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Exide: Margin improvement happening! - Views on News from Equitymaster
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Exide: Margin improvement happening!
Oct 24, 2005

Performance summary
Exide, the market leader in the automotive battery segment, had recently announced its second quarter and first half results. While net sales grew at 10% in the second quarter of the fiscal, operating profit jumped 23% YoY on the back of favorable raw material price scenario. Higher other income and lower tax incidence have enabled a 35% YoY growth in net profit in 2QFY06 (excluding extraordinary items).

Rs m) 2QFY05 2QFY06 Change 1HFY05 1HFY06 Change
Net sales 3,069 3,364 9.6% 5,783 6,638 14.8%
Expenditure 2,571 2,752 7.0% 4,777 5,501 15.2%
Operating profit (EBDITA) 498 612 22.9% 1,006 1,137 13.0%
Operating profit margin (%) 16.2% 18.2%   17.4% 17.1%  
Other income 2 23 1084.2% 7 42 501.4%
Interest 21 59 180.9% 115 93 -19.4%
Depreciation 132 138 4.4% 262 275 5.0%
Profit before tax 347 438 26.3% 636 810 27.4%
Extraordinary items (17) - - (17) - -
Tax 133 147.1 11.0% 238 277.1 16.7%
Profit after tax/(loss) 197 291 47.4% 381 533 39.8%
Net profit margin (%) 6.4% 8.6%   6.6% 8.0%  
No. of shares (m) 71.2 75.0   71.2 75.0  
Diluted earnings per share (Rs)* 11.1 15.5   10.7 14.2  
P/E ratio (x)         15.1  
(* annualised)            

What is the company's business?
Exide is India's largest storage battery company (33% market share in overall domestic market). It sells both automotive and industrial batteries 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 2QFY06?
Volume growth at realistic levels: Since 4QFY04, the company's topline has been growing at a healthy double-digits led by impressive growth in automobile sales. However, the sales growth at 9.6% is very much a realistic number as we go forward. When we met the company in August 2005, it has opined of slower growth in topline (given the rise in auto sales since September 2003). Also, the first quarter sales could have been affected by flash floods in various states. We believe that the company's topline will mirror auto demand, which we expect to grow by 7% to 8% long-term.

Cost breakup
(Rs m) 2QFY05 2QFY06 Change 1HFY05 1HFY06 Change
Raw material cost 1,729 1,795 3.8% 3,163 3,690 16.7%
% sales 56.3% 53.3%   54.7% 55.6%  
Staff 231 249 8.1% 464 497 7.0%
% sales 7.5% 7.4%   8.0% 7.5%  
Others 611 708 15.9% 1,150 1,315 14.3%
% sales 19.9% 21.0%   19.9% 19.8%  

Lead price kicker: The highlight of the quarter is the sharp rise in operating margins by 200 basis points. With raw material cost to sales falling from 56% in 2QFY05 to 53% in 2QFY06 led by favorable lead prices (one of the key raw material used in the manufacture of batteries). According to the World Bank, lead prices declined from 93.2 cents/kg in 2QFY05 to 89.2 cents/kg in 2QFY06. The decline is much sharper if one considers that the fact that lead prices are lower 8.7% as compared to 1QFY06, which is indicated in margins. We had factored in around 0.5% decline in raw material cost to sales in FY06. If prices continue to remain soft, we may have to upgrade our operating margin estimate for the company going forward.

Other income leaps: As compared to a 23% rise in operating profit in 2QFY06, profit before tax has risen at a faster pace of 26% YoY largely due to higher other income (taking into account higher interest expense). The rise in other income could be attributed to the surplus cash raised from private placement (3.7 m shares at Rs 153 per share). We had factored in a 42% rise in other income for FY06, which we believe will have to be revised upwards, post 1HFY06 numbers.

What to expect?
At the current price of Rs 215, the stock is trading a price to earnings multiple of 14.1 times our estimated FY06 earnings. Despite the strong growth prospects and the upside potential on the operating margins front, we believe that the current valuations adequately reflect the medium-term growth prospects. Also, given the dependence on auto companies for growth and increased competition from imports, the valuations of the company should be at discount to auto majors. To that extent, the risk-return matrix is skewed towards risk.

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