Weakening macroeconomic condition marked by rise in crude oil prices, rupee depreciation, rising interest rate regime coupled with regulatory challenge coming from mandatory long-term insurance as well as natural calamity like floods in Kerala had dampened the demand for most of the auto majors in India in September 2018. However, festive season brought cheers to selected pockets in the month of October 2018.
Indian battery manufacturers witnessed a healthy topline growth in Q2 FY19. However, their operating margin continued to remain under pressure due to rising raw material prices on adverse rupee movement and elevated fuel prices. In this article we analyse the financial performance of battery manufacturers in Q2, likely catalysts for growth and impediments in moving towards EV.
Quarter snapshotAmara Raja
Riding high on strong volume growth accruing from automobiles, industrial and export markets, Amara Raja (ARBL) clocked a strong (22.8 percent) year-on-year (YoY) growth in net sales. Realisation improved 6-7 percent on the back of rich product mix.
Within the auto segment, four-wheeler (4W) and two-wheeler (2W) volumes grew 19 percent and 13 percent YoY, respectively. Industrial segment volumes grew 35 percent on the back of a volume recovery from the telecom segment.
Higher raw material (RM) costs continue to eat into operating profitability. Earnings before interest, tax, depreciation and amortisation (EBITDA) margin contracted 320 bps (100 basis points = 1 percentage point) due to 13-14 percent YoY surge in lead prices on a weakening rupee. Rising staff cost and other expenses led to deteriorating operating profitability.
Exide Industries posted a healthy (15.3 percent) growth in net revenue on the back of strong demand from auto, industrial and invertor segments. A 3-3.5 percent price hike undertaken by the management in the auto segment also aided net revenue.
Despite healthy growth in net revenue, EBITDA remained flat and margin contracted 30 bps YoY. Elevated fuel prices and adverse rupee movement ate into operating margin.
Factors to watch out forSoftening RM prices
The ARBL management sees lead prices falling 6-7 percent in rupees terms in Q3 FY19, which is expected to help it achieve its EBITDA margin guidance of 14-16 percent. Softening fuel prices will help ease pressure from crude-related RM. Exide will also benefit from softening RM prices.Sluggish near term industry opportunities
Original equipment auto manufacturers (OEM) have been facing challenges in terms of volume growth on multiple macroeconomic challenges led by elevated fuel prices, adverse currency movement, rising interest rate and mandatory long term insurance. Weakening demand for auto OEMs could thwart volume growth for battery manufactures as well, impacting their topline growth. Market conditions are expected to be sluggish in the near term, but long term outlook for all segments continue to be positive on the back of economic growth, rising income levels, lower penetration, government’s thrust on increasing rural income and focus towards infrastructure and construction.Capacity expansion and technology upgrades
With ARBL’s capacity utilisation in automotive segment at 90 percent, the company plans to expand capacity to meet growing demand. It plans to expand its automotive capacity to 36 million units by FY20 from 25 million units in FY18. The management plans to expand invertor capacity as well.
Exide continues to focus on technological upgradation and cost reduction through technology. Recently, it collaborated with Switzerland-based Leclanché to build lithium-ion batteries and energy storage solutions that would be used in electric vehicles (EVs).Positive GST impact
The Goods & Service Tax (GST) has led to a meaningful shift from unorganised players (commands around 40 percent market share) to organised players due to price competitiveness. This is evident in 14-15 percent YoY growth in automotive battery volume reported by ARBL. Exide is also targeting the unorganised market by pushing competitive-priced products.Getting ready for EVs
Battery manufacturers are gearing themselves for upcoming EV shift and have already started investing. Exide’s collaboration with Switzerland-based Leclanché is one step in that direction. It has already come out with special e-rickshaw batteries that is expected to help it penetrate the segment.
ARBL is also using superior technology (tubular flooded batteries) to provide batteries to e-rickshaws. Additionally, its upcoming 100 mw hour li-ion battery plant in Andhra Pradesh places it in a sweet spot in the EV space.Reasonable valuationARBL is currently trading at 22.7 and 19.2 times FY19 and FY20 projected earnings and Exide is trading at 23.2 and 18.7 times FY19 and FY20 projected earnings, respectively. We advise investors to accumulate these stocks amid softening RM prices.
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