Exide Industries Ltd’s disappointing March quarter results did not see investors turn away from the counter. On the contrary, it closed 6.5% higher. Was it the relatively upbeat mood on the Street on Wednesday as the broad market gained 0.8%? For, the only bright spot about its results was its net revenue rising by 12% year-on-year (y-o-y) to Rs1,975 crore, the only parameter where Exide measured up to Bloomberg’s average estimates.

Perhaps the Street was gung-ho about Exide’s future prospects. The management said in a statement that sales at its automotive division in both the replacement and original equipment (OE) markets are doing well and the demand outlook is promising. Also, sales of the home inverter and uninterrupted power supply (UPS) segments are growing too. Macroeconomic data that point to green shoots of recovery backup this confidence.

However, its operating performance fell short of expectations. Lead played spoilsport as prices shot up by 30% y-o-y and by 18% over just three months. As a result, its raw material cost shot up by about 180 basis points (bps) compared to the December quarter. One basis point is a hundredth of a percentage point.

Although other expenses and staff costs dropped, it did not arrest the decline in margin. Operating margin therefore slipped by about 178 bps to 13.3%, against 14.4% pencilled by brokerages for the quarter.

Exide commands a leadership position in what is virtually a duopolistic market for automotive batteries. But then, there is constant pricing pressure in the replacement market.

Exide’s closest rival Amara Raja Batteries Ltd loses no opportunity to grab share, as it did a few years ago when Exide’s capacity constrained growth.

Stiff competition and marketing costs keep up the pressure on profitability. And, if raw material costs spike, that further constricts margins. To sustain or improve profitability, Exide’s sales growth and per unit realization has to scale up significantly, given higher raw material costs. Else, operating profit would contract in spite of revenue growth, just as it did in the March quarter by 2%, failing investor expectations.

The quarter’s net profit of Rs164.8 crore too missed the Street’s forecast by about 7% even as it was 6% lower y-o-y. Exide’s stock trades at a rich valuation of about 24 times its one-year forward estimated earnings. The stock may ride on bullish sentiment for the auto sector, as revenue growth is likely to grow at 15-20% over the next two years. The growth in profits depends on lead price movement, an area where Exide’s management has expressed concern.

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