks bleak, profitability is the larger issue. During the December quarter, although net revenue was up by 17.4% year-on-year to Rs.1,463.2 crore, operating profit and net profit were flat.
Analysts’ consensus points to a downward revision in operating margin estimated for the full year ended March 2014 by around 200-300 bps from an earlier 13-14% This is in stark contrast to the average operating margin of around 17-18% it enjoyed with an almost monopolistic presence in the automotive battery segment. In fact, its operating margin was nearly 1.5 times that of its closest competitor, Amara Raja Batteries Ltd, which has been steadily gaining ground in the automotive battery segment.
As a report by Prabhudas Lilladher Pvt. Ltd puts it, “We believe it is increasingly difficult for Exide to regain lost market share without sacrificing margins.” Needless to say, investors, too, have paid a price as the company saw a reversal of fortunes. The stock, which underperformed the BSE-500, has fallen sharply by about 9.2% since earnings were announced last week.
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First Published: Tue, Jan 22 2013. 08 24 PM IST
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