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Exide Industries: Input costs play spoilsport - Views on News from Equitymaster

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Exide Industries: Input costs play spoilsport

Oct 15, 2010

Exide Industries announced its 2QFY11 results. The company has reported a 19% YoY growth in its sales while net profits have increased by 42% YoY during the quarter. Here is our analysis of the results.

Performance summary
  • Net sales grow by 19% YoY during 2QFY11, 23% YoY during 1HFY11.
  • Operating margins contract by 4.2% YoY on the back of higher input costs (as a percentage of sales). Margins contract by 2.3% YoY during 1HFY11.
  • Net profits increase by 42% YoY on the back of an exceptional item of Rs 469 m. On excluding the same, profits are higher by 11% YoY. The reason for the same is higher other income.
  • Company’s board declares an interim dividend of Rs 0.9 per share (dividend yield of 0.6%).

Standalone financial snapshot
(Rs m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Net Sales 9,507 11,272 18.6% 18,542 22,793 22.9%
Expenditure 7,036 8,817 25.3% 13,976 17,706 26.7%
Operating profit (EBITDA) 2,471 2,455 -0.7% 4,566 5,087 11.4%
Operating profit margin (%) 26.0% 21.8%   24.6% 22.3%  
Other income 11 191 1574.6% 20 253 1143.8%
Depreciation 222 201 -9.1% 410 396 -3.4%
Interest 44 17 -61.6% 48 30 -36.9%
Exceptional income 0 469   0 469  
Profit before tax 2,217 2,897 30.7% 4,128 5,383 30.4%
Tax 720 768 6.6% 1,408 1,600 13.7%
Profit after tax/(loss) 1,497 2,129 42.3% 2,721 3,783 39.0%
Net profit margin (%) 15.7% 18.9%   14.7% 16.6%  
No. of shares (m)         850.0  
Diluted earnings per share (Rs)*         7.0  
P/E ratio (x)*         23.2  
* On a trailing 12-months basis

What has driven performance in 2QFY11?
  • Exide’s revenue momentum continued during the quarter gone by with the company’s topline increasing by 19% YoY. However, on a quarter on quarter basis, revenues marginally declined by 2%. This is nevertheless a strong performance considering that the company posted a 28% YoY and a 12% QoQ increase in revenues during the preceding quarter i.e. 1QFY11. While Exide would have seen a good rise in volumes, there was a certain amount of pricing pressure during the quarter. As per the management, higher focus was given to supplies to OEMs (original equipment manufacturers). It may be noted that the company garners higher realisations in the replacement market. As per the company’s management, Exide was facing pressure in keeping up with the rise in demand in the auto sector, especially for motorcycle batteries. Similar was the case for the four-wheeler segment as well.

    Cost break-up…
    (Rs m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
    Raw materials/ purchases 5,175 6,686 29.2% 10,396 13,549 30.3%
    % of sales 54.4% 59.3%   56.1% 59.4%  
    Employee costs 592 660 11.6% 1,140 1,338 17.4%
    % of sales 6.2% 5.9%   6.1% 5.9%  
    Other expenditure 1,270 1,471 15.8% 2,440 2,819 15.5%
    % of sales 13.4% 13.0%   13.2% 12.4%  
    Total 7,036 8,817   13,976 17,706  

  • Exide’s operating profits marginally declined 1% YoY during the quarter. The key reason for the same was higher raw material prices (lead is a key raw material for the company). As compared to a 19% YoY increase in revenues, raw material and purchase costs rose by 29% YoY. On the other hand, the company did well to restrict the increase in employee costs and other expenses as they increased by 12% YoY and 16% YoY during the quarter.

  • Exide’s net profits rose by 42% YoY during the quarter. The increase in profits was on account of higher other income (mainly dividends) and an exceptional income of Rs 469 m, which was on account of transfer of leasehold land. On adjusting the profits for both these items, the bottomline actually fell by 1% YoY, in line with the decline in operating profits.

  • During 1HFY11, revenues and profits rose by 23% YoY and 39% YoY. Operating profits increased at a slower pace as compared to the revenues on the back of a 2.3% YoY contraction in operating margins. Higher input costs were the key reason for the same. On adjusting the bottomline for other income and exceptional income, profits rose by 13% YoY.

What to expect?
At the current price of Rs 163, the stock is trading at a multiple of 19 times our FY13 estimated earnings per share (For RPro subscribers, our latest view can be tracked Here).

During the quarter, Exide commissioned its third motorcycle battery plant in Ahmednagar, Maharashtra. In addition, it commissioned additional production lines (for four-wheeler batteries) at its existing facilities in Shamnagar and Haldia during the month of September. With the same happening, it would be able to cater to the demand for the replacement market as well, which would in turn help it keep its margins steady, if not decrease, going forward. Further, Exide plans to invest nearly Rs 3.8 to Rs 4 bn during the year to enhance its production capacities to meet the demand for the next year.

Considering the exceptional income and higher other income earned during the quarter, we would need to revise our estimates upwards. But this would only be for the current year and as such would not really impact our FY13 estimates. We believe the stock is on the expensive side from a long term perspective and as such maintain our ‘cautious’ view at current levels.

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