Exide Industries: Buy: Business Line

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Parvatha Vardhini C

Investors with a two-to-three-year perspective can invest in Exide Industries. Robust demand for automotive batteries, capacity expansions, limited exposure to the telecom batteries segment and increased sourcing of raw material from captive units signal good earnings prospects over the given time-frame.

For the quarter ended September 2010, the company posted an 18 per cent year-on-year growth in net sales to Rs 1,127 crore and an adjusted growth of 17 per cent in net profits to Rs 166 crore

Although still healthy, operating margins declined from 26 per cent in the same quarter last year to about 22 per cent currently. At the current market price of Rs 163, the stock trades at a PE of 18 times its estimated FY-12 earnings, at a justifiable premium over its small-cap peer, Amara Raja Batteries.

Positive outlook for autos

 

Selling mainly under ‘Exide' and ‘SF' brands, the company is the market leader in automotive batteries. It has a 70 per cent share both in the original equipment (OE) and the replacement markets. Exide batteries power most of the models of Toyota, Honda, Hyundai, Tata Motors, Maruti and Mahindra and Mahindra. It also supplies two-wheeler batteries. During 2009-10, the company began supplies to models such as the Chevrolet Beat, Honda Jazz, Maruti Suzuki Ritz and Eeco and the Fiat Grand Punto.

About 60 per cent of the company's total revenues come from automotive batteries, of which a major portion is from the high-margin replacement segment. OE margins are generally lower, given the limited pricing power enjoyed.

For example, the current scenario of strong demand for automobile batteries has created capacity constraints for the company, restricting the volumes available for replacement sales.

This is partly the reason for the year-on-year contraction in operating margins by 4 percentage points in the September quarter. That said, OE sales do aid volume based growth in such years of high demand. Although the Society of Indian Automobile Manufacturers (SIAM) expects auto sales to moderate in the second half of this year because of the base effect, there is no sign of it yet. Given the continuing demand and its market share losses in recent times due to limited availability of capacity, the company has embarked on a capex plan of Rs 400 crore this fiscal.

Exide is enhancing its four-wheeler battery capacity by about 28 per cent and two-wheeler battery capacity by about 60 per cent during this year. Besides, robust automobile sales now means that there will be good replacement demand two years down the line and this lends greater visibility to earnings growth. Considering the increasing number of electric vehicle options in the two-wheeler segment, Exide has launched batteries for electric bikes and scooters and is also in the process of developing batteries for micro hybrid vehicles.

This apart, given the growing rural demand for small cars and bikes as also the company's plans to garner a 25 per cent market share in the tractor battery segment in the next one or two years, it is running a CRM initiative called ‘Project Kissan' in the rural areas to strengthen its foothold and is also increasing its retail touch points.

Industrial batteries hedged

At a time when prices and offtake of industrial batteries have generally been impacted by tower-sharing arrangements and the slowing of capex plans in the telecom industry, an area in which Exide scores over Amara Raja is its limited business with telecom companies. Exide derives 65 per cent of its industrial segment revenues from the sale of inverter and UPS batteries. Railways and telecom chip in with a 20 per cent contribution.

This augurs well for the company as large-scale computerisation of banking networks and government departments, creation of high-powered data centres in IT and financial services industry, increasing penetration of PCs and the continued power shortage situation are expected to keep the market for UPS and inverter batteries ticking.

Besides, the Government's priority to expand railway connectivity, modernise facilities and make India a manufacturing hub for coaches in South Asia, implies strong possibilities of incremental revenues from this front.

Reining in costs

Exide also scores in the reining in of raw material costs. The company has two lead smelters, Tandon Metals and Leadage Alloys India from where it currently sources 45 per cent of its lead requirements. This, in turn, implies that Exide will be able to withstand a run up in international lead prices better, as it happened earlier this year. More so, as sourcing from smelters is expected to go up to 70 per cent by March 2012.