Atlas Battery Limited
Atlas Battery (PSX: ATBA) is a major player in the auto parts industry and is in the business of manufacturing batteries for cars, motorcycles primarily using a variety of construction equipment and industrial applications in the country. The company was established in 1966 and is part of the well-known Atlas Group, which was founded when Shirazi Investments (Pvt) Ltd was formed in 1962 with a capital of half a million rupees. The company was started with a technical collaboration of Japan battery storage Co, later renamed GS Yada Corporation. The company started manufacturing in 1969 one year after going public.
The company was manufacturing only car batteries until 1974 when the company first introduced motorcycle batteries. After undergoing expansion in 1984, the company introduced proprolyene batteries in 1986. In subsequent years, atlas entered into joint venture agreements Japan Storage Battery, which acquired an equity stake of 15 percent in total. The company started exporting in 1996 and 1998, first motorcycle batteries and then car batteries. Jumping to 2015, the company for the first time in the country introduced hybrid batteries. In the outgoing year, the company announced six months’ free warranty on conventional auto batteries and one year for hybrid batteries.
Group and company shareholdings; recent events
The Atlas group formed in the 60s now has 18 companies, spread across various industries such as power generation, engineering, financial services and trading. Some of the major automotive players like Honda Atlas Cars and Atlas Honda that manufacturers motorcycles as well as Atlas Insurance are part of the group.
Majority of the shareholding (more than 77%) of the Atlas Battery is with its associate companies. Shirazi Investments held more than 58 percent of the shareholding in June 2017 while 15 percent were held by GS Yuasa International Ltd Japan. The two have 5 percent and over voting interest in the company. Atlas Foundation and Atlas insurance held about 2 percent each while the general public held 15 percent of the company’ holdings.
The company was recently fined with a million rupees by the Competition Commission of Pakistan (CCP) along with four more battery manufacturers for concealing information about their products. The fine was based on the violating of section 10 of the Competition Act 2010 that says that the manufacturers were not disclosing necessary information about their dry and acid-lead batteries on their packaging, warranty cards and the body of the batteries.
Financial and operational performance
Atlas Battery has seen stellar growth over the past six with a revenue CAGR growth of 19 percent between FY12 and FY17. Meanwhile, profit after tax grew at a compounded rate of 25 percent during the period. The company’s demand comes not only from the automotive industry in which cars and motorcycle manufacturers may be the primary demand drivers but also the replacement market within the new and used vehicle categories as well as the medium and heavy sized battery demand coming from UPS and generator users. Load shedding across the country has continued unabated and despite claims, the country is far from being a zero load shedding zone. This will continue to be a strong and growing market for Atlas Battery.
In FY17, the company saw a 22 percent jump in revenues on account of higher sales of batteries brought forward by automotive demand and a recovery in the replacement market. Margins however dropped to 17 percent likely on account to higher costs of imported lead and a global recovery in raw material prices. The company believes its cost of sales have remained consistent over the years. Margin in the past have remained between 15 percent to 16 percent while growing to 20 percent in FY16 because of lower raw material prices during that year. Despite higher costs though, earnings per share grew with lower finance costs, controlled indirect expenses and a hefty contribution from other income.
In its latest financials however, margins have dropped dramatically from 17 percent in 9MFY17 to 11 percent in 9MFY17 despite a growth of 12 percent in revenues. The currency depreciation against dollar as well as yen has hit the company hard. Lead prices have also seen spikes contributing to these higher costs of production. Meanwhile, due to stiff competition in the industry with a handful of players operating in the sector the company was not able to increase price of its batteries in line with lead price increase. In 9MFY18, profit margins dropped to 3 percent against 9 percent this period last year. Not only did costs of production rise, finance costs grew and there was a marked drop in other income (72%) which contributed to these fundamentals.
Opportunities and outlook
Though FY18 may not be the best year for the company in terms of performance, and it does face a lot of competition in the battery industry, the demand is on the company’s side. Production has ramped up in most segments of the automotive industry specially cars and motorcycles. The company’s associate Honda Atlas Cars and Atlas Honda are leading players in their respective segments where Atlas Battery could derive a lot of its demand. Moreover, as many as eight new players are entering the automotive industry, while new players in the motorcycle industry have already entered. New assemblers are looking for credible and established parts manufacturers and Atlas Battery could be in the right place at the right time to capture this potential demand. Meanwhile, a strong replacement or secondary market will continue to be a source of revenue for the company.
Price competition amongst players may keep margins on average at the same level as previous years but international lead prices and rupee-dollar parity will play a strong role in determining where the company’s margins stand, notwithstanding the demand growth. Though there is no estimate of the company’s current production capacity, the company is embarked on an expansion plan to be ready to cater to the new demand when it comes. The company announced that it is purchasing a 30 acres land at Port Qasim for future requirements.
