There’s a glaring divergence in the stock price performances of the two major battery makers. Since January, market leader Exide Industries Ltd’s shares have inched up barely by around 2% to Rs.139. In the same period, the stock of Amara Raja Batteries Ltd, the second largest battery maker, skyrocketed by 144% to Rs.237. Of course, this also mirrors the divergence in fundamentals—in the last eight quarters, Amara Raja has displayed powerful growth in comparison to Exide.
Exide’s September quarter performance disappointed the street, while Amara Raja’s surprised positively. Exide’s revenue rose by around 29% and operating profit more than doubled from the year-ago period. However, operating margin at 12.4%, although 469 basis points (bps) higher than in the dismal year-before quarter, was way below expectations. It was also significantly lower than the margin in the preceding June quarter. Marketing and advertising expenses, higher employee and power costs and competition in the home inverter segment eroded profitability.
On the other hand, Amara Raja, whose market share is about half that of Exide, has shown robust growth in profitability over the last eight quarters. Riding on the 28% growth in revenue in the September quarter, operating margin expanded by around 80 bps to 16.4% from a year ago. According to Yaresh Kothari, analyst, Angel Broking Ltd, “Amara Raja’s traction in the UPS segment, geographic expansion in auto replacement market and new product offerings has helped improve profit margin.”
But the main reason for the divergence in stock performance is the wobbly profitability of Exide against a slowly but steadily rising profitability displayed by Amara over the last six quarters. In April 2011, when lead prices peaked at $2,994 (around Rs.165,268 today) a tonne, Exide’s operating margin was 17.3% and Amara Raja’s was 14.1%. Now, with lead prices hovering at around $2,190 a tonne, Exide’s margin is 12.1%, while the competitor’s margin is at 16.4%. Trouble for Exide started as it had capacity constraints at a time when the automotive market was growing. More importantly, it was saddled with high-cost inventory when lead prices started sliding about four quarters ago.
This explains the narrowing valuations between the two stocks. While Exide’s price-to-earnings multiple is 16-17 times one-year forward earnings, Amara Raja’s PE multiple has moved up from around 10 to nearly 14 times. That said, Amara Raja is still the No.2 player in the automotive segment, which comprises a greater percentage of revenues for both firms. Hence, further improvement in valuations will hinge on revenue growth and market share improvement. In terms of raw material prices, both firms are well poised to gain from relatively stable lead prices and an appreciating rupee that makes imports less expensive.