Home / Market / Mark-to-market /  Investors turn away as Amara Raja’s profit margins ebb

Shares of India’s second-largest automotive battery maker Amara Raja Batteries Ltd have lost steam since the March quarter results (announcement on 25 May). They fell 7% in two weeks and are also down 25% from their 52-week high.

The tailspin in the hitherto outlier’s stock came after the company put up a disappointing show in the March quarter. Operating performance at 16.3% was significantly below the consensus on the Street. No doubt lead prices were up over the past six months, but then other expenses shot up. Advertising and marketing costs rose as the firm kept pace with competition.

Note, however, that revenue rose from a year earlier by around 9%. Higher revenue and lower profit margin indicate that the company sold more at the cost of profitability. A note by Karvy Consultants Pvt. Ltd says that the company sought to gain market share at the cost of profit margin. Amara Raja’s market share rose from 24% to 30% in the last few years. “The company passed on the majority of lower raw material cost benefit to customers with limited improvement in its operating performance, which indicates weak pricing power amid intensive competition," explains the report.

Amara Raja’s March quarter operating margin narrowed by 125 basis points from a year ago and by almost twice as much compared to the December quarter. A basis point is 0.01%.

Moreover, analysts are also sceptical about the company’s profitability in the coming quarters. This is mirrored in the one-year forward price-to-earnings multiple that started falling about two months before the results. Perhaps the Street got wind of its relatively weak performance during the March quarter. Amara Raja’s current market price of 841.65 discounts its one-year forward estimated earnings by about 29 times, which now looks expensive, as margins seem to have peaked.

The March quarter’s net profit (after adjustment) was a tad lower than the year-ago period, again deflating sentiment on the Street.

In sharp contrast, bigger rival Exide Industries Ltd, which had lost ground for a couple of years due to capacity constraints, stumped analysts by beating forecasts on revenue and profit growth. It fared well in the auto replacement market. Inverter sales also rose after many quarters of double-digit decline. Investors gave a thumbs up to the stock and it gained 9% since results were announced (on 27 April). The stock has revved up by around 36% since end-January and its price-to-earnings multiple expanded too.

Note that Exide Industries fell from grace on the back of a pathetic performance about three years ago, due to capacity constraints and fall in market share in the auto segment.

For now, it appears that there is a reversal in valuation between Exide and Amara Raja. Unless Amara Raja is able to make inroads in the market with minimal compromise on profitability, investors may get weary.

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