A fall in lead prices is good news for companies making batteries. From a peak of $2,994 (around Rs1.5 lakh today) a tonne in April 2011, international lead prices have fallen to $2,090, which should result in a better showing by battery makers in the March quarter and a brighter outlook for 2012-13.
The first two quarters of 2011-12 saw leading battery makers Exide Industries Ltd and Amara Raja Batteries Ltd reeling from high raw material costs. They were also hit by an unfavourable exchange rate and capacity constraints. Revenues staggered and profits fell.
Exide’s operating margin fell to a low of around 7% in the September quarter as capacity constraints in automotive batteries led to a poor product mix, which, in turn, affected profitability. Amara Raja was affected because of poor demand for batteries from telecom companies.
But after the December quarter results, both the companies said they would see some relief in the March quarter because of a 10-12% reduction in raw material costs. “Apart from a drop in lead prices, battery makers such as Exide would have exhausted high-cost inventory of raw material,” said Yaresh Kothari, an analyst with Angel Broking Ltd. “This, along with a more favourable exchange rate than (in) the preceding quarter, will aid profitability.”
Another surprise element for the March quarter was the better-than-expected offtake in passenger vehicle sales, which will translate into higher battery sales volume and revenue for the quarter.
In other words, lower raw material costs and higher operating leverage together should lift March quarter operating margins. Margins could have been better, but for slower growth in the replacement market—where margins are higher—as high inflation and sluggish economic activity hit demand.
Graphic by Yogesh Kumar/Mint
Analysts’ consensus estimate is a 75-100 basis points improvement in Exide’s operating margin for the March quarter over the preceding three months. Amara Raja’s profit may remain unchanged or dip, as its December quarter margin of 17.3% seems unsustainable.
With the next two quarters falling in summer—a period of power outages—sales of home inverters in the retail segment will rise. Exide’s presence in this segment will give a fillip to both revenue and profit. Both Exide and Amara Raja are present in the telecom sector, which unfortunately is going through tumultuous times, with no major expansions spelt out by service providers. Further, during inflationary times, there is a shift towards the unorganized market, which is a threat to automotive batteries in the replacement segment.
On the positive side, both the companies have debt-free balance sheets, a saving grace when interest rates are ruling high. So any rise in operating margins will trickle down to profits. Analysts revised earnings estimates for fiscal 2013 by 4-5%. Fortunes of both companies are closely linked to the performance of the auto sector. Any interest rate cut, therefore, can boost auto sales and have a ripple effect on battery sales.
Exide, which has twice the share that Amara Raja has in the automotive markets, commands a better valuation. This has historically been the case, in spite of the robust rally in Amara Raja’s shares in the past year. If lead prices continue to decline or remain stable, and automobile sector growth recovers, then battery makers have a good year lined up.
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