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Profitability of automotive battery makers, including Exide Industries and Amara Raja Batteries, may remain under pressure in the January-March quarter due to sustained increase in lead prices.
Lead prices rose by a little over nine per cent from $2,040 a tonne to $2,231 a tonne between October and December 2016. After a spell of calm in January, prices have moved up by another five per cent to $2,357 a tonne in February this year.
The price rise is attributed to mine shut-downs between 2013 and 2015 due to multi-year lows in commodity prices. Some reports suggest that increased production, particularly from China, would stabilise lead prices in the next few quarters.
Lead constitutes 60 per cent of the cost of batteries.
Automotive battery makers get cost-linked prices for OE (original equipment) sales to car makers; such sales have very low contribution to profits.
The margins are largely dependent on after-market or replacement sales.
Market leader Exide reported a seven per cent price increase during November and December. This helped the company clock a nine per cent increase in net profit in the October-December quarter on a 12 cent rise in sales.
However, the operating and net margins of the company have been on a consistent decline since March 2016.
In an e-mailed response to BusinessLine , Gautam Chatterjee, Managing Director and CEO of Exide, admitted the impact of cost-push on the company’s profitability in the current quarter.
“Since lead constitutes as much as 60 per cent of the cost of a battery, the industry’s profitability is immediately impacted by volatility in its price. We are hoping that by the first quarter of the next financial year, things will stabilise for the industry,” he said.
Chatterjee further added that the sales of two-wheeler batteries remained muted since demonetisation on November 8. In a January 2 press conference, he said four-wheeler battery sales were unaffected by demonetisation.
Exide’s share price has increased 22 per cent, from ₹174 to ₹212, over the last three months.
Amara Raja did not respond to queries. The company reported nearly 18 per cent decline in net profit in the December 2016 quarter despite a 22 per cent growth in topline over the corresponding period in 2015.
Apparently, the company expanded sales ignoring the impact of costs on margins.
The operating margin of the company has been on a consistent decline since the December 2015 quarter. Share price of Amara Raja has declined 10 per cent, from ₹940 to ₹846, over the last three months.
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