In a duopolistic situation, like in the branded battery market, one company’s gain is usually at the other’s expense. Exide Industries Ltd, which ruled the roost for decades especially in the automotive battery segment, cornering more than than half the market, lost ground on several counts in fiscal 2012 (FY12), says a Mint report.
The 52 week stock price data mirrors this as well. While Exide’s shares underperformed the Nifty mid-cap index, Amara Raja Batteries Ltd’s shares outperformed both the Nifty mid-cap and its competitors. Valuations corrected. Exide, which on an average trades at around 17-18 times one year forward earnings, is now trading at around 14 times. Meanwhile, Amara Raja valuations revved up to about 10 times forward earnings compared with the average of six seven times.
The turning point has been Exide’s market share loss. A report by Standard Chartered Securities (India) Ltd says, “In FY12, there was a dramatic shift—Exide lost almost 1,000 bps (basis points) of market share in the auto replacement segment on account of capacity constraints, hence losing pricing power and its valuation premium.” At this time, the competitor gained a share of around 250-300 bps. One basis point is one-hundredth of a percentage point.
Exide’s failing was its capacity constraint. When the auto industry grew at a scorching pace of 25-30 per cent across categories, Exide was unable to cope with a surge in after-sales market and original equipment (OE) demand. As it let go of the after-sales market share in favour of OE, margins suffered—the former segment enjoys a higher profit margin on account of greater pricing flexibility. As a result, Exide’s operating margin in FY12 plunged to 13.5%—almost 600 bps lower than the previous year. Amara Raja’s margin, on the contrary, expanded by around 120 bps to 15.7 per cent during the period.
Whether Exide will regain its power is hard to tell in the near term. Both firms may get a respite from falling lead prices—the international price is down 35 per cent to US$ 1,770 per tonne from a year ago. But the rupee decline would negate this by a large magnitude for the next two quarters.