• OCTOBER 28, 2004

Exide: Margins break the circuit

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)2QFY042QFY05Change1HFY041HFY05Change
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)      

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)2QFY042QFY05%Change1HFY041HFY05%Change
Raw materials 1,199 1,748 45.8% 2,326 318236.8%
% sales48.7%56.5% 48.6%54.3% 
Staff cost 213 231 8.4% 453 4642.5%
% sales8.6%7.5% 9.5%7.9% 
Other expenses 578 624 7.9% 1,138 12106.3%
% sales23.5%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.

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA, Canada or the European Union countries, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited (Research Analyst)
103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407