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Exide: Need a recharge

Feb 14, 2005

Performance summary
Going by the volume growth witnessed in automobiles in the first nine months of the fiscal year, it is going to be another record year for the auto sector in terms of absolute volumes sold. If auto majors are benefiting from the same, auto ancillary majors are more likely to follow suit. The performance of Exide Industries in 3QFY05 has to be viewed in this context. While net sales grew by 28% in 3QFY05, owing to higher raw material costs, margins were under significant pressure.

(Rs m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Net sales 2,301 2,945 28.0% 7,026 8,727 24.2%
Expenditure 1,858 2,564 38.0% 5,711 7,347 28.6%
Operating profit (EBDITA) 443 380 -14.1% 1,315 1,381 5.0%
EBDITA margin (%) 19.2% 12.9%   18.7% 15.8%  
Other income 4 6 68.6% 13 18 45.2%
Interest 49 (45) - 120 70 -41.7%
Depreciation 131 140 6.8% 403 402 -0.2%
Profit before tax 266 292 9.7% 806 928 15.1%
Extraordinary income/(expense) - - - - (17) -
Tax 96 83 -14.1% 290 320 10.3%
Profit after tax/(loss) 170 209 23.2% 516 591 14.5%
Net profit margin (%) 7.4% 7.1%   7.3% 6.8%  
No. of shares (m) 71.2 71.2   71.2 71.2  
Diluted earnings per share (Rs)* 9.5 11.8   9.7 11.1  
Price to earnings ratio (x)         14.1  
(* annualised)            

What is the company's business?
Exide Industries Ltd (EIL) is India's largest storage battery company (99% of revenues derived from batteries). It sells both automotive and industrial battery and the sales mix is estimated at 75:25. Over the years, the company has consolidated its position in the automotive OEM segment (90% share). Apart from this, the company has an estimated 63% market share in the replacement market (retail). 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., VRLA batteries and The Furukawa Battery Co.

What has driven performance in 3QFY05?
Volume growth tracks auto sector:  As is evident from the graph that highlights the growth in volumes sold across key segment of the auto sector in 3QFY05. Since commercial vehicles and passenger cars are segments that are of major significance to players like Exide, the 28% rise in net sales in 3QFY05 more or less mirrors the volume growth of cars and CVs during the quarter. But taking into account an estimated 16% growth in two-wheelers during the quarter, the volumes of batteries sold is likely to be higher. This seems to have been partly affected owing to decline in realisations. The 24% growth in net sales in 9mFY05 is higher than our estimates (we had factored in a 20% growth in net sales for Exide for the whole of FY05) and therefore, there is a need to upgrade our topline growth estimates for the current fiscal. We expect some preponement of vehicle purchases in 4QFY05 (based on our interaction with the industry), as prices are expected to increase in light of the new emission norms coming into effect in April 2005.

Higher lead and packaging materials effect:  One of the major reasons for the decline in margins is the rise in raw material prices (51% of sales in 3QFY04 to 59% of sales in 3QFY05). Operating margins in 9mFY05 at 16% levels is in line with our full year estimate and we will have a conservative view on the margins front in the next two years, as pressure from OEMs is likely to increase. Like other auto and auto ancillary majors, benefits from increased capacity utilisation and VRS is reflected in lower staff and other expenses in proportion to the rise in sales.

Cost break-upů
(Rs m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Raw materials 1,161 1,733 49.3% 3,474 5,059 45.7%
% sales 50.5% 58.8%   49.4% 58.0%  
Staff cost 240 227 -5.4% 692 691 -0.2%
% sales 10.4% 7.7%   9.9% 7.9%  
Other expenses 516 605 17.2% 1,590 1,741 9.5%
% sales 22.4% 20.5%   22.6% 20.0%  

Other income and lower interest cushion:  Despite a 14% decline in operating profit in 3QFY05, net profit rose by more than 23% owing to higher other income and a sharp fall in interest expenses. Exide raised Rs 874 m last year through external commercial borrowings, which it is utilising to retire some of its high cost debts. Increased cash flow is also showing at the other income level. To summarise 3QFY05 and 9mFY05 performance of Exide, while our margin estimate holds true, we have to factor in a faster rise in auto sales, higher other income and faster decrease in interest costs in our estimates.

With regards to the performance of the company over the last few quarters, there is a visible pressure in operating margins (graph) in light of higher lead and packaging materials. This despite the benefit of lowering of import duty last year shows the magnitude of increase in input costs. At the same time, volume growth continues to remain robust.

What to expect?
At Rs 156, the stock trades at a price to earnings multiple of 14.1 times annualised 9mFY05 earnings. While there is a need to upgrade our topline estimate for FY05, we would maintain our cautious view on operating margins and volume growth post FY05. As the auto sector gets more competitive, ancillary supplier will face pricing pressure and the current margins of Exide are significantly higher than that of Johnson Controls (one of the major automotive battery manufacturers in the world). While any decline in raw material costs will provide some cushion, given the poor visibility on this front, it is difficult to factor in this assumption in our estimates. Keeping in mind the lack of bargaining power and the valuations, we would remain cautious on the stock from a long-term standpoint.

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