BackExide Industries hit by poor economies of scale
Exide, which sells batteries to both automobile manufacturers and in the replacement market, saw sales fall 11% in the December quarter
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Exide Industries Ltd’s third quarter performance reiterates what one already knows about the auto industry—a story of sluggish demand and slowing sales growth.
The company, which sells batteries to both automobile manufacturers and in the replacement market, saw its sales fall 11% in the December quarter from a year ago. The fall in sales was sharper than what the market had expected.
Driven by the theory that the replacement market would be stable, analysts were expecting Exide to at least report unchanged sales number from a year ago. But that was not to be as even replacement market demand fell, perhaps owing to the economic slowdown and falling consumer discretionary spending.
“In the replacement market, the demand for heavy duty and light commercial vehicles including passenger cars used for commercial application (taxi) remained subdued. Automobile OEMs (original equipment manufacturers segment) has a de-growth," the company said in a statement.
The fall in sales hit the company hard. With overheads such as employee costs more or less remaining the same from a year ago, operating numbers were squeezed. Hence, earnings before interest, tax, depreciation and amortization (Ebitda) margin fell 30 basis points to 10.9%. As a result, net profit fell 5.4% from a year ago to ₹ 77.5 crore. A basis point is one-hundredth of a percentage point.
Even though the Ebidta margin contraction is only 30 basis points, the squeeze spooked analysts. Sharekhan Ltd, Anand Rathi Shares and Stock Brokers Ltd and Angel Broking Ltd were all expecting margins to expand in the range of 190-330 basis points. A favourable base and soft raw material costs had led the market to believe that the company will report higher margins during the quarter. But margins were hit by rupee volatility, which offset the decline in raw material prices, and price cuts taken by the firms to boost demand at the beginning of the third quarter.
The fall in margins and sales led to the Exide stock plunging by 7% on Monday. A rebound looks some time away. Not only are raw material prices strengthening, the sales outlook remains bleak. High inflation, an economic slowdown, higher fuel prices, and low business and consumer confidence will keep auto sales under pressure, indicated a note from Emkay Global Financial Services Ltd. According to the brokerage firm, automobile manufacturers are seeing a recovery only in the second half of fiscal year 2015.
A sustainable rally in Exide’s stock may have to wait till then as well even if valuations look attractive.
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