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Graphic: Satish Kumar/Mint
Graphic: Satish Kumar/Mint

Battery makers’ margins shine but face risk of hardening lead prices

  • The core business of automotive batteries fared well, riding on double-digit y-o-y growth in replacement market
  • Industrial battery sales grew reasonably well, led by uninterrupted power supply systems

Amara Raja Batteries Ltd and Exide Industries Ltd did well in the September quarter, with margins rising on the back of lower lead prices. Also, robust replacement market sales buoyed the operating performance.

The core business of automotive batteries fared well, riding on double-digit year-on-year growth in the replacement market. While Amara Raja did better on this count, both companies managed to offset the drop in original equipment sales. Industrial battery sales grew reasonably well, led by uninterrupted power supply systems.

However, home inverters and telecom continue to be a struggle for both battery firms. The former segment was impacted adversely by the retail liquidity crunch, while the latter’s sales were down due to poor capex in the industry.

Amara Raja’s Ebitda (earnings before interest, tax, depreciation and amortization) margin soared by 370 basis points year-on-year to 17.2%, better than the Street’s forecast of 15.1% margins. It was also better than Exide’s 190 basis point rise during the same quarter as the company gained from better product mix and operating leverage.

Margin expansion resulted in the 23.4% year-on-year growth in Ebitda for Amara Raja in spite of a revenue dip. This led to a 10% jump in its shares on Monday. Exide’s shares have risen about 3% since it announced results last week. A report by Edelweiss Securities Ltd said operating cash flows improved due to soft lead prices and extended payables.

That said, lead prices are already hardening, which is a threat to margins. As a result, profit margins may lose some charge, especially if the economic slowdown continues and auto sales are sluggish. A prolonged dip in vehicle sales impacts replacement market sales adversely, with a lag.

At their current stock market prices, battery makers trade at 18-20 times estimated one-year forward earnings. Exide being the market leader and having a technological edge over Amara Raja, trades at a marginal premium. Risks to Amara Raja’s valuation come from termination of its joint venture with Johnson Controls. Besides, analysts are watchful about the 24% stake held by global asset management company Brookfield; according to reports, the firm is evaluating its investment in the Indian batteries space.

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