Battery manufacturers face a double whammy – falling sales and a 30% rise in lead prices in three months – which pose risks to the companies’ profitability. The concern is evident from the 7% decline in shares of Exide Industries Ltd and Amara Raja Batteries Ltd since 1 October.

Though sales have declined steadily over the past 12 months, stable demand from the replacement market and lower year-on-year lead prices till recently managed to offset the impact of falling demand.

Graphic by Naveen Kumar Saini/Mint
Graphic by Naveen Kumar Saini/Mint

Demand from the replacement market was largely stable on the back of robust auto sales between FY16 and FY18. Auto batteries, which account for over half the sales of both the listed firms, are typically replaced in three to four years. And lead prices have been cascading since the middle of 2018, giving a leg up to battery makers’ profits. Lead prices comprise 50-60% of the cost of making a lead-acid battery. That’s how both Exide and Amara Raja clocked an increase in earnings before interest, tax, depreciation and amortization (Ebitda).

But things have now taken a turn for worse, and suddenly.

The 30% spurt in lead prices from end of May have surprised analysts. Also, the surge comes at time when auto original equipment sales are yet to pick up and hence business for battery firms is yet to improve. In fact, analysts forecast a revenue drop, albeit in single digits (4-6% year-on-year) for both Exide and Amara Raja during Q2FY20.

While most of the impact of rise in lead prices would be felt in Q3FY20, it would dampen profitability even in Q2FY20. Ebitda margin for the quarter is likely to be flat on a yearly basis. Things will worsen in the quarters ahead because operating leverage will likely remain low. The 50-60 day inventory across auto segments — passenger vehicles, two-wheelers and commercial vehicles — has dimmed hope of better offtake even in the second half.

Further, if vehicle sales continue to fall, it would have an adverse impact on replacement market sales as well. As such, dealers say that both Exide and Amara Raja are competing for sales in the replacement market, through product discounts, and offers such as higher warranty, etc.

Battery firms have had it rough so far this fiscal, with home inverter and telecom battery sales also nothing to write home about.

And if all this is not enough for investors to tread with caution, both firms also face the challenge of transitioning to lithium-ion batteries over the next few years. The paradigm shift in technology could keep valuations suppressed, with the 16-18 times price-to-earnings ratio for the estimated FY21 earnings looking steep, given the risk to growth and profitability in the near term.

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