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Exide: Will it continue to charge?

Sep 22, 2004

Riding on the back of robust auto sales, Exide, India's largest automotive battery manufacturer has seen some significant buying interest in recent times. In this article let us throw some light on the company's recent performance and on the future prospects of the same. Exide is India's leading storage battery maker in the organised sector in both automotive and industrial segments. The sales mix of the company is in the ratio of 60:40 in favour of the automotive segment. In the OEM segment for automobiles, the company has a dominant market share (around 90%) and caters to marquee customers such as Maruti, Hyundai, M&M, Tata, Toyota and the like. The industrial applications of EIL batteries extend to important sectors such as power, telecom and defense. Apart from this, the company has an estimated 63% market share in the replacement market (retail).

As seen from the chart above, riding on the back of robust vehicle sales, the company's volume sales have registered a strong CAGR of 19% in the last five years. Value sales however, have grown at a much lower rate of 8% owing to rising input costs and relatively lesser bargaining power of the company vis-a-vis its OEM customers. As far as its recent performance (1QFY05) is concerned, the company had recorded an impressive 32% YoY growth in bottomline on the back of a strong 19% topline growth.

What was even more encouraging was the fact that there was a sizeable 120 basis point improvement in operating margins owing to favorable sales mix. While lead prices, which forms the basic raw material, have been ruling at record highs, reduction in customs of the same and the contractual obligation of the company's OEM customers to absorb the rise in price, has meant that the impact of the same has been minimal if any.

On the future prospects front, sale of automotive batteries are expected to grow at a slower rate from here since the kind of growth that was witnessed last fiscal is not likely to materialize in the current year. However as far as the sale of industrial batteries is concerned, it may witness strong growth, as there have been huge investments in the power and telecom segments. Already, during the first quarter, sale of industrial batteries in value terms was higher by 30% YoY.

On the retail front, in the medium to long term the company is expected to witness a strong growth in volume sales on account of the fact that automotive batteries usually have a life of around 2 to 3 years and much of strong growth that is being witnessed in the auto segment recently is likely to turn into potential replacement demand 2-3 years down the line. Realisations however are expected to come under pressure owing to competition from other players and cheap imports from countries such as Thailand and China.

In the past few years, despite rising lead prices and pricing pressure, the company has been able to hold on to its margins. Going forward, although retail sales are more profitable and are likely to grow at a robust pace, we expect the margin pressure to continue and automotive battery realisations to fall at a CAGR of 2%-3% in the medium to long-term.

The stock is currently trading at Rs 153, implying a P/E of 15x its annualised 1QFY05 earnings. We remain positive on the company's ability to grow and protect its market share despite threat from competition. Moreover, strength in sale of industrial batteries is another positive. However, it is a dependent industry and may face near term pressure if there is any slowdown in auto industry. Thus, while near term valuations look stretched, over the long-term the prospects look attractive.


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