Amara Raja pulls ahead of Exide again

Driven by double-digit volume growth, the company continues to gain market share

For yet another quarter, Amara Raja’s operational performance was better than Exide Industries’, with the numbers beating analysts' expectations on all fronts. Powered by double-digit growth in volumes in both the automotive and industrial segments compared to lower single digits or a fall in growth for Exide, Amara Raja has been a consistent outperformer.

In the past seven quarters, for example, the average revenue growth for Amara Raja was 17-18 per cent, compared to Exide’s eight per cent. While the 8-10 per cent discount in pricing (to Exide) is helping, the decision by automakers to change their sourcing strategy to include multiple suppliers has benefitted Amara Raja. On the replacement front, which fetches higher margins, the company has been gaining share given the aggressive expansion of its distribution network. Technology inputs and product support from joint venture partner Johnson Controls have also helped the company offer latest products at competitive prices.

In the current quarter as well, Amara Raja’s performance was powered by a double-digit growth in the industrial segment (45 per cent of revenues) as well as a similar growth in the replacement segment of the automotive division (55 per cent of revenues). This helped the company post year-on-year sales growth of 16 per cent compared to a two-per cent fall in revenues for Exide. Volume growth for Exide was pegged back by four per cent in the four-wheeler OEM (original equipment manufacturer) volumes, while the industrial and replacement segment grew just two to five per cent. Exide’s revenues (about 64 per cent) are more skewed towards the auto segment.

The one positive for both companies, however, was on the margin front, with raw material-to-sales ratio coming down 400-500 basis points over the year-ago period to 61-62 per cent. This helped them achieve a sharp jump in operating profit margins, which zoomed to 15.4 per cent (up 380 bps) in the case of Exide and 18.6 per cent (up 229 bps) for Amara Raja. Analysts had estimated a 17.5-per cent margin in the case of Amara Raja and 13.5 per cent for Exide.

While higher volumes could help Amara Raja gain on the profitability front, Exide expects a 100-bps gain on the margin front by financial year 2018, after the completion of its technology upgradation programme. From the current margins of 15.4 per cent, expect the number to move towards the 16-per cent mark in the next couple of years. The outsized gains on the profitability front percolated down to the net profit front, helping the two post net profit growth of 33-38 per cent in the December 2015 quarter.

Despite strong profitability and net profit gains, analysts are not very excited over Exide’s prospects, given muted volume growth and continuous market share gains by Amara Raja (two to three per cent annually over the past couple of years). Further, a large capex which is expected to yield only 100 bps gain for margins will not, according to analysts, move the needle much as far as the impact on financials is concerned. The stock has lost 16 per cent over the past month with the only thing going for it being inexpensive valuations. At 13 times FY17 for its core battery business, valuations are trading at a steep discount to Amara Raja’s, which is at 20 times.

While investors can look at Amara Raja at lower entry points, an early improvement in margins or consistent volume/revenue growth for Exide would be a signal that the market leader is back in the hunt. For now, Amara Raja is outpacing it on every count.