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Exide: Backward integration paying off! - Views on News from Equitymaster

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Exide: Backward integration paying off!

Oct 12, 2009

Performance summary
  • Topline grows by a modest 6% YoY during the second quarter.
  • Operating margins witness a huge jump of 9.5%, leading to a 67% surge in operating profits during the quarter.
  • Bottomline grows by a strong 92% YoY for the quarter as depreciation and interest charges add further zing to the operating performance.
  • Half yearly bottomline grows 70% YoY on the back of a mere 2.5% topline growth, thanks once again to the strong operating performance.

(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Net sales 9,008 9,507 5.5% 18,093 18,542 2.5%
Expenditure 7,524 7,036 -6.5% 15,091 13,976 -7.4%
Operating profit (EBDITA) 1,484 2,471 66.5% 3,002 4,566 52.1%
EBDITA margin (%) 16.5% 26.0%   16.6% 24.6%  
Other income - 11   4 20 372.1%
Interest (net) 134 44 -67.1% 242 48 -80.1%
Depreciation 169 222 30.8% 332 410 23.5%
Profit before tax 1,181 2,217 87.7% 2,433 4,128 69.7%
Tax 403 720 79.0% 833 1,408 69.1%
Profit after tax/(loss) 778 1,497 92.3% 1,600 2,721 70.0%
Net profit margin (%) 8.6% 15.7%   8.8% 14.7%  
No. of shares (m) 800.0 800.0   800.0 800.0  
Diluted earnings per share (Rs)*         5.0  
Price to earnings ratio (x)*         20.4  
* on trailing twelve months earnings)

What has driven performance in 2QFY10?
  • Exide’s topline grew by a tepid 6% during the quarter. However, the performance was better than the first quarter where the topline growth was virtually flat. Exide supplies batteries to the automotive and industrial segments and hence, with a revival in the same during the second quarter, the company also witnessed an improved performance. While volumes grew at double-digit rates, its impact on topline was muted given that the company had lowered its selling prices during the quarter. The company also benefited from cost savings as well as volume growth in home, UPS, inverters and two-wheeler batteries.

  • For the company to meet our sales projections, the topline will have to grow by 16% YoY for the second half of the fiscal. While that does look like a tall order, it should be noted that the second half of the previous fiscal was not amongst the best in recent time and hence, Exide does stand a good chance of growing its topline by about 11% for the full year as projected by us.

    cost break up
    (Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
    Raw materials 5,969 5,215 -12.6% 12,154 10,471 -13.8%
    % sales 66.3% 54.8%   67.2% 56.5%  
    Staff cost 421 592 40.4% 817 1,129 38.1%
    % sales 4.7% 6.2%   4.5% 6.1%  
    Other expenditure 1,134 1,230 8.5% 2,120 2,377 12.1%
    % sales 12.6% 12.9%   11.7% 12.8%  

  • Bringing about a substantial improvement in its operating performance, the company has managed to cut its raw material expenses by nearly 13% during the quarter and hence, boost its operating profits by a strong 67% YoY. While a part of the improvement could be attributed to reduced prices of lead – Exide’s main raw material – the company also benefitted from sourcing nearly 40% of its lead and lead alloy requirements from its own captive smelters and also having made its cost structure more efficient by connecting tier II and tier III cities through a hub-and-spoke model. Had it not been for the strong 40% jump in staff costs, the growth in operating margins could have been even higher.

  • Exide’s net profits saw a strong growth of 92% YoY during 2QFY10. This was led by operating margin expansion, lower than proportionate increase in depreciation and lower interest costs. The net margins improved to 15.7% from 8.6% during 2QFY09.

What to expect?
At the current price of Rs 97, the stock is trading at a multiple of 14 times our FY12 estimates. The company has continued to surprise us positively on the margins front. As against our assumption of 18% for the full year, the company’s first half margins have come in at 25%. Quite a bit of this improvement we believe is sustainable in the long-term on account of the shift in the company’s strategy of manufacturing lead and lead-alloys from its captive smelters. Hence, in view of this structural shift, we upgrade the FY12 target price of the stock to Rs 138 per share.

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Apr 18, 2019 (Close)


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