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Exide: Itís a volume business - Views on News from Equitymaster
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Exide: Itís a volume business
Jun 24, 2005

The performance of Exide Industries Ltd (EIL) in the first 9 months of the FY05 has been a mixed bag. During this period, the topline grew by 24% YoY. However, operating margins were under pressures (2.9% lower as compared to the corresponding period of the previous year). While we expect the company to report another quarter of robust topline performance, we shall look at the history of its performance to determine whether the performance is sustainable in long run.

What is the companyís business?
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.

Last 5 years at a glanceÖ
Rs m FY00 FY01 FY02 FY03 FY04 CAGR
Net sales 7,586 7,701 7,915 8,785 9,781 6.6%
Operating expenses 6,129 6,293 6,603 7,183 7,979 6.8%
EBDITA 1,457 1,409 1,313 1,602 1,802 5.5%
EBDITA margin 19.2% 18.3% 16.6% 18.2% 18.4%
Depreciation 396 434 440 461 545 8.3%
Interest 539 474 415 307 108 -33.0%
Profit before tax 590 521 467 863 1,193 19.2%
Extraordinary items (39) (36) (43) (55) (91)
Tax 63 70 110 285 373 56.2%
Profit after tax 488 416 314 523 729 10.5%
Net profit margin 6.4% 5.4% 4.0% 6.0% 7.4%
EPS 13.6 11.5 8.8 14.7 20.4
Fully diluted EPS 6.8 5.8 4.4 7.4 10.2

Topline traces the auto sector: As can be seen from the table, the volume growth over the last five years was 17.2%. If one were to consider the growth in sales of only four-wheelers in the last five years, the average growth in industry volumes was 9.7%. In FY05, for instance, four-wheeler sales has registered a growth of 15.3% YoY. Exideís growth in topline has to be viewed in this context. Having said that, net sales have risen at a slower rate of 6.6% in the last five years owing to pricing pressure from customers, especially OEMs (original equipment manufacturers). While we believe that prices will continue to remain under pressure, prospects on the volume growth front are promising from a long-term standpoint.

Margins are lower: Operating costs have increased at a faster rate, thereby affecting margins. The main reason fro the same, apart from increasing input cost (lead), is the fall in the realisation of the company (chart above). But for the volume growth, the revenue picture would have been different. It should be noted that the performance of the company is largely dependent on that of the auto sector. With increasing competition in all the segments of the auto industry, the OEMs put increasing pressure on their suppliers (like Exide). Due to lack of the bargaining power, the company is unable to increase prices.

Going forward, we expect the pricing pressure to continue and infact have considered a 2% reduction in our estimates. This would restrict any upward movement in operating margins.

Net margins on a rise: As can be seen from the table above, post FY02, net margins are on a rise (in FY04, the same surpassed the highs of FY00). This has been because of prudent management of funds and working capital requirements on part of the company. As a part of this strategy, the company made all the efforts to reduce its interest burden (see table above), firstly by replacing high cost debt and then by reducing the dependence on borrowed funds. This was made possible by effective working capital management, which is evident from the fact that the share of net working capital to total assets of the company stood at 16% in FY04 as compared to 28% in FY00. Going forward, we do not foresee any significant changes on this front.

What to expect?
At Rs 172, the stock trades at a price to earnings multiple of 15.3 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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