How Exide and Amara Raja are bucking the trend in auto sector
1 min read . Updated: 15 Jul 2019, 11:25 PM IST
Premium- Together, the two account for about three-fourths of the replacement market sales that has better realizations than OEMs
- Apart from the tailwinds of robust replacement market sales, soft lead prices are expected to support profitability
Battery firms Exide Industries Ltd and Amara Raja Batteries Ltd are bracing for tough times ahead, given the drastic fall in auto sales. But the magnitude of the impact will be lower for them compared to other auto component makers.
Here’s why:
While orders for batteries from original equipment manufacturers (OEMs) will drop, the saving grace is the replacement market, which brings in 50-60% of auto segment revenue for these two battery makers. Replacement demand is still robust.
According to ICICI Securities Ltd, “Given the life of battery is typically about four years, manufacturers realise steady replacement demand growth of around 10%, which will help them traverse the challenging times at auto OEMs (muted volume growth of about 5% over FY19-21E)."
Further, post the implementation of GST (goods and services tax), small manufacturers from the unorganized sector have fallen by the wayside, helping Exide and Amara Raja garner a bigger share in the replacement market. Together, the two companies account for about three-fourths of the market. That’s not all. Replacement market sales enjoy better realizations than OEMs.
Apart from the tailwinds of robust replacement market sales, soft lead prices are expected to support profitability. Lead comprises about 70% of these companies’ raw material costs. In its preview note for the June quarter, Elara Securities India Pvt. Ltd forecasts 2-3% year-on-year revenue growth for the two firms. However, it expects 30% growth in Amara Raja’s Ebitda (earnings before interest, tax, depreciation and amortization) on a low base, and 7% growth for Exide.
No wonder, while the Nifty Auto index has fallen 11% since 1 April, shares of Exide and Amara Raja are down 7% and 8%, respectively. That said, whether they will lose power in the coming quarters hinges on how auto sales will pan out. Also, whether telecom, industrial and home inverters can offset the near-term pain from the auto slowdown remains to be seen.
A long-term concern around the two companies is the business impact of conversion to lithium-ion batteries in the new era of electric vehicles. Although it is evident that both are working on these technologies, it remains to be seen how they would combat competition from some OEMs, who with deep pockets are also venturing into this arena. Until then, valuations will hinge on lead price movement and auto sales.
