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Exide: The depreciation dampener - Views on News from Equitymaster

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Exide: The depreciation dampener
Oct 23, 2008

Performance summary
  • Powered by the industrial and the automotive replacement segment, the company’s topline grows by a robust 35% YoY during 2QFY09.

  • Operating profits grow by 27% YoY and operating margins slide by 1% as rupee depreciation impacts import of key raw materials.

  • Net profits grow by 25% YoY as higher interest costs lend further weakness to operating margin contraction.



(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Net sales 6,678 9,008 34.9% 13,317 18,074 35.7%
Expenditure 5,506 7,524 36.7% 10,834 15,091 39.3%
Operating profit (EBDITA) 1,172 1,484 26.6% 2,482 2,983 20.2%
EBDITA margin (%) 17.5% 16.5%   18.6% 16.5%  
Other income 5 -   12 24 102.6%
Interest (net) 78 134 71.9% 131 242 84.5%
Depreciation 147 169 15.2% 340 332 -2.3%
Profit before tax 952 1,181 24.0% 2,024 2,433 20.2%
Tax 330 403 22.0% 700 833 18.9%
Profit after tax/(loss) 622 778 25.1% 1,324 1,600 20.9%
Net profit margin (%) 9.3% 8.6%   9.9% 8.9%  
No. of shares (m) 750.0 800.0   750.0 800.0  
Diluted earnings per share (Rs)*       1.7 3.5  
Price to earnings ratio (x)*         14.8  
(* on trailing twelve months earnings)

What has driven performance in 2QFY09?
  • Exide manufactures batteries for both the industrial and the automotive segments. During the quarter, the growth in the automotive OEM segment was a little muted. However, it was more than made up by the stellar performance of the auto replacement battery segment, enabling the combined automotive segment to grow by 35% YoY. In the industrial segment, strong traction in the telecom and power space resulted in a 40% YoY jump in revenues during the quarter. Thus, both the segments contributed handsomely to the overall topline growth of 35% YoY.

  • Exide’s operating margins have slid by 1% YoY in 2QFY09. This is mainly due to the huge 41% jump in raw material costs. It should be noted that the company imports a major portion of its key raw material ‘lead’ and with the rupee having depreciated against the US dollar during the quarter, raw material costs have been on the higher side. In fact, had it not been for some proactive steps taken by the company like reducing its dependence on imported lead, the damage to operating profits would have been more. Furthermore, the company also did well to keep its other cost heads, especially the staff costs under check.

    Cost break-up…
    (Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
    Raw materials 4,247 5,969 40.6% 8,338 12,154 45.8%
    % sales 63.6% 66.3%   62.6% 67.2%  
    Staff cost 375 421 12.3% 770 817 6.2%
    % sales 5.6% 4.7%   5.8% 4.5%  
    Other expenditure 884 1,134 28.2% 1,726 2,120 22.8%
    % sales 13.2% 12.6%   13.0% 11.7%  

  • The company has reported a 72% YoY jump in interest costs and this has put further pressure on profits. Among other things, depreciation growth has remained benign and tax outgo has also been in line with profit growth, resulting in a bottomline growth of 25% YoY for the quarter.

What to expect?
    At the current price of Rs 51, the stock is trading at a multiple of 7 times our estimated FY11 earnings. The company’s first half earnings have come in line with our estimates and given the fundamentals, we don’t see any significant threat to our estimates in the near term. The recent correction has made Exide an attractive medium term play. We remain positive on the stock.

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