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Exide: Margins break the circuit

Oct 28, 2004

Performance summary
Exide, India’s largest manufacturer of automotive batteries has put up a disappointing set of 2QFY05 numbers. The bottomline of the company has fallen by 5% as compared to the same quarter last year. While the topline growth has been robust with a 26% YoY rise, higher raw material expenses have resulted into a dip in its bottomline. For the half-year period, the topline and bottomline growth stood at 22% and 15% respectively.

(Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
Net sales 2,464 3,096 25.6% 4,789 5,856 22.3%
Expenditure 1,990 2,603 30.8% 3,916 4,855 24.0%
Operating profit (EBDITA) 474 493 3.9% 873 1,001 14.6%
EBDITA margin (%) 19.2% 15.9%   18.2% 17.1%  
Other income 5 7 42.3% 9 12 36.3%
Interest (net) 34 21 -38.0% 70 115 63.5%
Depreciation 124 132 6.4% 272 262 -3.6%
Profit before tax 321 347 8.0% 540 636 17.8%
Extraordinary item - (17)   -    
Tax 114 133 16.2% 194 238 22.4%
Profit after tax/(loss) 207 197 -4.7% 346 398 15.2%
Net profit margin (%) 8.4% 6.4%   7.2% 6.8%  
No. of shares (m) 35.7 71.2   35.7 71.2  
Diluted earnings per share (Rs)* 11.6 11.1   9.7 11.2  
Price to earnings ratio (x)   13.3     13.1  
(* annualised)            

Background
Exide Industries Ltd (EIL) is India's largest storage battery company (99% of revenues derived from batteries). It sells both automotive and industrial battery and the sales mix is estimated at 75:25. Over the years, the company has consolidated its position in the automotive OEM segment (90% share). Apart from this, the company has an estimated 63% market share in the replacement market (retail). 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.

What has driven performance in 2QFY05?
Riding on auto sales:  The company supplies automotive batteries to almost all the major OEMs in the country. Thus, the strong topline growth is the consequence of robust growth in auto sales in the country during 2QFY05. Just to put things in perspective, Maruti, India’s largest passenger car manufacturer, has seen its volumes grow by 20% YoY during the quarter. Besides, two-wheeler sales have also risen by 13% during the quarter, thus ensuring a revenue flow for the company on this front as well. As far as sales of industrial batteries are concerned, there have been significant investments in power and telecom segments in the past few months and this also seems to have aided the topline growth. Already, during the first quarter, sale of industrial batteries in value terms was higher by 30% YoY.

Lead prices continue to hurt:  Operating margins have fallen by a significant 330 basis points. The wrecker-in-chief has been lead, the key raw material, whose prices has risen steadily (over 50% YoY) during the past few months and has continued to exert pressure on operating margins. Increasing competition in the retail market and a seemingly lower bargaining power vis-ŕ-vis its OEM customers seems to have significantly blunted the company’s ability to pass on the price hike to its end users. Although staff costs and other expenses have fallen, it was still not enough to stall the fall in margins.

Cost break-up...
(Rs m) 2QFY04 2QFY05 %Change 1HFY04 1HFY05 %Change
Raw materials 1,199 1,748 45.8% 2,326 3182 36.8%
% sales 48.7% 56.5%   48.6% 54.3%  
Staff cost 213 231 8.4% 453 464 2.5%
% sales 8.6% 7.5%   9.5% 7.9%  
Other expenses 578 624 7.9% 1,138 1210 6.3%
% sales 23.5% 20.2%   23.8% 20.7%  

Net profit:  In the past couple of years, the company has slashed debt to the tune of nearly Rs 1.5 bn and this is now having a positive impact on its interest expenses as they were down by a significant 38% as compared to same quarter last year. However, higher tax provisioning has further taken its toll on the company’s bottomline and as a consequence, has witnessed a fall of 5% YoY.

What to expect?
At Rs 147, the stock currently trades at a P/E multiple of 13 times its annualised 1HFY05 earnings. The company’s tie-up with leading OEMs is a big positive for the company going forward and is likely to ensure a robust stream of revenues in the medium to long term. On the retail side however, increasing competition might not only hurt market share but could also put pressure on realisations. Thus, while explosive growth might elude the company, it is good steady long-term bet, provided the tie-ups remain in place.


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