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Business News/ Markets / Mark To Market/  Headwinds drain earnings power of battery firms despite decent Q1
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Headwinds drain earnings power of battery firms despite decent Q1

Some auto firms might work on in-house lithium-ion batteries; this clouds long-term prospects of battery makers
  • For now, it seems like the stocks of domestic battery makers may stay on low-charge for some time now
  • For now, it seems like the stocks of domestic battery makers may stay on low-charge for some time nowPremium
    For now, it seems like the stocks of domestic battery makers may stay on low-charge for some time now

    Until now, battery manufacturers coped well with the slowdown in auto sales. But the ride ahead looks tough.

    Fortunately, replacement market sales of automotive batteries, good offtake in UPS (uninterrupted power supply) systems and home inverters have charged revenues of both Exide Industries Ltd and Amara Raja Batteries Ltd. This compensated for the double-digit drop in original-equipment (OE) demand, leading to flat revenue that was in-line with estimates.

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    Profit growth, though, came from lower raw material costs. Lead prices fell by about 20% year-on-year. Hence, in spite of low operating leverage, the Ebitda (earnings before interest, tax, depreciation and amortization) margins of both manufacturers expanded.

    Exide’s margin rose by about 60 basis points year-on-year to 14.7%, while Amara Raja’s leapfrogged by 300 basis points to 15.4%. However, Exide’s shares plunged 35% in the past year, while Amara Raja’s fell 20%.

    Exide’s warranty costs were high, which hurt profitability, said analysts. This could hamper future sales in the replacement market as it raises questions on product quality. A report by Nomura Research on Exide said the jump in warranty costs was due to issues in punch-grid batteries and e-rickshaws.

    To be sure, both companies gained market share from the non-regulated market after the implementation of the goods and services tax.

    Still, during the analysts’ call, the Exide management even hinted at slowing down capacity expansion if the demand slowdown continues. Besides, as some auto manufacturers might work on in-house lithium-ion batteries, it clouds the long-term prospects of battery makers.

    Further, weak OE sales would lead to poor replacement sales in the next two years. “Our analysis of four-wheeler automotive battery-replacement volumes indicate that growth is likely to slow from 10% in FY20 (estimate) to 6% in FY21 (estimate). This is due to weak volume growth of the OE segment in the past few years, assuming a replacement cycle of three years for passenger vehicles and two years for medium and heavy commercial vehicles, light commercial vehicles and tractors," said Nomura Financial Advisory and Securities (India) Pvt. Ltd.

    For now, it seems like the stocks of domestic battery makers may stay on low-charge for some time now.

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    Published: 07 Aug 2019, 08:10 AM IST
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