Replacement sector fails to power Exide's numbers in September quarter

Firm de-risking business model but pressure on revenue likely in the near term

Exide’s September quarter (Q2) performance was affected by lower supplies to auto makers, or original equipment manufacturers (OEMs). A cut in production by many auto companies has resulted in overall revenues falling 4 per cent year-on-year (YoY). The auto OEM space accounts for close to 18 per cent of the company’s revenues. 

The replacement and industrial segments have helped offset some pain in the OEM segment. 
 

The firm posted high single-digit growth in the replacement segment that accounts for about half its overall revenues. Exide also reported good growth in uninterrupted power supply, solar, and other infrastructure segments. 

Despite the weak revenue performance, operating profit grew 10 per cent, while margins expanded by 180 basis points YoY to 14.1 per cent, on account of falling lead prices. 

Margin expansion was limited, given the price cuts in the two-wheeler replacement segment as well as negative operating leverage. With lead prices strengthening by 9 per cent in the September quarter and the delayed impact of the same, the company will have to bear additional cost in the current quarter. The company is looking at cost control measures and technology upgrades to improve profitability.

Given the technological change and shift towards electric vehicles, the company, which currently makes lead acid-based batteries, is de-risking its business to focus on lithium ion batteries. The company recently tied up with Swiss company Leclanche. 

The joint venture will initially assemble modules and battery packs, and start manufacturing the same by mid-2020.  
 

The company also entered the electric rickshaw space with its offering called the Neo (initially in the east India market), and is targeting 10 per cent market share. While the Exide stock gained about 1.3 per cent in trade on a stable Q2 show, analysts say the company faces multiple challenges on account of the auto slowdown, industrial segment profitability, as well as a shift towards electric vehicles. 

Analysts at Kotak Institutional Equities have cut net profit estimates by up to 15 per cent over the next couple of financial years, given the dip in auto volumes, higher raw material costs, and negative operating leverage.