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Exide Ind.: Operating margins go for a toss
Jan 18, 2011

Exide Industries announced its 3QFY11 results. The company has reported a 15% YoY growth in its sales while net profits have decline by 5% YoY during the quarter. Here is our analysis of the results.

Performance summary
  • Net sales grow by 15% YoY during 3QFY11, 20% YoY during 9mFY11.
  • Operating margins contract by 8.8% YoY on the back of higher input costs (as a percentage of sales). Margins contract by 4.3% YoY during 9mFY11.
  • Net profits decline by 5% YoY during 3QFY11, rise by 25% YoY during 9mFY11.

(Rs m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Net Sales 9,134 10,502 15.0% 27,675 33,295 20.3%
Expenditure 6,942 8,900 28.2% 20,918 26,606 27.2%
Operating profit (EBITDA) 2,192 1,601 -26.9% 6,757 6,688 -1.0%
Operating profit margin (%) 24.0% 15.2%   24.4% 20.1%  
Other income 6 331 5612.1% 26 584 2136.8%
Depreciation 189 212 12.5% 598 608 1.6%
Interest 29 19 -35.2% 77 49 -36.2%
Exceptional income 0 0   0 469  
Profit before tax 1,980 1,702 -14.0% 6,108 7,084 16.0%
Tax 675 458 -32.2% 2,083 2,058 -1.2%
Profit after tax/(loss) 1,305 1,244 -4.6% 4,026 5,027 24.9%
Net profit margin (%) 14.3% 11.8%   14.5% 15.1%  
No. of shares (m)         850.0  
Diluted earnings per share (Rs)*         6.9  
P/E ratio (x)*         19.7  
* On a trailing 12-months basis; Adjusted for exceptional items

What has driven performance in 3QFY11?
  • Exide Industries (Exide) recorded a 15% YoY increase in revenues during the quarter ended December 2010. On a quarter on quarter, revenues declined by about 7%. It must be noted that the quarter ended December tends to contribute the least to the full year revenues as sales during the post festive season tend to slowdown. In addition, customers tend to defer their purchase during the month of December.

    Apart from these factors, Exide has been focusing on the OEM segment for a while now. This is given the strong volumes off take that the auto industry has seen over the past one and a half years. The intent for this is clear. As per the company, it would give greater important to sustaining long term relationships with customers over short term profit motives. This it says because the replacement market is a more profitable business for the battery manufacturer. But since the company is aiming to meet the requirements of the OEMS, Exide has been focusing less on the replacement market. Further, supply constraints also led to the company losing some market share in the replacement market. However, the management seems confident of recovering it back once the additional capacities come on stream during the first quarter of next fiscal.

    The company's performance was also hampered by its industrial segment, wherein, the demand was not as per the company's expectations. In addition, this segment faced issues in terms of higher input costs.

    Cost break-up...
    (Rs m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
    Raw materials/ purchases 5,128 6,831 33.2% 15,524 20,380 31.3%
    % of sales 56.1% 65.0%   56.1% 61.2%  
    Employee costs 541 636 17.7% 1,680 1,974 17.5%
    % of sales 5.9% 6.1%   6.1% 5.9%  
    Other expenditure 1,274 1,434 12.5% 3,714 4,252 14.5%
    % of sales 13.9% 13.7%   13.4% 12.8%  
    Total expenditure 6,942 8,900   20,918 26,606  

  • Exide’s operating expenditure increased by 28% YoY leading to its operating profits to decline by 27% YoY during the quarter. The key factor behind the sharp rise in expenses was higher raw material costs, which rose by 33% YoY. During the quarter ended December 2010, raw material costs stood at 65% of revenues as compared to 56.1% during the corresponding quarter last year.

  • Exide’s net profits declined by 5% YoY. The lesser decline in profits was due to various factors such as higher other income (dividends) and lower interest costs. If we exclude the other income for both the quarters, then the profit decline would have been sharper on the back of a 13% YoY increase in depreciation costs.

  • As for the company’s performance during the 9mFY11 period, Exide reported a 20% YoY increase in revenues, while profits were up by 25% YoY. On excluding the Rs 470 extraordinary income it earning during the quarter ended September 2010, profit growth would have been 13% YoY during this period.

What to expect?
At the current price of Rs 138, the stock is trading at a multiple of 16 times our FY13 estimated earnings per share (For RPro subscribers, our latest view can be tracked here). Exide’s management has mentioned that the company is going through a challenging phase. On one side the company is trying to meet the requirements of the OEMs, on the other, its less focus on the more profitable replacement market is taking a toll on its profits. However, with new capacities coming up in the future, it will help the company to cater to the replacement market as well.

While the absolute battery sales volumes will continue to rise on the back of the strong volume off take of the auto industry and the replacement markets, the tricky part is that of the input costs.

It must be noted that for the full year FY10, Exide reported operating margins of 23%. Never has the company’s operating margins crossed the 20% mark, at least in the past twelve years. The average operating margins during this period stood at 17%. Now, while the company is working on reducing its input costs (by using recycled lead), the performance during the latest quarter makes the short term outlook uncertain.

Despite Exide’s stock falling sharply in today’s trading session, we maintain a cautious view on the stock keeping in mind the uncertainty attached to it over the short term.

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