Exide Industries Ltd’s results for the December quarter give no inkling of the sharp slowdown in the auto industry. More than two-thirds of the company’s sales are accounted for by automobile batteries. Still, sales rose by 9.2% and profit rose by 5.4% in what’s been one of the worst periods faced by the auto sector, fraught with production shutdowns.
In fact, Exide has cut prices of its products sharply, factoring in the drop in lead prices. In volume terms, therefore, sales would have grown in double digits.
The reason Exide’s sales and profit haven’t declined despite the slowdown in the auto sector is that sales in the replacement segment continue to grow smartly. Sales to original equipment manufacturers would be weak, in line with primary sales. But while replacement sales are still strong, Exide seems to have passed a higher-than-expected proportion of savings on lead costs to its customers.
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So although lead prices are down by more than half on a year-on-year basis, the operating margin has declined by about 50 basis points (one basis point is one-hundredth of a percentage point). Some analysts had assumed that the profit would get a boost as a large part of the savings on lead costs may flow into the bottom line. Going by the performance in the December quarter, that doesn’t seem to be the case.
It’s also not the case that the company is locked into long-term lead contracts and the benefit of lower lead prices would flow in later quarters. Due to the high volatility in lead prices, the company has shortened the period for which it buys raw materials in advance. According to an analyst with a domestic brokerage, the company has brought down its lead purchase contracts from three months to one month.
Having said that, Exide’s performance does seem to be insulated from the slowdown in the auto sector, thanks to the high contribution from the replacement segment. This seems to be reflected in the company’s valuation of about 12 times trailing earnings.
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