Margin pressures ahead for Amara Raja Batteries

Results in line with estimates, but rise in lead prices and competition could weigh on profit

Amara Raja’s September quarter results were in line with estimates, with revenues growing 17 per cent while net profit was up 10 per cent, over the year ago period. While revenues were aided by strong volume growth in two-wheelers and passenger-vehicle segments, the bottom line was aided by a lower tax rate. Operating profit margins, however, declined 30 basis points year-on-year to 17.1 per cent due to higher other expenses. This was despite the lower raw material costs (lead prices) in the quarter with raw material to sales falling by 10 basis points to 64.3 per cent, compared to the year ago quarter. The higher other expenses were related to warranty, promotions and startup costs at the company’s new plant. In contrast, rival Exide Industries reported an operating profit margin of 15.2 per cent for the September quarter, 60 basis points higher over the year ago period. Its tight control on costs as well as drop in raw material costs to sales by 110 basis points to 61.1 per cent helped achieve higher margins.

The key for the Street would be the ability of battery makers to maintain margins as lead prices are up 26 per cent from the lows in the September quarter and 10 per cent over the June quarter. While companies have the option of raising product prices to offset some of the increase in input costs, its sustainability will largely depend on the impact price hikes have on volumes and market share of the two companies.

On demand front, Amara’s volume growth is estimated at 20 per cent year-on-year in both the two-wheeler and four-wheeler segments. This is similar to Exide’s sales performance as demand from both the replacement as well as new-automobile segments were strong. Exide posted a revenue growth of 10.5 per cent, which was marginally higher than estimates. Analysts believe improving sales graph for auto sales will be a major boost to Exide as it controls 60 per cent market share of the new-automobile segment. Higher rural income growth led by a favourable monsoon as well as pay commission impact on sales should help.

Both stocks have gained between 11 and 14 per cent over the last couple of months and at the current price, while Exide is trading at 21 times its FY18 estimates, Amara Raja is valued at 28 times. Investors will be wary of near-term impact on profit given higher lead prices. Further, higher competitive intensity could lead to pressure on product pricing. However, given the structural drivers and auto and industrial demand recovery over the medium-term, investors can look at the two stocks on dips.