Shares of Amara Raja Batteries Ltd hit a record Rs.407.30 in intra-day on Wednesday. At this price, valuation of this second largest battery maker in the organized segment has shot past that of market leader Exide Industries Ltd.
The key reason is Amara Raja’s sustained growth in automotive battery market share, the core business accounting for over half the revenue of both companies. Over the last year, its gain has been Exide’s loss. Dealer reports say the former’s market share in the auto replacement market has inched up steadily to around 38% from about 25%, whereas the latter has lost equal ground from its earlier strong 55% share.
Will the outperformance continue? Can Amara Raja sustain its growth rate? Its strength in telecom batteries augurs well in the coming quarters as replacement activity has been noticed. Meanwhile, in the automotive original equipment segment, the firm cashed in on Exide’s capacity constraint at a crucial time two years ago, when the auto sector posted scorching growth rates. This will reinforce its sales in the replacement market in the coming years. Also, Amara Raja’s timely entry into the two-wheeler market will aid future revenue as the segment is expected to clock a 25% replacement market growth in the coming 12-18 months, even though the passenger and commercial vehicle segments may post tepid growth.
For now, there is no telling why the market leader whose brand was generic in auto batteries is unable to lift itself from the trough. Indeed, some point out that Amara Raja’s auto batteries in the replacement market are priced lower than that of Exide. But from an investor standpoint, profitability powers the stock price. For the December quarter, Amara Raja’s operating margin rose by 130 basis points to 17.4% while that of Exide’s dipped by 30 basis points to 10.9% from the year-ago period. A basis point is 0.01%. Growth in sales volumes will boost operating leverage for Amara Raja, which could sustain profitability. What’s favourable for both is that lead prices are stable, so far.
The Street forecast is that Amara Raja will clock 22-25% growth in fiscal year 2014 net profit, while that of Exide could decline by 10-11% from a year back. That said, Exide’s market price of Rs.110 discounts fiscal year 2014 earnings by around 14 times, while Amara Raja’s price of Rs.394 factors in most of the positives at the price-to-earnings multiple of 16.
“The prevailing market prices of both shares discount the recent developments and near-term outlook fairly,” said Surjit Arora, analyst at Prabhudas Lilladher Pvt. Ltd.
The only factor that might pull down Amara Raja’s stock price is the slowdown in net profit growth rate due to capital expenditure, which will lead to higher depreciation and lower net profit. Or, Exide’s improvement in market share in the coming quarters may see its shares moving up.