Atlas Battery Limited (PSX: ATBA) was established in 1966 as a public limited company. It manufactures and sells automotive and motorcycle batteries and allied products.
Three years after the company was formed, in 1969 it signed a technical collaboration agreement with Japan Storage Battery Co. Limited, Japan (now, GS Yuasa Corporation). It sells batteries under the name “AGS”.
The company is largely held by its associate companies, undertaking and related parties with more than 77 percent of the shares held under this category. Within this, a major shareholder is Shirazi Investments (Private) Limited that holds nearly 59 percent of the total shares. Shirazi Investments serves as the holding company of the Atlas Group. Some 18 percent of the shares are held by the local general while the directors, CEO, their spouses and minor children hold none or very few shares. The remaining 5 percent of the shares are held by the rest of the shareholders.
Historical operational performance
Atlas Battery’s turnover and profit margins have been fluctuating over the years; the latter, however, have followed a falling trend, with an improvement seen only recently in FY20.
After continuously increasing in double digits for five years, revenue decreased in FY16 by 12 percent. This was due to slow demand in the replacement market. In addition, the short winter season also kept demand low for the company. The situation was also worsened by a surplus supply of batteries by various manufacturers, particularly in the second and third quarters of FY16. Despite this, the company was able to increase profitability from a net margin of 6.35 percent in FY15 to 9 percent in FY16; this was a result of a decline in cost of raw materials that brought cost of production down to 80 percent of revenue (FY15: 85 percent).
Atlas Battery was back on its growth trajectory as its topline grew by 22.5 percent in FY17. The demand was mostly present in the replacement category within both locally manufactured as well as imported used vehicle category, in addition to heavy and medium sized batteries used in Uninterrupted Power Supply (UPS) units and generators due to shortage of electricity. However, profitability reduced as costs related with raw materials rose; but net margin remained rather flat at 8.6 percent as other income contributed significantly towards the bottomline. This was generated through a combination of fair value gain on investments and “investments in high performing equity mutual funds”.
Although revenue grew in FY18, at 6.8 percent it was relatively lower than that seen in previous years- mostly recorded at double digits. The company’s demand comes from the automotive sector or for usage in UPS units and generators in case of load shedding. With setting up of new power plants, the power generation capacity increased leading to lower load shedding and hence lesser need for alternative sources of electricity. However, some demand was generated through reduction in solar panel costs increasing usage in off-grid areas in particular. But this rise in revenue came at a more than corresponding increase in cost that grew to consume 89 percent of the revenue. Thus, gross margin reduced to nearly 11 percent whereas in the absence of a large other income as that seen in last year, net margin also contracted considerably to lock in at 3 percent.
Revenue contracted considerably in FY19 at 30 percent. Nearly all the segments of the automotive industry registered negative growth creating spillover effect for the battery industry. Production in the automotive industry was affected by a high cost of production, currency devaluation and high interest rates. This also affected demand for vehicles, and thus batteries. With a contraction in revenue, cost of production made up nearly 98 percent of revenue, causing gross margin to drop to 2 percent. Although other income contributed notably it was insufficient to keep the company from incurring a loss. Thus, net margin reduced to a negative 4.6 percent.
Fall in revenue was marginal at close to 2 percent in FY20. Most of this decline was seen in the last quarter, whereas cumulatively sales average decline rate stood at 4.7 percent over the last six years. This was mostly due to a decrease in demand. Correspondingly, costs also declined, although they still made up more than 90 percent of revenue, which is considered high when historically cost of production has hovered around 85 percent of revenue. The effect of this was also reflected in the bottomline, which although was negative at Rs 327 million, but the loss was lower than that seen in the previous year at Rs 593 million.
Recent result and future outlook
Revenue recovered after a period of low demand which was partly due to the outbreak of the pandemic during the last quarter of FY20. The effect of it continued, however, economic activity gradually resumed as is reflected by a year on year increase in revenue during 1QFY21 by nearly 26 percent. This was accompanied by a less than corresponding cost of production that caused gross margin to double. The impact trickled down the bottomline that was positive at Rs 222 million as compared to a loss of Rs 56 million in 1QFY20.
Although the company sees demand generation from the automotive industry, it faces challenge from the battery industry in the form of surplus capacity and stagnant market size.