The sharp spurt in commercial vehicle sales and impressive rise in passenger car sales have benefited auto ancillary majors significantly. Exide, the country's largest car battery manufacturer and supplier, has posted a 8% rise in revenues and notable rise in net profit for the second quarter ended September 2002.
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Exide is the the leading supplier of automotive batteries to many Original Equipment Manufacturers (OEMs) like Telco, Maruti, Hyundai, Ford and other multinationals as well. With both CV and passenger car sales looking up in the last 12 months, Exide has also benefited. Turnover has increased by 7% in 2QFY03. Apart from automotive storage batteries, Exide also has presence in industrial battery segment (estimated sales mix is in the ratio of 60:40). But demand from the latter has remained sluggish on account of weakness in industrial sector. The 7% rise in sales in 2QFY03 has to be viewed in context of the company's poor performance in the second quarter last year. In 2QFY02, Exide saw its turnover dropping by 18% YoY.
Operating margins have dropped marginally in 2QFY03. Due to tough market conditions, auto ancillary manufacturers' have been forced to reduce prices. In the last six years, average realisation of batteries for Exide has declined at a CAGR of 5%. Since margins are lower in the OEM segment, Exide and other competitors have been focusing on increasing contribution from expanding presence in the retail market, which is primarily led by replacement demand. However, stiff competition from domestic players like Amara Raja Batteries, entry of multinationals and cheaper imports have exercised downward pressure on prices on this front as well.
Despite such a challenging environment, the performance of the company at the operating level is commendable. The Finance Minister, in the last budget, had announced a reduction in the import duty of lead from 35% to 25% that came as a relief to the indigenous battery manufacturers in India. Increased asset sweating, stable lead prices (raw material) and tightening of working capital has increased cash flow, which the company has utilised to retire debt. The rise in other income is also on account of the same despite ongoing buyback programme. Extraordinary items in 2QFY03 pertain to write off towards implementation of ERP system. After accounting for a sharp rise in tax, net profit for 2QFY03 has increased by 18% to Rs 144 m.
As far as growth prospects are concerned, the company in its outlook for FY03 has said that it is optimistic of further reduction in import duty on raw materials in the future (for example, duty on aluminium was also brought down to 15% in the last budget thus providing a major boost to the prospects of the sector). Though we expect price realisation to remain under pressure, lower raw material costs will enable Exide to maintain operating margins at the current level in the future (raw material costs account of 50% of sales).
In order to gear up to meet future demand, the company expanded its production capacity by opening of a new auto battery plant at Hosur in Tamil Nadu. Since the fastest growing auto players like Hyundai and Ford have manufacturing facilities in Tamil Nadu, the company is well-poised to capitalise on any upturn in car demand. However, cheaper imports continue to remain a key cause of concern (especially from South East Asian markets).
The stock currently trades at Rs 75 implying a P/E multiple of 4.6x annualised 2QFY03 earnings. Based on our estimated earnings of Rs 9 per share in FY03, P/E multiple works out to 8.3x. However, the stock price has been languishing at the current prices due to the ongoing buyback programme that is limiting the price movement on the bourses. Exide had announced its buyback plan in December 2001 at a maximum price of Rs 70 per share. As per the scheme, 0.3 m shares were bought back upto September 30, 2002. The buyback scheme opened on January 10th 2002 and closes on December 23, 2002. Since the company is highly reliant on the automobile sector for growth, valuations at 8x do not seem to be compelling.
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