Mumbai: Amara Raja Batteries Ltd’s shares surged 10% on Monday as it staged a strong profitability performance in the September quarter.

What gives?

That lower lead prices would power operating performance was expected. It was also mirrored in competitor Exide Industries Ltd’s results announced a week ago.

However, Amara Raja’s performance was a tad more impressive because of robust replacement market sales across segments and exports.

The core business area, automotive batteries, fared well as double-digit year-on-year (yoy) growth offset the 25-30% drop in original equipment (OE) sales. And, the 22% rise in exports added an extra punch to volume growth. Industrial battery sales grew reasonably well, led by uninterrupted power supply systems.

However, the pain area continues to be home inverters and telecom, which is similar to that experienced by Exide. Basically, home inverter sales being discretionary products were impacted adversely by the liquidity crunch. Analysts reckon that telecom sales would continue to hurt due to slowdown in capex.

Fortunately, traction in automotive and industrial segments was aided by lower lead prices. Hence Ebitda (earnings before interest, tax, depreciation and tax) margin soared by 370 basis points (bps) yoy to 17.2%. The margin zoomed past Bloomberg’s 12-analyst consensus of 15.1%. It was also better than Exide’s 190 bps rise during the same quarter. Margin expansion helped the 23.4% yoy growth in Ebitda, in spite of a dip in revenue. This explains the stock’s reaction to results. A report by Edelweiss Securities Ltd said operating cash flows improved due to soft lead prices and extended payables. “Management reiterated long-term Ebitda margin guidance of 14-16%," it said in a note to its clients.

One basis point is a hundredth of a percentage point.

That said, lead prices are already hardening. Commodity experts foresee a further rise from the 6-8% increase seen in the last one month or so. This may discharge profit margins for Amara Raja and lead-acid battery makers, especially if economic slowdown continues and auto sales are sluggish. Prolonged dip in vehicle sales will impact replacement market sales adversely, with a lag.

Still, Amara Raja’s valuation of 17-18 times the estimated one-year forward earnings are likely to sustain. Although there is little to worry on the operating performance, risks to valuation exist from termination of its joint venture with Johnson Controls International Plc. Also, the uncertainty about the 24% stake held by global asset management company Brookfield may weigh on valuations.

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