Automobile stocks have been under-pressure since last year and so is auto ancillary sector. During this time, there are two auto-ancillary stocks that have been terribly beaten down by the Street. Amara Raja Batteries and Exide Industries were known to be the best stocks from the auto-ancillary pack but in last one year, these two have witnessed a drastic fall due to the price war, poor results and higher lead prices.
NSE
In last one year, Amara Raja slipped 20 percent and Exide plunged 27 percent. During this period, Nifty Auto also saw a decline of 33 percent, which is primarily due to the decline in sales, demand slowdown and the shift to BS-VI regulations. Both auto and auto-ancillary sectors go hand-in-hand, however, the reasons behind the slip in battery makers this time are different.
According to a report by Anand Rathi, both battery makers i.e. Amara and Exide have started a price war. Firstly, Amara reduced its prices by 6 percent in 2W (two-wheeler) replacement market across products. Secondly, it announced warranty forever after seeing Exide extending the warranty for three months.
The report further added, “Lowering prices is unnecessary at a time when volume growth is muted. Amara saw 12 percent decline in volumes in the auto OEM segment. Margins for battery makers will also improve on the back of lower lead prices.”
On the results front, both battery makers have reported poor earnings since last year. Revenues and net profit have continuously taken a hit in almost every quarter. Exide’s results improved in March 2019 but saw a substantial decline in the quarter before i.e. December 2018, while Amara performed vice-versa. Furthermore, the valuations of both these companies stand neck-to-neck. In fact, it’s quite evident that these two are struggling in the current market situation.
Furthermore, lead prices contribute majorly to the profits of Amara and Exide. In fact, lead comprises about 70 percent of these companies’ raw material costs. Higher lead prices in future will take a hit on the company’s share price even more. Also, conversion to lithium-ion batteries stands challenging in the upcoming era of electric vehicles. It will be quite interesting to see how Amara and Exide compete in the market with the same technology.
On July 19, 2019, the share price of Amara Raja Batteries fell 5.54 percent and Exide declined about 7.4 percent intraday on the NSE.
First Published:Jul 19, 2019 3:44 PM IST
