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Exide: Packing quite a punch!
Apr 23, 2007

Performance summary
Exide, India’s largest storage battery manufacturer has put up yet another impressive performance for the quarter ended March 2007. Riding on the back of robust auto numbers, the bottomline of the company has grown by an impressive 49% YoY on the back of a strong 36% topline growth. Although operating margins have shrunk marginally by 30 basis points, strong growth in other income and a benign depreciation charge has ensured that growth in bottomline remained higher than the topline. The company’s performance during the full fiscal FY07 has been even more impressive as it has reported a strong 54% growth in bottomline on the back of a 35% growth in topline as compared to previous fiscal. Operating margins have also shown a marginal improvement of 50 basis points.

(Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change
Net sales 3,877 5,289 36.4% 13,886 18,703 34.7%
Expenditure 3,311 4,530 36.8% 11,661 15,626 34.0%
Operating profit (EBDITA) 566 759 34.0% 2,225 3,077 38.3%
EBDITA margin (%) 14.6% 14.3%   16.0% 16.5%  
Other income 12 42 248.8% 65 94 44.5%
Interest (net) 43 80 84.1% 224 277 23.5%
Depreciation 136 141 3.7% 548 542 -1.1%
Profit before tax 399 580 45.4% 1,517 2,352 55.0%
Tax 140 195 39.3% 510 800 56.9%
Profit after tax/(loss) 259 385 48.7% 1,007 1,552 54.1%
Net profit margin (%) 6.7% 7.3%   7.3% 8.3%  
No. of shares (m) 75.0 749.7   75.0 749.7  
Diluted earnings per share (Rs)* 1.4 2.1   1.3 2.1  
Price to earnings ratio (x)**         23.2  
(* annualised, ** on trailing twelve months earnings)

What is the company’s business?
EIL (Exide Industries Ltd) is India's largest storage battery company. 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 and currently boasts of an overall market share of 78%. 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 railways) and has a 50% market share.

What has driven performance in 4QFY07?
Auto demand in the fast lane: As seen from the table below, barring motorcycles, all the other auto segments have continued to grow at a fast clip during 4QFY07. This has obviously benefited Exide as it continues to have a dominant presence in auto OEM batteries. At the end of FY07, it commanded a huge 80% share in the car market and a market share of 78%, all segments combined. As per reports, the production of four-wheeler automotive batteries increased to 5.6 million units from 4.6 million units and production of two wheeler batteries increased from 5.8 million units to 7.0 million units. As far as new orders are concerned, the company’s batteries have started adorning the hoods of the likes of Logan, Honda Civic, Maruti Swift Diesel, Zen Estilo and Hyundai Verna, thus once again underscoring its OEM strength.

The company was also able to capitalize on the opportunities thrown open by industrial battery market. The Indian Railways continued to repose faith in the company’s batteries and new products are in the pipeline so that further growth is achieved in the segment.

Automobile production stats...
Domestic 4QFY06 4QFY07 % change FY06 FY07 % change
Motorcycles 1,652,229 1,694,703 2.6% 6,207,690 7,112,225 14.6%
Passenger vehicles 377,194 449,342 19.1% 1,309,300 1,544,850 18.0%
Commercial vehicles 115,353 150,295 30.3% 391,083 520,000 33.0%
Three - wheelers 123,524 146,048 18.2% 434,423 556,124 28.0%
Total 2,268,300 2,440,388 7.6% 8,342,496 9,733,199 16.7%

Its ‘Lead’ once again: Lead prices, which constitute a huge chunk of the total raw material prices for the company have continued to rise, thus putting a constant pressure on the company’s margins. As evident from table below, raw material costs as a percentage of sales have jumped by a huge 540 basis points. Had it not been for the softening of dollar and savings on the other expenses front, operating margins during the quarter would have witnessed a further decline. The fact that lead price increase is a pass through has also helped matters. The company, in phases had increased prices by as much as 14.3% in order to nullify a 14.5% increase in lead prices.

Cost break-up...
(Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change
Raw materials 2,261 3,369 49.0% 7,854 11,369 44.8%
% sales 58.3% 63.7%   56.6% 60.8%  
Staff cost 252 331 31.1% 994 1,240 24.7%
% sales 6.5% 6.3%   7.2% 6.6%  
Other expenditure 798 830 4.1% 2,813 3,017 7.3%
% sales 20.6% 15.7%   20.3% 16.1%  

The company seems to have utilized its capacity more effectively during the quarter as it has reported higher volumes without the concomitant increase in depreciation charges. This has really given a big boost to the bottomline growth of the company and has also helped it offset higher finance charges, which were presumably incurred on the back of expansion related capex.

As far as the performance of the past few quarters is concerned, while sales have gone into a higher orbit during FY07, margins have come under pressure during the latter half of FY07. We do not expect the margin pressure to subside any time soon and expect the same to remain at current levels.

History in quarters...
  4QFY07 3QFY07 2QFY07 1QFY07 4QFY06 3QFY06
Net sales growth (% YoY) 36.4% 34.0% 34.1% 34.7% 24.5% 16.0%
OPM (%) 14.3% 14.9% 18.6% 18.1% 14.6% 15.3%
NPM (%) 7.3% 7.6% 9.7% 8.6% 6.7% 6.3%

What to expect?
At the current price of Rs 48, the stock is trading at a price to earnings multiple of 23 times its FY07 earnings. Given the robust growth in volumes expected in the medium term and the company’s ability to pass on lead price hike to most of its end users, the stock should continue to trade at such lofty valuations for some more time to come. We will soon come out with an updated research report on the stock.

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