An 18-20% jump in lead prices in six months is no small thing for battery manufacturers, especially since it accounts for two-thirds of the total input cost. The December quarter results of the two largest battery firms—Exide Industries Ltd and Amara Raja Batteries Ltd—clearly reflected the impact of surging lead prices on profitability, which were below estimates on the Street.

The impact would have been worse but for the vibrant demand for automotive batteries on the back of growing vehicle sales almost across all segments. This was supported by growth in telecom and home inverter battery sales too. So, while Exide’s revenue jumped by 32% year-on-year, Amara Raja clocked a 17% growth.

On the one hand, strong demand brought in the benefits of operating leverage. On the other, it helped the battery makers pass on the rise in lead prices in the replacement market, where margins are many notches higher than in the original equipment segment. This arrested the fall in profitability during the quarter. Further, both firms controlled costs on other fronts such as marketing and employee costs during the quarter.

Therefore, Exide’s operating margin contracted by a small 84 basis points year-on-year while that of its competitor Amara Raja fell by a mere 18 basis points.

Fortunately, high revenue growth aided expansion in operating profit for both firms.

No doubt, the two leading battery firms’ efforts to combat rising lead prices are commendable. However, the price surge in the metal continued into January too and it remains to be seen how far the manufacturers will be able to pass them on, without hurting demand. The silver lining is the strong forecasts for auto sales in the coming years, which is the basis for the 14-15% compound annual growth rate in revenue expected for battery firms.

Meanwhile, the disparate valuations between Exide and Amara Raja continue. In spite of being the market leader, the former trades at 17 times estimated one-year forward earnings, while the latter as the No.2 contender trades at a premium of almost seven times to Exide. This may be because Exide’s operating margin is lower than that of Amara Raja.

That said, a stronger revenue growth may translate into faster earnings accretion for Exide in the coming quarters, when compared to Amara Raja. If this happens, the valuation gap may reduce between the two, which implies that Exide’s shares are better poised in terms of returns compared to its competitor.