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Exide: Continues to excite - Views on News from Equitymaster
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Exide: Continues to excite
Oct 15, 2007

Performance summary
  • Topline grows by 48% YoY during 2QFY08, led by jump in both volumes and realisations.

  • Record high lead prices continue to affect cost structure, resulting into a 110 basis points (1.1%) drop in operating margins.

  • Margin pressure coupled with higher tax outgo restrict the bottomline growth to 42% YoY during 2QFY08, which although lower than the topline, is by no means unimpressive.

  • On the half yearly front, the company turns in an even better performance as bottomline surges 62% YoY on the back of a 49% YoY growth in topline.

(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Net sales 4,512 6,678 48.0% 8,923 13,317 49.2%
Expenditure 3,674 5,506 49.9% 7,287 10,834 48.7%
Operating profit (EBDITA) 838 1,172 39.8% 1,636 2,482 51.7%
EBDITA margin (%) 18.6% 17.5%   18.3% 18.6%  
Other income 24 5 -77.4% 33 12 -64.5%
Interest (net) 71 78 9.6% 164 131 -19.9%
Depreciation 134 147 9.9% 267 340 27.1%
Profit before tax 657 952 44.9% 1,239 2,024 63.4%
Tax 220 330 50.0% 420 700 66.7%
Profit after tax/(loss) 437 622 42.3% 819 1,324 61.7%
Net profit margin (%) 9.7% 9.3%   9.2% 9.9%  
No. of shares (m) 749.7 750.0   749.7 750.0  
Diluted earnings per share (Rs)* 2.3 3.3   2.2 3.5  
Price to earnings ratio (x)**         24.5  
(* annualised, ** on trailing twelve months earnings)

What is the company’s business?
Exide is India's largest storage battery company. 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 and currently boasts of an overall market share of 78% in four wheelers and 58% share in two-wheelers. 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 railways) and has a 50% market share.

What has driven performance in 2QFY08?
Riding the wave: With the exception of two-wheelers, strong tailwinds continued to blow across other major battery consuming sectors like telecom, power and railways and this has helped Exide notch up a 22% YoY growth in volumes during 2QFY08. The remaining 21% growth was contributed by improvement in realisations, a result of the company’s strong bargaining power as well as customer clauses, which allowed for any rise in raw material prices to act as a pass through. While the full year target remains robust, the management feels that it may not be as good as the first half of FY08.

Raw material squeeze: Exide’s operating margins contracted by 1.1% during 2QFY08. This was largely a consequence of the huge 73% jump in raw material expenses. The company’s major raw material is lead, which has seen prices almost doubling in recent times. This has had a negative impact on the company’s profitability. Exide has managed to nullify some of the impact by resorting to recycled lead and is also setting up a lead smelter, which might further drive reduction in the raw material costs of the company. While staff costs have also increased by a significant 24% YoY, the company has managed to absorb the same through a splendid topline performance.

cost break-up
(Rs m) 2QFY07 2QFY08 Change
Raw materials 2,458 4,247 72.8%
% sales 54.5% 63.6%  
Staff cost 303 375 23.8%
% sales 6.7% 5.6%  
Other expenditure 914 884 -3.2%
% sales 20.2% 13.2%  

While other income declined, interest expense grew by 10% YoY during the quarter. However, on account of their small size, these items were not able to significantly influence the PBT growth which registered an impressive jump of 45% YoY. Tax outgo grew by a significant 50% YoY and slowed down the 45% pre-tax jump in profits to a 42% growth at the net level.

Over the last few quarters: As seen from the table below, Exide continues to impress in FY08 as not only the topline growth but the margins have also been higher than what was witnessed during FY07. However, it remains to be seen whether the buoyancy will continue in the coming quarters.

Last few quarters
  2QFY07 3QFY07 4QFY07 1QFY08 2QFY08
Net sales (YoY growth %) 34.1% 34.0% 36.4% 50.5% 48.0%
OPM 18.6% 14.9% 14.3% 19.7% 17.5%
NPM 9.7% 7.6% 7.3% 10.6% 9.3%

What to expect?
At the current price of Rs 68, the stock is trading at a multiple of 17.2 times our estimated FY10 earnings. While the company has achieved 65% of our FY08 earnings target in the first half itself, we believe that our earnings assumption of 25% CAGR between FY07 and FY10 is a reasonable estimate of the medium term prospects of the company. Hence, we believe that the risk-reward ratio is currently in favour of the former.

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