Exide plays the value card

The leading battery manufacturer is intent on increasing margins even if it means letting go of market shares in some segments

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Battery manufacturer Exide has been able to reverse the spot it found itself in in the first half of 2012-13 (April-June, 2012). It had been unable to effect price hikes and had lost market share in automotive batteries. Amara Raja, which entered the segment in 2000 with its brand, Amaron, has been able to chip away at the market leader's share of the 15.9 million units (approx) market. Pricing was one of the pegs for Exide's rival's growth.

But now, Exide has been able to take its third price hike in the segment of replacement batteries for automobiles (which commands more margins than supplying to original equipment manufacturers or OEMs) in July and also increased its market share.

"Exide has managed to take regular price hikes in the replacement segment signalling a return of pricing power," say research analysts Jatin Chawla and Akshay Saxena of Credit Suisse. The company's three price increases over the last nine months, ranged from 15-18 per cent and would help neutralise the impact of higher lead prices and rupee depreciation.

It has also discontinued special incentives to dealers since February this year after regaining lost market share in the replacement segment. This segment is expected to grow much faster than the business of supplying to OEMs as new vehicle sales have slowed. It is the company's focus. In fact, its replacement to OEM mix in cars was 1.74:1 in the June quarter, the highest over the past few years.

The OEM segment, driven by hard negotiations between supplier and OEMs, too has Exide raise prices. Before increasing prices after 18 months, the company had suffered two consecutive quarters of falling margins until then.

Senior research analyst Gaurant Dadwal, Nirmal Bang, points out, "In February 2013, the company went for a price hike of 5-6 per cent. This was over and above the impact of increase in input (lead) costs, as the company has complete pass-through agreements with OEMs."

The battery maker then is clearly aiming for profitability rather than market share and volumes, given its focus on price hikes. Margins have looked up for the branded battery manufacturer due to its price hikes and focus on the more profitable replacement segment. Ebidta margins which had fallen from 15 per cent in April-June, 2012 to about 11.3 per cent in October-December, 2012, have since improved to 16.1 per cent.

Pricing has reduced its share in the OEM segment from 75 per cent to 66 per cent. The company lost a few clients as it was not willing to reduce prices to maintain its margins even if it meant foregoing market share. P K Kataky, managing director & CEO, Exide Industries says during an investor conference call, "We do not want to get into a situation where the more we sell, the more we lose. You want at least some profit coming from the OEMs."

Exide will still have to look out for its largest competitor, Amara Raja. Amaron's market share in the OEM business rose from 23 per cent to 28 per cent in 2012-13. However, the OEM volumes are just a fraction of replacements.

Amaron had broken into the scene a little over a decade ago with advertising from O&M to get heard in a category that is unlike other consumer segments. Even though it is the car user who buys a battery to replace a worn-out one, the consumer does not go out looking for it. It might be a high-ticket category but one with very low interest levels.

Amaron tried mainstream advertising to underline its batteries which would not require water levels to be checked and last long thanks to an anti-corrosion technology developed along with an US partner. On the ground, for the resellers, it offered discounts that also got carried forward to the end customer. Amaron, then steadily gained market share, with Exide batteries selling at a 15 per cent premium for years. Recently, Exide had brought down the price premium to 5 per cent.

For now, the more premium Exide can rest assured. Fortune Research in a recent report says that capacity constraints faced by Exide's key competitor may help it command a premium. Amara Raja will add capacity towards the end of 2013-14. Exide is also better-placed for commodity inflation as it imorts only 15 per cent of its lead requirement as against Amara Raja's 46 per cent raw material imports, leaving Exide's smaller peer vulnerable to rupee depreciation.

Amara Raja had to raise its prices by about 15 per cent, owing to "rupee depreciation and other input costs" according to Rajesh Jindal, head of automotive battery division, Amara Raja, unlike Exide's single-minded focus on premium and profitable play.

EXIDE'S FUEL FOR GROWTH

• Replacement market: 14 million units; OEM market: About 1.9 million units
• Exide's share in replacements: 50% (Amaron: 35%).
• Exide's share in OEM supply: 66%
• Exide had slipped to 25% last year before recovering
• With price hikes, Exide has improved margins
• Exide wants more revenue from the replacement business