Exide sails through Q4, but some near-term concerns persist
Premium- Margin pressures remain due to cost increases and adverse mix
- Lead prices have increased steeply by around 20% in the last three quarters.
Strong growth in both automotive and industrial segments aided Exide Industries Ltd's performance in the March quarter. The company’s management said that aftermarket demand for automotive and UPS batteries has remained strong. This translated into net profit and revenue growth of 45% and 43%, respectively at Rs244 crore and Rs294 crore on a year-on-year (y-o-y) basis.
Further, the lagged impact of raw material inflation weighed on its gross margin, which contracted by 160 basis points (bps) sequentially and 390bps y-o-y to 34.3%. One basis point is one hundredth of a percentage point. However, lower staff cost contained the steep contraction in operating margins at 14%. Analysts had pencilled-in Q4 operating margins to be in the 12-13% range.
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“Margin pressures remain due to cost increases and adverse mix. Lead prices have increased steeply by around 20% in the last three quarters. In addition, the product mix is likely to turn adverse with the normalization of replacement segment growth to single-digits from H2FY22," analysts at Emkay Global Financial Services Ltd said in a report on 29 April.
Second, with improving power availability, growth moderation in the inverter/UPS segment, which form around 20-22% of revenues, is another downside risk earnings, analysts said.
Apart from these, government’s electrification push of two-wheelers and three-wheelers poses a risk to lead battery manufacturers. “Unlike e-cars, e-two-wheelers/e-three-wheelers do not require lead acid batteries as an auxiliary battery. This would, in turn, impact 15-20% of the revenues of lead acid battery players. Furthermore, lithium also poses a risk to industrial batteries (revenues). Any concrete steps in this direction would potentially lead to the derating of the price-to-earnings multiple," analysts at Motilal Oswal Financial Services Ltd said in their latest earnings review report.
On the valuation front, Bloomberg data shows that Exide is trading at a one-year forward price-to-earnings multiple of 13 times, lower than 18 times multiple of competitor Amara Raja Batteries Ltd. The latter has outperformed the former in terms of revenue growth in the past six quarters. Analysts attribute the gap in revenue growth and consequently the valuations to Amara Raja’s technological innovations.
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