The continuing weakness in auto sales would prove to be a double whammy for battery makers in a year or so, Exide has warned analysts.
The drop in sales beginning middle of 2011 would start getting translated into a dip in replacement market sales as within a year, those batteries would run out of life and have to be replaced. Battery makers still continue to see robust replacement market sales due to high car sales seen in 2010 and in the first half of 2011.
But things are changing fast. By beginning of the fourth quarter, auto battery makers like Exide and Amara Raja would have to contend with the dreaded prospect of continuing lower supplies to car makers, called original equipment manufacturer (OEM) supplies, and also a drop in sales of batteries in the replacement market as well.
“If the OEM market remains like this for the next one year, the consequent replacement market would also be hit,” MD and CEO of Exide PK Kataky told analysts during a conference call.
What’s worse, a drop in replacement sales affect profitability much more than lower OEM sales.
Exide earns gross margins in excess of 30% from the replacement battery market. Being the market leader, it has always been a price-setter and commanded a strong premium over its peers.
In contrast, gross margin in the OEM supplies is estimated to be at a low 1.5% till recently, which has been steadily declining from close to 6% since the beginning of the slowdown.
In an undesirable fallout of the crisis in the auto sector, Exide has not disclosed many of the segment-wise performance parameters like margins and even volumes for the second quarter, a development that spooked most analysts attending the conference call.
An analyst asked: “We are curious why Exide has turned opaque at a time when rest of the corporate world is increasingly going transparent with disclosures?”
Exide MD, probably dictated by an urgent need to protect whatever competitive information that he has in a shrinking market, only said the decision not to disclose segmental data has been taken by the board.
In a bid to raise OEM margins, Exide has been negotiating with auto makers for accepting a hike in battery prices. While many have accepted, some have resisted.
“Their situations are really bad. So, getting an upward revision at this moment is getting very difficult,” Kataky said.
Apart from the sluggishness in the auto sector, Exide also suffered because of a steep fall in inverter sales due to lesser power outages and weather conditions not very favourable for inverter usage.