Replacement market both tyres and batteries thrive on
Normally when the parent auto industry takes a beating, the fortunes of the auto-ancillary firms begin to look shaky. But, a couple of sub-segments such as tyres and batteries may be less affected in spite of the anticipated drop in auto sales, at least in the near term. This is because robust auto sales in the last 24 months have paved the way for a huge replacement market, which both tyres and batteries thrive on.
Surveys indicate that batteries and tyres are replaced about three years after the original sale. And that’s where the money in the business lies, too. Tyre, battery and forging companies enjoy better profit margins from replacement market sales than from direct original equipment sales.
In the last two quarters, leading battery maker Exide Industries Ltd said that a part of its margin erosion happened on account of diversion of sales from the replacement market to the original equipment market to retain its foothold with the parent auto firms. Its auto sales ratio, which is 60:40 in favour of replacement markets, was almost reversed. Margins also dropped nearly 4 percentage points from the preceding quarter, despite revenue growth.
Battery makers Amara Raja Batteries Ltd and Exide, and tyre firms Apollo Tyres Ltd and Ceat Ltd among others have added capacity during the last 12-18 months. Exide intends to focus on replacement market volumes in the coming quarters. Likewise, Amara Raja has increased its market share in this segment, while keeping its original equipment share stable at 26%.
Meanwhile, one could see a marginal improvement in telecom battery sales, again as some of the existing infrastructure will need upgrading.
Replacement demand could accelerate the annual sales volume growth rate from about 10% to 13-14% for batteries. Besides, it’s easier to pass on cost-inflation to the consumer in the replacement market. Tyre makers hiked prices by about 17% over fiscal 2011 as rubber prices soared by 70%. Ceat’s managing director, Anant Goenka, in a recent media interview said that the firm has not felt any impact of the auto slowdown in sales, as only 14% of its sales is to the original equipment segment.
Further, any slowdown in auto sales over the medium term may also soften core commodity prices, which in turn will benefit ancillary firms. One saw rubber prices cooling off last fortnight. Of course, the big threat that the replacement market players face is competition from the unorganized segment and Chinese imports. Yet, the huge 30%-plus growth rate in the auto sector over the last 24 months should keep the meter ticking for ancillary firms with a strong retail presence.
CloudTags: Replacement Battery, demand, help, tyre manufacturers, Mitac bp-8050 battery, Dell inspiron 1300 batteries
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