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Exide: The interest effect! - Views on News from Equitymaster
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Exide: The interest effect!
Jan 12, 2006

Performance Summary
Exide Industries announced its 3QFY06 results yesterday. While the topline maintained its double-digit growth, the bottomline grew by mere 3% YoY, primarily due to a significant rise in the interest expense along with higher effective tax rates. However, the company has managed well on the operating margins front, which increased by 140 basis points.

Rs m) 3QFY05 3QFY06 Change 9MFY05 9MFY06 Change
Net sales 2,945 3,416 16.0% 8,727 10,054 15.2%
Expenditure 2,564 2,895 12.9% 7,341 8,396 14.4%
Operating profit (EBDITA) 380 522 37.2% 1,386 1,658 19.6%
Operating profit margin (%) 12.9% 15.3% 15.9% 16.5%
Other income 6 11 91.5% 13 53 312.5%
Interest (45) 88 - 70 181 159.5%
Depreciation 140 137 -2.3% 402 412 2.5%
Profit before tax 292 308 5.7% 928 1,118 20.6%
Extraordinary items - - - (17) -
Tax 83 92.9 12.6% 320 370 15.6%
Profit after tax/(loss) 209 215 2.9% 591 748 26.7%
Net profit margin (%) 7.1% 6.3% 6.8% 7.4%
No. of shares (m) 71.2 75.0 71.2 75.0
Diluted earnings per share (Rs)* 11.8 11.5 11.1 13.3
P/E ratio (x)** 20.7
(*annualised, **trailing twelve months)

Company background
Exide is India's largest storage battery company (33% market share in overall domestic market). It sells both automotive and industrial batteries and the sales mix is estimated at 60:40. Over the years, it has consolidated its position in the automotive OEM segment. Exide's growth prospects are largely linked to the auto sector, considering its large presence in this segment. It has a technology tie up with Shin Kobe Electric Machinery Co and VRLA batteries and The Furukawa Battery Co. The company also caters to the needs of industrial customers (like telecom) and has a 50% market share.

What has driven the performance in 3QFY06?
Volumes aiding topline growth: Exide is a leading supplier to automobile majors like, Maruti, Tata Motors, Bajaj Auto and Hero Honda, among others. The leading automobile players have reported a decent set of volume numbers, which has worked in favour of the company as evident by a 16% YoY growth in the sales. Going forward, we expect company to grow in line with the growth in the automobile industry (8% to 10% CAGR). Having said that, company is also putting efforts to strengthen its position in the replacement market, which could further improve its topline performance. It should be noted that margins in the replacement market are significantly higher when compared to the OEM (original equipment manufacturers) sales.

Raw material costs a surprise: As can be seen from the table below, Exide has managed to control the raw material costs, which has registered a decline of 310 basis points. This is in spite of an increase in the average lead prices (see adjacent graph) during the current quarter as compared to 2QFY06 and 3QFY05. This partly appears due to advance purchases made by the company (as reflected by increase in the closing stock by Rs 143 m). The increase in other expenses can be attributed to the brand building exercise that Exide undertook during this quarter. Overall, company has been able to improve its operating margins as evident from a 37% YoY increase as compared to a 16% YoY increase in the topline.

Cost breakup
(Rs m) 3QFY05 3QFY06 Change 9MFY05 9MFY06 Change
Raw material cost 1,733 1,903 9.8% 4,895 5,593 14.3%
% sales 58.8% 55.7% 56.1% 55.6%
Staff 227 245 8.2% 691 742 7.4%
% sales 7.7% 7.2% 7.9% 7.4%
Others 605 746 23.4% 1,755 2,061 17.5%
% sales 20.5% 21.8% 20.1% 20.5%

Interest expense breakup
(Rs m) 3QFY05 3QFY06
Reported expense (45) 88
Foreign exchange Gain/ (Loss) 79 (37)
Net interest expense 34 51
Interest the currency impact: In spite of an improved performance at the operating level, the company managed to register a mere 3% YoY growth in the bottomline. This is primarily due to foreign exchange loss that the company incurred during the current period, as compared to gain in 3QFY05. As a result, there has been a substantial increase in the interest expense of the company. It should be noted that the final impact of the foreign exchange gain/loss is ascertained at the end of the year. Similarly, there was an increase in the effective tax rate of the company by 200 basis points. As a result of above, net margins for the quarter declined by 80 basis points. However, if one considers the performance of the nine months, margins have improved by 60 basis points.

What to expect?
At the current price of Rs 259, the stock is trading a price to earnings multiple of 20.7 times trailing twelve months earnings. Despite the strong growth prospects and the upside potential on the operating margins front, we believe that the current valuations adequately reflect the medium-term growth prospects. Also, given the dependence on auto companies for growth and increased competition from imports, the valuations of the company should be at discount to auto majors. We are in process of updating our research report, which will be made available at the earliest.

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Feb 23, 2018 (Close)


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