With lead prices rising, is the joyride over for battery makers?
The price of lead has suddenly surged by about 12% from its low in end-January. If the trend continues, it could be very discomforting for battery manufacturers
The price of lead has suddenly surged by about 12% from its low in end-January. If the trend continues, it could be very discomforting for battery manufacturers. Any rise in the price of lead, the key input for making batteries, pulls down operating margins of these companies, unless of course, it is passed on to customers.
But currently, it seems rather difficult for manufacturers to hike battery prices. The reason is weak demand for automotive batteries in the replacement market, where profit margins are far higher than for the original equipment supplies. Cut-throat competition between two market leaders Exide Industries Ltd and Amara Raja Batteries Ltd would make a price hike difficult. And then, there is the unorganized battery manufacturing segment too that competes in the replacement market.
In fact, in its December quarter results’ media release, market leader Exide Industries had said that there was “no significant improvement in demand for the automotive original equipment (OE) and industrial battery, including demand for inverter as well as power, telecom and solar batteries”. The last four quarters’ performance shows that Exide Industries’ revenue stagnated, whereas Amara Raja’s was erratic.
Has profitability peaked then for the two listed entities and market leaders? Exide Industries’ December quarter operating margin at 15.4% was the best in many years. Likewise, Amara Raja delivered a power-packed 232 basis point year-on-year jump in operating margin. But most of this came on the back of plummeting lead prices that hit the abyss in the latter part of calendar year 2015. For instance, Exide Industries’ raw material cost was 400 basis points lower year-on-year. A basis point is 0.01%.
Now, the reversal in lead prices and subdued demand growth in automotive replacement battery sales will weigh on profit margins, albeit with a lag. This could hurt investor sentiment that has been highly optimistic for several quarters. Besides, stocks of both these companies have rallied and valuations, which range between 20 and 25 times one-year forward estimated earnings per share, aren’t cheap.
The only ray of hope is that truck sales have been robust for about two years. A revival of truck battery sales in the replacement market could add to volumes and help offset, at least partially, the rise in raw material costs.
The writer does not own shares in the above-mentioned companies.