Atlas Battery (PSX: ATBA) part of the renowned Atlas group and supplying to its dominating associates in the automotive business, the likes of Honda Atlas Cars and Atlas Honda, is in trouble. For FY19, the company has been unable to cover its operating expenses. Whereas margins have thinned down dramatically to 2 percent from 11 percent in just one year, its earnings before interest and taxes have gone red. Overall profits have turned into losses. The offender? Low-demand and high-cost.

Demand has shrunk from most quarters. In terms of automobile applications, Atlas Honda's volumes have dropped by 3 percent in FY19, while Honda's car volumes dropped by 14 percent. The latter had also shut down in plants for 10 days due to paucity of demand. Overall, automakers saw a 12 percent reduction in volumes during FY19 which translates to reduced demand for auto parts such as batteries. The replacement market is also where Atlas Battery's demand has come under threat. The company faces competition from cheaper imports while the overall market size has also shrunk.

In its financial report for the third quarter, the company also claims that “some of the battery manufacturers have resorted to unfair trade practices and are resultantly offering extraordinarily high discounts on their products, which cannot be matched by law abiding companies like ours". Discounts are hardly unfair practices but high discounts do give competition to players, especially in an environment where demand is already hard to come by. Resultantly, the reduction in revenues of 30 percent was expected.

The low volume comes also with the higher cost scenario what with the devaluation of the rupee. Lead prices have remained pretty stable in the past year though they did drive upwards in March. Overall higher cost of imports due to depreciation coupled with fuel and energy pricing in the country has brought the cost of production up. Interest rates trends have also increased the cost of borrowing.

The company expenses as a share of revenue have increased—further from 6 percent to 7 percent in FY19 while finance costs have grown to 2 percent of revenues. They used to be less than 1 percent in FY18.

Given how closely pegged the company's performance is to the performance of the automotive industry and the demand for vehicles in the market, one should remain circumspect about the company's profitability hereon. The replacement market is also under pressure. Other revenue sources such as industrial and alternative power applications such as off-grid solar panels are not major segments either. The company should reach out to regional markets for exporting opportunity especially with a weak rupee. Exports could offset some of the loss demand in domestic markets. It should also work on optimizing its import inventory to shield itself from exchange risk.

Copyright Business Recorder, 2019