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Exide Ind.: No respite from margin pressures
Apr 28, 2011

Exide Industries announced the fourth quarter results of financial year 2010-2011 (4QFY11). The company reported a 21% YoY increase in revenues, while profits grew by 22% YoY. Here is our analysis of the results.

Performance summary
  • Net sales grow by 21% YoY during FY11 led by stronger volumes off take for the auto industry.
  • Operating margins contract by 3.8% YoY on the back of higher input costs (as a percentage of sales).
  • Net profits grow by 24% YoY during FY11 on account of extraordinary income received during the year, higher other income and lower interest costs.
  • Total dividend for FY11 amounts to Rs 1.5 per share (dividend yield of 1%).

Standalone financial snapshot
(Rs m) 4QFY10 4QFY11 Change FY10 FY11 Change
Net Sales 10,298 12,481 21.2% 37,974 45,775 20.5%
Expenditure 8,128 10,142 24.8% 29,046 36,748 26.5%
Operating profit (EBITDA) 2,171 2,339 7.7% 8,928 9,027 1.1%
Operating profit margin (%) 21.1% 18.7%   23.5% 19.7%  
Other income 62 216 250.6% 88 799 812.6%
Depreciation 208 227 8.7% 807 835 3.5%
Interest 26 8 -68.3% 103 57 -44.3%
Exceptional income 0 0   0 469  
Profit before tax 1,998 2,320 16.1% 8,106 9,404 16.0%
Tax 653 683 4.6% 2,735 2,740 0.2%
Profit after tax/(loss) 1,345 1,637 21.7% 5,371 6,664 24.1%
Net profit margin (%) 13.1% 13.1%   14.1% 14.6%  
No. of shares (m)         850.0  
Diluted earnings per share (Rs)*         7.3  
P/E ratio (x)*         20.7  
* On a trailing 12-months basis; Adjusted for exceptional items

What has driven performance in FY11?
  • Exide Industries (Exide) recorded a 21% YoY increase in revenues during the year ended March 2011. 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 importance 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 had not yet sufficiently picked up. In addition, this segment faced issues in terms of higher input costs.

    Cost break-up...
    (Rs m) 4QFY10 4QFY11 Change FY10 FY11 Change
    Raw materials/ purchases 6,059 7,695 27.0% 21,583 28,075 30.1%
    % of sales 58.8% 61.7%   56.8% 61.3%  
    Employee costs 681 854 25.4% 2,361 2,829 19.8%
    % of sales 6.6% 6.8%   6.2% 6.2%  
    Other expenditure 1,387 1,593 14.8% 5,101 5,845 14.6%
    % of sales 13.5% 12.8%   13.4% 12.8%  
    Total expenditure 8,128 10,142   29,046 36,748  

  • Exide's operating expenditure increased by 27% YoY as a result of which its operating profits grew by a mere 1% YoY during the year. The key factor behind the sharp rise in expenses was higher raw material costs, which rose by 30% YoY. During the year ended March 2011, raw material costs stood at 61.3% of revenues as compared to 56.8% in FY10. Prices of lead continued to remain high in the international markets and unlike previous years, the company was not able to entirely pass on this hike to customers. As a result, it had to settle for reduced margins. Thus, operating margins shrunk by 3.8% to 19.7% during the year.

  • Despite the poor performance at the operating level, Exide's net profits grew by 24% YoY. This was due to the extraordinary income of Rs 469 m that the company received during the year. Excluding the same, growth in net profits stood at 15% YoY, which was still higher than the growth in operating profits. This was due to various factors such as higher other income (dividends) and lower interest costs.

What to expect?
At the current price of Rs 151, the stock is trading at a multiple of 17.6 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 lesser 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. The average operating margins in the past twelve years stood at 17%. Now, while the company is working on reducing its input costs (by using recycled lead), the performance during the last few quarters makes the short term outlook uncertain.

We maintain a cautious view on the stock keeping in mind the uncertainty attached to it over the short term.

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