Exide Industries has decided to create fresh capacity beginning next year as the first signs of revival in the automobile sector have begun to show up after the car makers reported improvement in sales over the past couple of months following subdued demand in the past two years. The change in stance comes after the company in the past restrained from capacity addition, thereby ceding its dominant position to competitors such as Amar Raja.
"Last time when our capacity came the whole slowdown started. The current strategy is that whenever we reach 90% capacity utilisation we should start thinking of capacity addition. Fresh capacity takes about one to one-and-a-half year's time. By that time the 10% headroom would get exhausted. So we are planning to create capacity in FY16," Exide managing director P K Kataky said.
Last time Exide saw capacity utilisation crossing 90% was in 2008 but it made a cardinal mistake in refusing to invest money in capacity enhancement as a result of which it suffered capacity constraints in 2009-10 and 2010-11 in catering to the replacement market.
While honouring its commitment to the OEM customers, Exide let go of surging demand in the replacement market with key rival Amara Raja stepping in and seizing the market share.
Exide has seen steep revival in demand for batteries in the OEM segment beginning June with capacity utilisation touching 90% when automobile production grew by 12%.
But higher volumes in OEM supplies doesn't add to profitability in a big way as margins are wafer thin, much lower than what is earned from the replacement market which explains Amara Raja's better profitability.
"If you are too conservative about raising capacity, you would miss out on higher demand, while if you are too aggressive you would land up with excess capacity and higher overhead costs," Kataky said on the sidelines of annual general meeting of the company while trying to explain the catch-22 situation that Exide faces.
This year Exide would be creating capacities mostly for industrial segment at a cost of Rs 350 crore.
"In automotive we wouldn't raise capacity now but would go for technology upgradations which would entail some hike in capacities in the process."
Revival in sales of automobiles, a good season for inverters as well as entry into telecom battery segment are the broad reasons behind's Exide's turnaround in fortunes in the first quarter.
"The main reason behind first quarter's positive performance is that we had a good inverter segment and also due to our reentry into the telecom segment, from which we had almost exited. There we have improved our market share from 8% to more than 20% sequentially. Also, we have done pretty well in industrial battery segment. There is also continuous cost cutting and product value engineering," Kataky said.
"The inverter demand is so much that dealers are even cutting down on stocking automobile batteries, and keeping a level just enough not to miss any sales," he said.
Telecom battery segment is valued at Rs 600 crore. There is lot of excess capacity in this sector so Exide wouldn't be adding capacity but would raise market share helping raise sales by another 20-30% this year.
Interver sales, which is highly seasonal, accounts for 20% of Exide sales generally.