Exide's Price Hike To Batter It Further

Having risen by 36.98% in 2012, Exide Industries looks like an investment that has worked well for shareholders. However, recent pressures have led the stock prices of Exide to depreciate by 10% so far in 2013. The company has been facing headwinds on multiple fronts, which have added to tremendous downward pressure on its margins.

For starters, the automobile industry has been slogging its way due to reduced demand, which has been caused by high interest rates, soaring fuel prices and low industrial output. This has impacted vehicle sales across the board, thus affecting Exide’s sales to Original Equipment Manufacturers (OEM). In Q3FY13, the replacement market for automotive batteries saw a volume growth of 25% YoY. However, due to de-growth in the OEM segment, the overall growth was only 13%. This was the volumes bit, where the pressure does not end.

The situation has been so desperate that Exide has been cutting through its margins to boost sales to OEMs. This has happened to such an extent, that it is now operating on a wafer thin margin. The gross margins for sales to four-wheeler OEMs have dipped sharply from 11.9% in Q3FY12 to 1.3% in Q3FY13. Apart from this, lead prices have been weighing down the margins since the second half of 2012. The graph alongside illustrates just well how much appreciation the prices of lead have seen in a short time.

Since two-thirds of battery makers’ sales come from the replacement market, a substantial amount of stability is provided for during such turbulent times. That becomes the only front on which Exide can do something to save itself. Recent reports have indicated that the company planning to raise the prices for replacement batteries by 5-6%.

But there’s a problem here too! Amara Raja Batteries, a tough competitor which has shaken the market and lodged itself in a strong position, has been gradually increasing its market share through investments in mass communication, competitive pricing and widening geographical presence. Does increasing prices in a tightly competitive scenario seem right?

We had turned pessimistic about the near-term outlook of Exide from the way it was operating. We expect the negative trend to continue for another quarter or two till the situation in the automobile industry starts seeing some signs of improvement. Till then, expect Exide to continue cannibalising itself.