Amara Raja could face growth, margin pressures

While price hikes will partly offset higher lead costs, growth worries may impact revenues

The Amara Raja stock hit a 52-week low on Thursday as higher lead prices, expensive valuations and higher exposure to the telecom segment weighed on the scrip. Lead prices on the London Metal Exchange, which had risen 28 per cent year-on-year to $2,149 per tonne in the December 2016 quarter, are up about 12 per cent since the start of 2017. Lead prices are currently trading at $2,227 per tonne. The rise in lead prices is attributed to mine shutdowns. Given that lead accounts for 60 per cent of the raw material costs, it will have a bearing on the operating profit margins.

Some of the higher raw material costs will be offset by the price hike of threeseven per cent taken by the company in December 2016. Given demand issues especially in the industrial segment front, the company will have to balance the need to protect margins while improving volumes and market share.

The company faced the double whammy of demonetisation and higher input costs in the December 2016 quarter, which led to revenue growth of 9.6 per cent, the slowest growth in 29 quarters. Operating profit margin of 15.35 per cent, too, was the lowest in about 12 quarters. Amara Raja had highlighted price challenges due to the sudden increase in lead prices. Revenue growth for Exide came in at 13 per cent while its operating profit margins were at 13.3 per cent.

Analysts expect the March quarter to be impacted by higher lead prices, though demand is expected to improve after demonetisation. While the higher costs of lead are passed on to the automakers, battery makers have pricing power in the replacement segment given the dual nature of the business.

One area that Amara Raja could be impacted more than Exide is the telecom segment. This segment accounts for 24 per cent of the company’s overall revenues as compared to Exide’s five per cent exposure. Slowdown in tower additions as well as tower sharing will impact replacement demand going ahead, believe analysts. Increased adoption of lithium-ion can be another headwind for battery makers like Amara Raja which are currently selling lead-acid batteries to this segment.

Given the headwinds, brokerages such as Goldman Sachs recently downgraded the stock. Though the stock has corrected 21 per cent since October 2016, it is still trading at 24 times its FY18 earnings estimates. This is at a 15 per cent premium to larger peer Exide Industries.