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Exide: Dovetailing the auto story! - Views on News from Equitymaster

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Exide: Dovetailing the auto story!
Oct 19, 2006

Performance summary
Exide, India’s largest supplier of batteries to automotive and industrial customers has put up an impressive performance for the quarter ended September 30, 2006. Riding on the back of buoyant industrial environment, the topline of the company has grown by 34% with bottomline growing at an even more impressive 50% on a YoY basis. Operating margins have also witnessed an expansion of 40 basis points. As far as the half yearly performance is concerned, the company has managed to grow its bottomline by 36% on the back of a 34% jump in net sales over the corresponding previous half year.

Financial performance: Standalone snapshot
(Rs m) 2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Net sales 3,364 4,512 34.1% 6,638 8,923 34.4%
Expenditure 2,752 3,674 33.5% 5,501 7,287 32.4%
Operating profit (EBDITA) 612 838 36.9% 1,137 1,636 44.0%
EBDITA margin (%) 18.2% 18.6%   17.1% 18.3%  
Other income 23 24 6.2% 42 33 -21.2%
Interest (net) 59 71 20.8% 93 164 76.2%
Depreciation 138 134 -3.1% 275 363 31.8%
Profit before tax 438 657 50.1% 810 1,143 41.1%
Extraordinary income/(expense) - -   - -  
Tax 147 220 49.6% 277 420 51.6%
Profit after tax/(loss) 291 437 50.4% 533 723 35.7%
Net profit margin (%) 8.6% 9.7%   8.0% 8.1%  
No. of shares (m) 75.0 749.7   75.0 222.7  
Diluted earnings per share (Rs)* 1.6 2.3   4.8 6.5  
Price to earnings ratio (x)**         21.8  
(* annualised, ** on trailing twelve months earnings)            

What is the company’s business?
EIL (Exide Industries Ltd) is India's largest storage battery company (33% market share in overall domestic market). 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. 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 has a 50% market share.

What has driven performance in 2QFY07?
Robust auto demand powers the topline: Two-wheelers and passenger vehicles, Exide’s market of dependence in the automotive segment, have continued to grow at a rapid pace thus resulting into a strong order flow for Exide. As per data released by SIAM (Society of Indian Automobile Manufacturers), while production of passenger cars have improved by 20% YoY during the first six months of the current fiscal, two-wheeler production has also grown by an impressive rate of 16% (22% growth in motorcycles/step-throughs) during the same period. This has benefited Exide as it accounts for 80% of all the batteries fitted into these vehicles. With a robust macro environment in place in the country currently, we believe demand for the company’s industrial batteries also seems to have grown at a fair clip. It should be remembered that Exide supplies industrial batteries to high growth sectors such as telecom, power and malls and multiplexes.

Margin expansion - Low cost strategy paying off: In order to curtail costs, the company has employed a strategy of sourcing low end batteries from nations such as Sri Lanka and this seems to be having its effects on the operating margins as they have expanded by 40 basis points during the quarter. This despite the rise in raw material costs as a percentage of sales is indeed commendable.

Cost break up
(Rs m) 2QFY06 2QFY07 Change
Raw materials 1,795 2,458 36.9%
% sales 53.3% 54.5%  
Staff cost 249 303 21.4%
% sales 7.4% 6.7%  
Other expenditure 708 914 29.0%
% sales 21.0% 20.2%  

Besides improvement at the operating level, a 3% fall in depreciation outgo has also helped the company record the impressive 50% jump in profits.

What to expect?
At the current price of Rs 38, the stock is trading at a price to earnings multiple of 22 times its trailing twelve month earnings. Given its dominant position and efforts at protecting its margins, we remain upbeat on the long-term prospects of the company. Its profits however are vulnerable to lead prices and hence expectations need to be tempered to that extent.

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