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Exide: In turbo charge mode! - Views on News from Equitymaster
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Exide: In turbo charge mode!
Jan 18, 2007

Performance Summary
Exide, India’s largest supplier of batteries to automotive and industrial customers has put up yet another impressive performance for the quarter ended December 30, 2006. Riding on the back of buoyant industrial environment and robust auto sales, the topline of the company has grown by 34% with bottomline growing at an even more impressive 62% on a YoY basis. However, there has been some pressure on the operating margin front as they have taken a 40 basis points hit. As far as the 9mFY07 performance is concerned, the company has managed to grow its bottomline by 43% on the back of a 34% jump in net sales over the corresponding previous 9-month period.

Financial performance: Standalone snapshot
(Rs m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Net sales 3,416 4,577 34.0% 10,054 13,500 34.3%
Expenditure 2,895 3,895 34.6% 8,396 11,181 33.2%
Operating profit (EBDITA) 522 682 30.7% 1,658 2,319 39.8%
EBDITA margin (%) 15.3% 14.9%   16.5% 17.2%  
Other income 11 19 66.4% 53 52 -2.5%
Interest (net) 88 34 -61.6% 181 197 9.0%
Depreciation 137 134 -2.1% 412 496 20.5%
Profit before tax 308 534 73.0% 1,118 1,677 49.9%
Tax 93 185 99.1% 370 605 63.5%
Profit after tax/(loss) 215 349 61.8% 748 1,072 43.2%
Net profit margin (%) 6.3% 7.6%   7.4% 7.9%  
No. of shares (m) 75.0 749.7   75.0 749.7  
Diluted earnings per share (Rs)* 1.1 1.9   1.3 1.9  
Price to earnings ratio (x)**         22.6  
(* annualised, ** on trailing twelve months earnings)

What is the company’s business?
EIL (Exide Industries Ltd) is India's largest storage battery company (33% market share in overall domestic market). It sells both automotive and industrial battery 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 performance in 3QFY07?
Robust auto demand powers the topline: As per our discussion with the management, Exide currently enjoys a 78% market share in four-wheeler OEMs and 58% market share in two-wheeler OEMs. From the SIAM data available with us, these categories have grown by 9% and 20% YoY respectively during 3QFY07, thus benefiting Exide. Further, with UPS batteries showing tremendous growth (grew by 32% in FY06), the industrial segment of the company has also been on an upswing for quite some time now. The replacement market demand also seems to be playing an active role behind the stellar topline growth of the company. Since batteries are slow moving consumer goods, it typically takes 2-3 years for replacement demand to kick in. Since auto sales were strong in FY04 and FY05, significant contribution to the Exide topline from the replacement demand arising out of these sales cannot be denied. Thus, with buoyancy witnessed across all its target markets, Exide’s topline has jumped a strong 34% during the quarter.

Automobile production stats…
Domestic 3QFY06 3QFY07 % change 9mFY06 9mFY07 % change
Motorcycles 2,031,603 2,221,086 9.3% 5,599,764 6,375,774 13.9%
Passenger vehicles 309,340 357,371 15.5% 932,106 1,095,508 17.5%
Commercial vehicles 97,939 132,402 35.2% 275,730 369,705 34.1%
Three - wheelers 109,529 145,752 33.1% 310,899 410,076 31.9%
Total 2,548,411 2,856,611 12.1% 7,118,499 8,251,063 15.9%
Source: SIAM

Lead prices continue to play spoilsport: High lead prices have been playing havoc with the financials of battery manufacturers and this quarter was no different. As per the management of the company, the price rise in lead during 3QFY07 was particularly severe and had it not been for the improved productivity and tight control on costs, the impact would have been even worse than the 40 basis point drop in operating margins during 3QFY07 vis-ŕ-vis 3QFY06. The fact that the company was able to pass on some of the price hike to its customers also helped ease pressure on margins.

Cost break up
(Rs m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Raw materials 1,903 2,695 41.6% 5,593 7,683 37.4%
% sales 55.7% 58.9%   55.6% 56.9%  
Staff cost 245 321 30.8% 742 909 22.5%
% sales 7.2% 7.0%   7.4% 6.7%  
Other expenditure 746 879 17.8% 2,061 2,590 25.6%
% sales 21.8% 19.2%   20.5% 19.2%  

While there has been pressure at the operating level, lower depreciation outgo and a huge fall in net interest to the tune of 62% has helped the company expand its net profit margins by a significant 130 basis points, leading to a 62% jump in bottomline.

What to expect?
At the current price of Rs 44, the stock is trading at a price to earnings multiple of 15 times its trailing twelve month earnings. While the company is on target to meeting our FY07 estimates, we do not envisage such robust growth to continue in the medium term and hence, it looks like an expensive medium term play.

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