Battery makers face market-share pressure

Battery makers are coming under pressure as competition is mounting in the replacement market and volumes are shrinking due to cyclicality of the business.

The companies, which are already facing high input costs, have even not been able to pass the recent excise duty hike to consumers. Instead they are cutting prices to keep volumes up.
Exide, a leading player in the four-wheeler battery market, has cut prices 5-8%. While analysts feel that the price cut may help it garner some market share, they said the timing of the reduction and its impact on the company’s financial performance were a matter of concern.

“The disturbing fact is that this price cut has come on top of an excise duty hike which is yet to be passed through. Given that there is no lever from lead prices and that the company has not hiked prices since the rupee started depreciating in the second quarter of the last fiscal, we believe margins greater than 18% are unlikely in FY13. The price cut is an attempt to gain replacement market share. However, we believe pricing action alone would not help the company gain market share in sustainable manner,” Vijay Sarathy T S and Narayanan Ravindranathan of Spark capital said in their report on April 18.

Some analysts say that though price cuts would help in gaining market share, they may shrink margins further.

“As per our calculations, blended realisations are likely to be impacted by around 90 basis points (bps). Net impact on margins should be about 50 bps after considering the benefit of lower lead prices. A 100 bps change in margins can impact earnings estimates by about 6.5%,” Kapil Singh and Nishit Jalan of Nomura Equity Research said in their report on Tuesday.

However, Exide officials said that prices have been cut across some segments.

“We are now chasing volume in the four-wheeler replacement market aggressively, and for this we have rationalised prices in some segments, though details can’t be divulged,” an official who did not wish to be named said.

Amara Raja, another battery major, however, said it is not feeling any pressure and hence not contemplating any price cuts right now. 

“It is a fact that input costs have gone up starting from lead to poly propylene. However, technically it does not make sense to cut prices at this point though the price-volume elasticity has to be kept in mind. We are evaluating the situation closely and would take some more time before taking a decision on the issue,” K Suresh, Amara Raja’s chief financial officer, told DNA Money. 

Analysts, too, feel there would be no immediate price cut by Amara Raja. “Given that Amara Raja has been gaining market share and that its batteries retail at a discount to Exide’s, we expect the company not to tinker its pricing substantially,” the Spark Capital report said.

Battery dealers are also feeling the heat with companies like Exide trading off the price cut with the dealer margin.

According to dealers, Exide has cut incentives given to dealers for achieving a certain target. This was to offset the price reduction impact.

“Summer is generally a slow season for battery sales. But we have not seen a continuous slowdown in sales for the past three months. Also, companies are cutting prices, which is further impacting our margins,” said a Mumbai-based battery dealer, who did not wish to be named. 

According to another Mumbai-based Exide dealer, the dealer incentives have been reduced to 5-8%.