The Diverging Fortunes Of India’s Two Largest Battery Makers
Amara Raja Ltd., India’s second-largest battery maker, beat market leader Exide Industries Ltd. in the last nine sessions on improved outlook. Yet, that masks its underperformance in the last year and a half.
Amara Raja’s shares have fallen over 7 percent compared with a 46 percent jump in Exide since January last year. That’s in part because of a slowdown in sales to the telecom tower companies, and also Exide’s push to increase its domination.
Amara Raja’s sales to the telecom sector, which contributes 20 percent of its revenue, remained stagnant in the last 12-18 months, according to a report by Elara Capital. That’s because of lower tower additions as India’s telecom industry went through consolidation amid growing debt.
It also faced competition from rivals like HBL Power Systems and NED Energy that also supply to tower companies. The resultant pricing pressure didn't allow Amara Raja to pass on higher costs of lead.
Moreover, telecom towers in India used diesel generators and lead-acid batteries but Reliance Jio Infocomm Ltd. opted for lithium-ion batteries. About 95 percent of towers of billionaire Mukesh Ambani’s upstart operate on lithium ion batteries sourced from China, brokerage Motilal Oswal said in a report.
Exide, on the other hand, took interactions with its channel partners constructively and improved after-sales infrastructure and changed its product mix with the launch of brands like ‘Dynex’ targeted the value segment, according to Motilal Oswal. It narrowed the pricing gap with Amara Raja, helping it gain incremental market share. Also, nearly 40 percent of the company’s lead requirement is met through its two captive smelters, reducing dependence on expensive imports. That aided its margins, the report said.
Emailed queries to Amara Raja remained unanswered while Exide declined to comment citing silent period ahead of earnings.
Exide maintained its profit while Amara Raja’s bottom line fell in the last two years.
Exide’s margins stayed stable despite fluctuating lead prices, but Amara Raja saw its margins erode significantly. And it doesn’t expect them to improve in the ongoing financial year.
Equirius Capital, however, upgraded Amara Raja’s stock citing benefits from goods and services tax and a pick-up in automobile sales. The stock offers 17.6 percent potential returns with a ‘Buy’ ratings of 63.6 percent compared with 5.5 percent upside for Exide with 70.6 percent ‘Buy’ recommendations.
The Road Ahead
The domestic lead acid battery industry is a duopoly with Exide and Amara Raja controlling nearly 90 percent of the organised market. After the goods and services tax rollout, unorganised players were hit by higher costs and inability to offer a credit period of 45-60 days— the number of days given to a customer to pay an invoice—in the pre-GST period. The gradual shift towards the organised market is likely to aid both Amara Raja and Exide, Equirus Capital said in a report.
E-rickshaw batteries is another opportunity. The segment is estimated to be worth Rs 3,100 crore as of March, and has been gaining traction in tier-2 cites, Motilal Oswal said. E rickshaw sales are expected to grow at an annualised rate of 15 to 20 percent till March 2020, it said.
And demand from automakers is expected to sustain in a market where car and two-wheeler sales more than doubled in the last decade. After a single-digit annualised growth in five years through March 2017, battery sales volumes to automakers rose 15 percent year-on-year in 12 months through March, according to a note by Centrum Capital. Higher incomes and rates that are still lower than their last peak are expected to drive demand, it said.