Investors can sell their holdings in Exide Industries. At the current market price of Rs 122, the stock trades at about 20 times its trailing twelve month earnings. While this is in line with its three-year historical average, the upside for the stock seems muted given the company’s declining pricing power, moderating operating margins and stiff competition impeding its ability to regain lost market share. Exide has been facing headwinds, but its competitor Amara Raja Batteries has made handsome gains.

Market share losses

Exide has been facing challenges for more than a year now. Initially, in 2011-12, it faced capacity constraints when demand for batteries from auto manufacturers was strong.

This forced the company to cut down on sales in the more lucrative replacement market and focus on the increasing supplies to auto makers. But by doing so, Exide took a hit on its margins. This is because battery makers have greater pricing power in the replacement market than direct sale to auto makers.

While capacity constraints have eased, the loss of market share in the replacement segment is proving to be its Achilles’ heel this year.

With new vehicle sales slowing down considerably, replacement demand for vehicles sold in 2009-10, 10-11 has started picking up.

To make the most of the demand and regain its market share, the company has only partly passed on cost escalations due to currency fluctuations and rise in lead prices, thus sacrificing on margins once again.

Margin pressures

For the quarter ended December 2012, although a pick up in replacement volumes (25 per cent growth in four-wheeler batteries and 50 per cent in two-wheeler batteries) helped improve net sales by 17 per cent to Rs 1,462 crore, muted operational performance resulted in a flat net profit of Rs 104 crore compared to the same period last year. Operating margins have dropped to 11.2 per cent from 13 per cent a year ago.

In fact, in the last two years, the company’s operating margins have dropped sharply from 20 per cent plus levels seen earlier.

With the company looking to prioritising market share gains over margins, the margins may not revive anytime soon.

(This article was published on February 2, 2013)
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