Lead prices are nowhere near cooling off. Since last January, prices have risen by 22%. Battery makers, for whom lead is the principal raw material, are feeling the heat.
In fact, but for the buoyancy in the automobile market that has kept demand for batteries rising over the past 24 months, battery makers would have found it hard to cope with such a surge in input costs.
After a decent show during the September quarter, the forecast for two leading battery firms—Amara Raja Batteries Ltd and Exide Industries Ltd—is not bad at all, considering the challenge on the raw material front.
The price hikes in the replacement automobile market, absorbed due to strong demand along with higher sales volumes, are likely to translate into a 15-20% year-on-year (y-o-y) growth in revenue for both companies.
Revenue growth also gets a fillip from a low year-ago base period, when sales had plummeted following demonetization.
Meanwhile, battery sales have been strong even across original equipment (OE) segments such as passenger vehicles, two- and three-wheelers, farm equipment and commercial vehicles.
As a result, while the lead price rise has been steep, the strong demand environment will alleviate pressures on profitability, at least partially. Analysts estimate operating margins to hover reasonably around the September quarter levels (14-15%). Growth in home inverter sales and in telecom segment, which have lagged behind that of automobiles in the past few years, will be positive surprises on the Street.
The rising stock prices of the two firms have already factored in increasing battery sales. Exide shares have moved up 9% since October, while those of Amara Raja have gone up 21%. Although the valuations of both stocks are running close, the Street has backed the latter, largely due to innovation at the company and aggressive attempts to enter new areas. Further, there’s hope the new goods and services tax (GST) will favour organized segment sales, compared with the unorganized, which so far has offered cutthroat competition to organized counterparts.
No doubt, soaring lead prices could dampen profit momentum. But the Street would be more worried if rising battery sales were to slow down, which would then make it hard for manufacturers to pass on rising raw material costs.