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Exide: Ancillary after all! - Views on News from Equitymaster
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Exide: Ancillary after all!
Jun 28, 2005

Introduction to results
Exide Industries (EIL) announced its 4QFY05 and FY05 results a short while ago. For FY05, while the topline grew by 21% YoY, increasing input cost and pressures on realisations has made a dent on the bottom line, which registered a mere 6% YoY growth. For the fourth quarter, the results were more disappointing. Though topline managed a 17% increase, the bottomline fell by 14% mainly due to margin pressure.

Financial snapshot…
(Rs m) 4QFY04 4QFY05 Change FY04 FY05 Change
Sales 2,659 3114 17.1% 9,781 11,841 21.1%
Expenditure 2,172 2,710 24.8% 7,979 10,057 26.0%
Operating Profit (EBDIT) 487 404 -17.1% 1,802 1,784 -1.0%
Operating Profit Margin (%) 18.3% 13.0%   18.4% 15.1%  
Other Income 7 12 72.9% 20 30 52.0%
Interest (net) (35) 45 -228.3% 85 115 34.9%
Depreciation 142 137 -3.7% 545 539 -1.2%
Profit before Tax 387 234 -39.5% 1,192 1,162 -2.6%
Tax 83 53 -36.7% 373 373 0.0%
Extraordinary items 92 - -100.0% 92 17 -81.5%
Profit after Tax/(Loss) 212 182 -14.2% 728 772 6.0%
Net profit margin (%) 8.0% 5.8%   7.4% 6.5%  
No. of Shares (m) 71.2 71.2   71.2 71.2  
Diluted Earnings per share (Rs)* 11.9 10.2   10.2 10.8  
P/E Ratio (x)         15.7  
(*annualised)            

What is the company’s business?
EIL is India's largest storage battery company (33% market share in overall domestic market). It sells both automotive and industrial battery and the sales mix is estimated at 75:25. Over the years, it has consolidated its position in the automotive OEM segment (90% share). 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.

What has driven the performance in FY05?
Riding on the auto wave:  The performance of the company is directly correlated to that of auto industry (particularly two-wheeler and passenger car segment). Both these two segment account almost two third of the volume sales. In FY05, while the motorcycle segment grew by 21% YoY, car demand grew by 16% YoY. This together with the replacement demand enabled the company to grow topline by 21% YoY.

Raw materials – Is the worst over?  As evident from the table, the company has been facing significant pressures on margins, led by two factors. One of the reasons has been constant rise in the prices of lead over last 5 years (from 47 cents/kg in FY00 to 71 cent/kg in FY05). Though the prices have receded from the peak, they are still at significantly high levels a when compared to FY00. Going forward, any reduction in the lead prices (we do expect the same to recede further by approximately 20% in next two years) can provide a cushion to the margins.

Cost breakup
(Rs m) 4QFY04 4QFY05 Change FY04 FY05 Change
Raw mat 1,292 1,763 36.5% 4,721 6,822 44.5%
% sales 48.6% 56.6%   48.3% 57.6%  
Staff 189 209 10.4% 881 899 2.1%
% sales 7.1% 6.7%   9.0% 7.6%  
Others 692 649 -6.2% 2,377 2,390 0.6%
% sales 26.0% 20.8%   24.3% 20.2%  

Second and equally important factor has been fall in the average realisation of the company over the last few years. Going forward, we do not see improvement in realisations, if not a fall in the OEM segment (original equipment manufacturers).

The above two factors have completely overshadowed the company’s efficiency in controlling cost, which is evident from a reduction in both staff cost and other expenses as percentage of sales.

What to expect?
At Rs 170, the stock is trading at a price to earnings multiple of 15.7 times its FY05 earnings. The company has declared a dividend of Rs 2.5 per share (dividend yield of 1.4%).

Going forward, while we expect two-wheeler demand to grow by 12% CAGR over the next three years, the tractor segment is likely to grow by 6% to 7%, depending upon monsoons. We also expect commercial vehicle sales to grow by 8% to 10% in this period, even as car demand grows at a steady pace. The growth in industry volumes could be much higher, depending upon new launches, where there are number of models lined up from various stables. This is likely to benefit Exide. Therefore, we do not foresee topline growth being a major concern. The topline growth could also be propelled if the company’s initiatives on the submarine battery side fructifies.

Having said that, concerns on the raw material side remain intact, even as global economists predict softening of lead prices going forward. This, in our view, is difficult to predict. Another cause of concern is on the working capital side where there could be pressure going forward owing to higher credit days to auto majors.

We had recommended the stock in March 2005 at Rs 157 with a price target of Rs 205 with a two-year perspective. As compared to our estimates, while the topline and operating profits are in line (1% to 3% deviation), net profit is lower by 10% as compared to our estimates. This is largely on account of higher interest expenses, which in our view, has increased due to higher working capital requirements accompanied by capacity expansion. Overall, while we are optimistic on the growth prospects, we would rate this stock in the high-risk category for retail investors.

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