In the wake of weak auto sales battery manufacturers were already going through a rough patch, now the prices of lead has swollen by around 30% in the past 3 months poses colossal risk to their profits. Both Amara Raja Batteries Ltd and Exide Industries Ltd has been 7% drop in the share price since 1st of October 2019.
Since the past 12 months, these companies have already seen decline in sales of new batteries, getting stable demand only from the replacement battery market.
Between FY16 and FY18 manufacturers saw a decent and steady demand from the replacement market along with the new battery market owing to the healthy sales between the mentioned periods. Auto batteries is responsible for over 50% of the sales of all batteries for the above mentioned firms. Lead prices have been steadily increasing since mid of 2018 and battery manufacturers have been taking benefit of the same to increase both revenue and profits as lead prices are 50%-60% of the manufacturing cost of a lead-acid batter. This is how these two companies increased Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA).
This sudden increase in Lead prices is going to be problematic for Battery manufacturers
Companies and analysts alike are shocked with 30% surge in lead prices since end of May, and the surge cannot come at a worse time than this as the auto sector is seeing a decline in sales. Analysts say that the impact of this increase in price will be seen in Q3 FY20, companies generally keep 50-60 day inventory of batteries used across all segments (four wheeler, trucks, and two wheeler) but this inventory may not be able to save them for long if the prices do not come down.
Additionally, if the decline in the auto market continues like this it will impact the replacement battery market as well. Battery firms have taken hits this FY as neither telecom batteries nor home inverter batteries have seen high sales. Furthermore, companies like Exide and Amara Raja need to shift towards Lithium-Ion batteries in the coming years which is expected to keep their valuation suppressed for the time being.