Q4 results: Amara Raja trails Exide for third straight quarter

Market leader has done better on revenue front, margins

The Amara Raja stock corrected over 8 per cent intraday on its weak March quarter performance, and downward revision of margin estimates by brokerages for FY19.  While the stock recovered from its intraday lows, a weak industrial segment as well as any upward movement of lead prices will be overhangs.

A major headwind is margin pressure because of the lead prices, which have hit their highest levels in at least five years in the March quarter.  Raw materials, as a proportion of revenues, are up over 200 basis points (bps) on a sequential basis, and 70 bps over the year-ago quarter.  This weighed on the company's margins, which came in at 13.3 per cent — about 230 bps lower than the December quarter.

In addition to the lead price increase, what aggravated the margins is higher share of automaker (OEM) volumes in the mix and trading revenues in the inverter segment. 

Higher employee (higher gratuity provisioning) expenses as well as costs related to the commissioning of the two-wheeler plants also affected profitability. 

The last two, however, are one-offs and are unlikely to recur.

What added to the cost woes was the muted demand from the telecom sector, where revenues are estimated to have been lower by 10-15 per cent year-on-year.  The management indicated that overall industrial segment revenues were flat as the telecom weakness was offset by growth in other areas. 

While raw material costs are high, lead costs have come down a bit on a sequential basis. 

 Analysts expect margins to improve on the back of price hikes, and cost improvement measures taken by the company.  

Revenue growth will continue to be supported by the automotive segment.  March quarter revenues from the segment improved by over 25 per cent, helping overall revenues to increase 17 per cent year-on-year. 

Despite the strong top line performance, the company has been trailing its largest peer Exide on the revenue growth front for three straight quarters.  

Exide’s margins at 13.7 per cent were 40 basis points higher than Amara Raja and the company reported 80 basis points improvement on this metric, as compared to the decline for Amara Raja. Investors should await a firm trend in lead prices before taking an exposure to either of the stocks.