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Exide: All charged up - Views on News from Equitymaster
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Exide: All charged up
Jul 21, 2006

Performance Summary
Exide, India’s largest manufacturer of automotive and industrial batteries has announced a robust set of results for 1QFY07. On a YoY basis, while the topline of the company has grown by 35%, the bottomline has exhibited a growth rate of 57%. Led by favorable raw material prices, operating margins expanded by 210 basis points during the quarter.

Financial performance: Standalone snapshot
(Rs m) 1QFY06 1QFY07 Change
Net sales 3,274 4,411 34.7%
Expenditure 2,749 3,613 31.4%
Operating profit (EBDITA) 525 798 52.2%
EBDITA margin (%) 16.0% 18.1%  
Other income 19 9 -53.7%
Interest (net) (34) (93) 171.6%
Depreciation 137 133 -2.8%
Profit before tax 372 581 56.1%
Tax 130 200 53.8%
Profit after tax/(loss) 242 381 57.3%
Net profit margin (%) 7.4% 8.6%  
No. of shares (m) 75.0 75.0  
Diluted earnings per share (Rs)* 12.9 20.3  
Price to earnings ratio (x)**   15.5  
(* annualised, ** on trailing twelve months earnings)

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 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.

What has driven performance in 1QFY07?
Buoyant auto demand aids growth in topline: Exide is leading supplier of automotive batteries to OEMs and hence, when the auto industry does well, the effect also rubs off on Exide. The story this quarter has been no different. The automobile industry witnessed a growth of 20% YoY in volumes during 1QFY07. While the passenger car sales rose by 24%, two-wheeler market grew by 19%. Commercial vehicles registered the highest growth among all segments at 47% YoY (though on a low base). On account of growth across all these segments, Exide was also able to increase its topline, thus registering 35% YoY growth. Although the numbers are not available, the industrial batteries division of the company must have also done well on the back of strong growth in telecom and financial services infrastructure (ATMs and cell sites).

Cost break-up…
(Rs m) 1QFY06 1QFY07 Change
Raw materials 1,895 2,531 33.5%
% sales 57.9% 57.4%  
Staff cost 247 285 15.3%
% sales 7.6% 6.5%  
Other expenses 607 797 31.3%
% sales 18.5% 18.1%  

Lower wages help control costs: Although wages were higher YoY on an absolute basis, their percentage as total sales declined during 1QFY07 and this largely helped in the expanding the EBTIDA margin by 210 basis points. Raw material costs and other expenses also declined marginally as a percentage of sales as compared to same quarter last year. While we have estimated marginal expansion in operating margins, the extent of the rise in 1QFY07 is a positive surprise. However, we are not upgrading our estimates, as we expect volume growth to taper off.

Interest outgo shows a rise: The company’s net interest expenses more than doubled during the quarter while the other income has also seen a fall on a YoY basis. However, the topline growth and savings on costs has ensured a strong bottomline growth of 57% YoY. The decline in other income could be attributed to the fact that the company invested in ING Vysya Life Insurance last year (49% stake), resulting in lower cash in hand.

What to expect?
At the current price of Rs 238, the stock is trading at a price to earnings multiple of 13 times our estimated FY08 earnings. The company has surprised us on the higher side during the first quarter and if this stellar performance continues for one more quarter, then we might have to revisit our numbers. We continue to have a negative view on the stock in light of the valuations.

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