Exide Industries Ltd’s resilient performance in the September quarter (Q2 FY20), despite the slowdown in the auto sector, is comforting. The country’s largest battery maker scored brownie points as profitability improved from the year-ago period.
However, this is not to say that the company is completely out of the woods.
Investors are worried about the recent uptrend in lead prices, which could be detrimental to continued profitability. Plus, this comes at a time when revenue growth is stymied, thanks to the auto sector demand woes.
Note that Exide’s September quarter Ebitda margin expansion of 14.1%, from 12.2% in the year-ago period, came on the back of benign lead prices. Raw material cost as a percentage of sales fell by 310 basis points year-on-year. One basis point is a hundredth of a percentage point. Lead accounts for about two-thirds of the input cost for making batteries. The drop in raw material cost offset the poor operating leverage in the quarter.
Even as margins improved, Exide’s revenue traction faltered on plummeting demand from original equipment manufacturers (OEMs). Net revenue for the September quarter dropped by 4% year-on-year to ₹2,611 crore. Sluggish auto segment apart, even the telecom segment was dull, while the uninterrupted power supply systems and solar power segments fared a tad better. The silver lining was the higher mix of replacement market sales, where realization on sales and profit margins are better. According to analysts, improved marketing efforts, inclusion of brands in the lower end of the market and faster turnaround of warranty claims, supported replacement market sales. The upshot: Exide’s Ebitda jumped by 10% year-on-year (y-o-y) to ₹367 crore.
Depreciation charges and interest costs were higher during the quarter. Even so, the net profit of ₹237 crore was higher y-o-y after adjusting for an exceptional gain of ₹108 crore in the year-ago period. That said, with lead prices increasing over the past few weeks, investors are worried. Besides, there are fears that continued auto slowdown will impact replacement market sales. The second largest battery maker Amara Raja Batteries Ltd is also vying for a larger share of the replacement market pie.
Dealer checks suggest a price war—discounts and other offers to lure customers. This will hurt profit margins, especially if lead prices continue to increase. “We remain concerned over slowdown in auto OEMs (15-20% of revenues). Even weakness in the industrial and telecom segments continues to persist. Hence, we expect the stock to trade at a lower than historical multiple (about 17-18 times)," pointed out a report by IDFC Capital Markets & Securities Ltd. Exide’s shares reflect investors’ worries. So far this fiscal year, the stock has declined almost 14% on the National Stock Exchange.