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Exide: Power Pack!
Apr 22, 2006

Performance Summary
Exide Industries announced its 4QFY06 results yesterday. While the company maintained its strong topline growth, margins improved, despite rising lead prices (key raw material). What is more important is that the operating performance trickled down to the bottomline, which grew at a much faster pace of 42% YoY in 4QFY06. This was primarily on account of lower interest outgo and better asset utilisation.

Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Net sales 3114 3,877 24.5% 11,841 13,931 17.7%
Expenditure 2,710 3,311 22.2% 10,057 11,707 16.4%
Operating profit (EBDITA) 404 566 40.2% 1,784 2,225 24.7%
Operating profit margin (%) 13.0% 14.6%   15.1% 16.0%  
Other income 12 12 0.0% 30 65 113.5%
Interest 45 43 -3.6% 115 224 95.6%
Depreciation 137 136 -0.4% 539 548 1.7%
Profit before tax 234 399 70.3% 1,162 1,517 30.6%
Extraordinary items - - - (17) -  
Tax 52 140 168.2% 373 510 36.9%
Profit after tax/(loss) 182 259 42.2% 772 1,007 30.5%
Net profit margin (%) 5.8% 6.7%   6.5% 7.2%  
No. of shares (m) 71.2 75.0   71.2 75.0  
Diluted earnings per share (Rs)* 10.2 13.8   10.8 13.4  
P/E ratio (x)**            
(*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. Recently, the company acquired 50% stake in ING Vysya Life Insurance Company at a cost of Rs 2.5 bn (long-term investment).

WHAT HAS DRIVEN THE PERFORMANCE IN 4QFY06?
Topline - Riding on the auto boom: Exide is a key supplier to almost all the automobile original equipment manufacturers (OEM). 4QFY06 was a good quarter for the automobile players (auto sales were higher by __YoY in 4QFY06). This appears to have worked in favour of the company. While this is the case on the OEM front, the company has been making efforts to improve its market share in the replacement market. These factors have enabled the company to report a 25% YoY growth in topline in the current quarter. Going forward, with India expected to grow by 8% in FY07, the topline prospects are promising. Secondly, the telecom sector is also expected to widen its reach to rural markets, which would entail setting up more cell-sites (batteries are used in cell-sites in a large way). With the auto sector, at a broader level, expected to grow in line with the GDP growth in the long-term, we remain confident of the fact that Exide will be able to outperform industry growth at the topline level. Our view is based on the fact that the competitors are also relatively weaker.

Operating margins A balancing act: In 4QFY06, Exide reported expansion in operating margins. As can be seen from the table below, Exide has managed to control raw material costs (in relation to sales), which has registered a decline of 120 basis points (or 1.2%). This is despite the increase in the average lead prices (see adjacent graph) during the current quarter as compared to 3QFY06 and 4QFY05. This was a result of advance purchases made by the company in the previous quarter and higher contribution from replacement sales. To put things in perspective, margins in the replacement market are around 20% to 25% higher as compared to the OEM market.

Cost breakup
(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Raw material cost 1,852 2,261 22.0% 6,767 7,854 16.1%
% sales 59.5% 58.3%   57.1% 56.4%  
Staff 209 252 20.9% 899 994 10.6%
% sales 6.7% 6.5%   7.6% 7.1%  
Others 649 798 22.9% 2,390 2,859 19.6%
% sales 20.8% 20.6%   20.2% 20.5%  

Strong earnings performance: What is commendable was the fact that the net profit grew at a faster clip than operating profit. This was largely on account of efficient asset utilisation, foreign exchange management and lower interest charges (despite effective tax rate increasing by 2%).

OVER THE LAST FOUR QUARTERS
If one were to sum up the performance of the last four quarters, while the company has focused on growth, it has not come at the cost of profitability, especially when viewed in light of increasing raw material prices. The automobile sector, as a whole, grew by 13% YoY in FY06 (as per SIAM). Considering this, the topline growth of the company at over 17% YoY is commendable (also indicates that the company has gained market share).

What to expect?
At Rs 284, the stock is trading a price to earnings multiple of 21.1 times FY06 earnings. Despite strong growth prospects and potential margin expansion, 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.

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