Exide Industries (BOM:500086)

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Exide is India's largest storage battery company. The company manufactures the widest range of storage batteries in the world from 2.5 Ah to 15,000 Ah capacities, covering the broadest spectrum of applications. Currently, the company has a domestic market share of more than 40% in industrial segment and more than 70% in auto OEM and replacement auto. The company is also one of the largest power storage solution companies in South-East Asia. It has a technology tie up with Shin Kobe Electric Machinery Co and VRLA Batteries and The Furukawa Battery Co.

During FY09, automotive segment witnessed a slowdown, hurting Exide’s growth in the OE (Original Equipment) space. However, thanks to the decent performance of the auto replacement battery segment, overall growth in the automotive segment remained positive. In the industrial segment, sub-segments like inverter, UPS and telecom performed exceptionally well, thus playing a key role in enabling the company to post a robust topline growth of 19% for the full year. Growth in operating profits came in slightly lower at 17% as higher lead prices exerted pressure. The bottomline witnessed a growth of 14% YoY as besides slightly lower operating margins, higher interest and tax outgo played spoilsport.

Going forward, as the automobile industry is expected to grow at a steady pace, topline growth does not appear to be a major concern for Exide. This growth could also be propelled by strong demand for industrial batteries from sectors like telecom, power, malls and multiplexes. Having said that, the main causes of concern are falling average realisations, elongated replacement cycle, threat from imports and uncertainty about the lead prices. Even the volumes of the company have grown at substantially lower speed than the growth in auto sales in India in past few years. Competetors are eating into the market share of Exide which has fallen from 90% to current level. Another cause of concern can be on the working capital side, with respect to higher credit period demanded by OEMs. This could directly affect the bottomline by way of rising interest expenses.

Quarterly Result Analysis- Sept '09

Performance summary

 -Topline grows by a modest 6% YoY during the second quarter.
 - Operating margins witness a huge jump of 9.5%, leading to a 67% surge in operating profits during the quarter.
- Bottomline grows by a strong 92% YoY for the quarter as depreciation and interest charges add further zing to the operating performance.
 - Half yearly bottomline grows 70% YoY on the back of a mere 2.5% topline growth, thanks once again to the strong operating performance. 

• on trailing twelve months earnings

What has driven performance in 2QFY10?

- Exide’s topline grew by a tepid 6% during the quarter. However, the performance was better than the first quarter where the topline growth was virtually flat. Exide supplies batteries to the automotive and industrial segments and hence, with a revival in the same during the second quarter, the company also witnessed an improved performance. While volumes grew at double-digit rates, its impact on topline was muted given that the company had lowered its selling prices during the quarter. The company also benefited from cost savings as well as volume growth in home, UPS, inverters and two-wheeler batteries.

- For the company to meet our sales projections, the topline will have to grow by 16% YoY for the second half of the fiscal. While that does look like a tall order, it should be noted that the second half of the previous fiscal was not amongst the best in recent time and hence, Exide does stand a good chance of growing its topline by about 11% for the full year as projected by us.

- Bringing about a substantial improvement in its operating performance, the company has managed to cut its raw material expenses by nearly 13% during the quarter and hence, boost its operating profits by a strong 67% YoY. While a part of the improvement could be attributed to reduced prices of lead – Exide’s main raw material – the company also benefitted from sourcing nearly 40% of its lead and lead alloy requirements from its own captive smelters and also having made its cost structure more efficient by connecting tier II and tier III cities through a hub-and-spoke model. Had it not been for the strong 40% jump in staff costs, the growth in operating margins could have been even higher.

- Exide’s net profits saw a strong growth of 92% YoY during 2QFY10. This was led by operating margin expansion, lower than proportionate increase in depreciation and lower interest costs. The net margins improved to 15.7% from 8.6% during 2QFY09.