Higher cost of lead compounds growth challenges for battery makers

Street prefers Exide to Amara Raja, given the valuation difference

For the second consecutive quarter in a row, Exide Industries outperformed its smaller peer Amara Raja on the revenue growth front. The country’s largest battery maker posted a revenue growth of 43 per cent year-on-year for the March quarter, while Amara reported 33 per cent growth for the same period.

Though the automotive segment, which includes supplies to automakers as well as sales in the replacement segment, powered the sales of both the players, Amara’s growth was on a higher base. The positive for Amara has been that capacity constraints that impacted its passenger vehicle segment have eased with four wheeler volumes growing 20 per cent. Home inverters and the industrial segment too registered robust growth.

Demand growth in the near term is expected to be weak given the second wave of Covid infections, manufacturing shutdowns and muted auto sales. Amara Raja, which reported a 4.5 per cent sales uptick in FY21 (as compared to 2 per cent for Exide), expects growth to be in low double digits.  

Operating performance of both battery makers was impacted by the sharp rise in raw material costs with gross margins falling by 376-390 basis points YoY. Lead, the key input for batteries, has seen a 5 per cent sequential increase in price in the March quarter. Operating leverage helped Amara Raja to restrict the hit to profitability with margins declining by 36 basis points YoY. Exide on the other hand was able to increase its operating profit margins by 90 basis points due to better control measures.

In the near term, margins for both companies will be under pressure given further inflation in input costs. Lead prices are up 7 per cent on a sequential basis and are now trading at levels last seen almost 14 quarters ago. Amara Raja has taken a price hike of 1-1.5 per cent to offset the cost impact.

While base business for Amara Raja is expected to grow at a steady pace a key risk to medium term cash flows could come from the company’s participation in the production linked incentive programme for advanced cell chemistry. Analysts at Nomura Research believes the company needs to commit large capital (Rs 3,000 to Rs 4,000 crore for 5GWH) for PLI to avoid obsolescence risk. However, this comes at a time of demand uncertainty, thin margins for global players and access to technology which might impact its return ratios.

Nomura Research prefers Exide over Amara Raja given the latter’s expensive valuations with the stock trading at around 16 times its FY23 earnings estimates. Excluding its insurance business, Exide’s core operations (batteries) trades at 14 times its FY23 estimates. The preference for Exide was also reflected in the stock prices on Monday with the company gaining over 3 per cent as compared to a 1 per cent fall for Amara Raja.

While the sector is a duopoly and both players are grabbing share in the replacement market, investors should be cognizant of the medium risk due to the shift to lithium batteries as compared to lead acid batteries in use currently. Lower cost of lithium batteries will impact the auto and industrial battery segments of these companies.