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Amara Raja Batteries’ growth could come at the cost of margins

LiveMint logoLiveMint 14-06-2017 Vatsala Kamat

Battery maker Amara Raja Batteries Ltd’s share price slumped by 10% after its March quarter results were announced about a fortnight ago. More worrisome is that it is 20% down from the 52-week high scaled in October.

The fall is glaring because its closest competitor and market leader Exide Industries Ltd has rallied. There is a clear divergence in stock performance (see chart).

Sure, the surge in the price of lead that shot up by 40% between June and October 2016 was the first trigger for investor caution. Soon after, demonetization blues hurt Amara Raja’s sales especially in the automotive replacement market, during the December quarter. Until then, the stock was powering ahead with every quarterly result—it rose 10-fold in five years!

The question now is whether receding lead prices witnessed in the last few weeks will again drive profitability higher. Agreed, the worst in terms of lead prices may be over for the medium term and it may ease the pressure on profit margins. But stiff competition is likely to reflect in pricing pressures too. Note that Exide Industries is back on the growth track unlike three-four years ago when Amara Raja cashed in on the firm’s capacity constraints.

So, the net revenue growth on the back of strong auto sales may come at the cost of profit margins. Amara Raja’s March quarter sales rose by 17% but then the operating margin shrank by nearly 300 basis points to 13.7%. A basis point is one-hundredth percentage point. In fact, the results were below forecasts, while Exide Industries’ surpassed them.

That’s not all. There are challenges in other segments too. The power sector may see good generation in the current year, which may lower demand for inverters and uninterrupted power supply. Therefore, revenue from Amara Raja’s industrial segment that comprises a fifth of total revenue may not clock robust growth. This explains the lack of near-term capex in this segment despite 85% capacity utilization.

In other words, Amara Raja’s profitability growth may be limited for the near term as Exide Industries has slowly but steadily played the catch-up game with it. It has regained its lost market share. Importantly, Exide’s attractive pricing mainly in the auto segment and marketing strategies has narrowed the pricing gap in the replacement market.

Brokerage firms therefore reckon that the Amara Raja stock’s current market price of Rs847 factors in all the positives that would come in from growth in the auto segment. Lower operating margin, seen in the last few quarters, may be the norm.

A new ray of hope is that the goods and services tax will weed out the unorganized sector that accounts for over a third of the battery market. But this is anyway a long-term dream. No wonder, most brokerage firms have trimmed Amara Raja’s earnings forecast for the next two years.

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