Stock Review: Exide Industries

 

 

Investors with a low risk appetite and looking for reasonable returns can consider Exide Industries with a horizon of two years

 

   Leading auto and industrial-battery manufacturer Exide Industries posted double-digit growth in both revenue and profit for the past two quarters. This is on the back of robust vehicle sales and better margins due to higher realisations and low raw material costs supported by captive sourcing.

   Given that automobile demand is expected to remain buoyant in coming quarters due to improved economic outlook, besides increase in demand from industrial users owing to power deficit, the company is well-placed to deliver good numbers in coming quarters as well. Investors with low-risk appetite looking for reasonable equity return can take exposure in the stock with a horizon of two years.

BUSINESS:

Exide is the largest power storage solutions company with market share of 70% in domestic market. It operates six battery-manufacturing plants in India besides two lead smelters. The company accounts for 72% share in the original equipment maker (OEM) segment for automobiles and a similar market share in the replacement segment.

   It enjoys pricing power in both these segments and leverages the extensive sales and distribution network, which includes 38,500 retail outlets for after sales service.

   As far as the revenue model goes, Exide derives 60% of its business from the sale of automobile batteries and the rest from industrial segment. Within the auto segment, over 70% comes from the high-margin replacement sales where existing users need to replace battery of their vehicles, which has a cycle of 2-3 years on average.Exide also holds 50% stake in ING Vyasa life insurance but this is purely an investment, which is expected to yield benefits to its shareholders.

GROWTH DRIVERS:

While auto demand is expected to continue to grow albeit at a slower pace after sharp rise in the last one year, the demand for the auto batteries will rise in the near future as also coming years from replacement demand.

 
   This is because, Exide supplies across all segments (passenger as well as commercial vehicles) of the auto industry. Some of the prominent names in the client list include Tata Motors, Maruti Suzuki, Mahindra-Renault, Ashok Leyland, Swaraj Motors and Eicher Motors. This provides it with reasonable cushion in terms of business spread among the key players in the industry. Another trigger for revenues is likely to come from Tata Motor's ramping up of manufacturing capacity of its low-cost car Nano at Sanand (Gujarat). Exide is one of the top battery suppliers for Nano and will benefit from higher volumes. The recent launches in the passenger vehicles segment will also help in expanding revenue base in the coming quarters.

   In the industrial segment, Exide is going to reap benefits from acute shortage of power from rural housing demand.

   To meet this rising demand, the company has plans to invest 350 crore to expand its capacity by end of FY11, as it has been operating at full capacity in the last one-year.

FINANCIAL PERFORMANCE:

The company reported compounded annual growth of 26% in topline in the last three years with net profit growing more than 51% in this period. This was despite the downturn in the auto market for a year due to the economic slowdown in 2008-09. Its business mix explains this. As the company draws majority of its revenue form the replacement demand, which is high margin segment compared with OEM sales directly to automobile makers, it is relatively insulated from any negative surprises in the downturn.

   For the quarter ended June 30, the company's net sales rose 28% over the year-ago period to 1,152 crore while net profit grew 35% to 165 crore. While auto-battery demand remained strong, growth in the industrial segment was slower than expected due to lower sales to telecom tower companies who were slow in their expansion plans. Better earnings growth is partly due to higher product prices even as EIL managed to keep raw material costs under check due to sourcing of lead, its key input, from a captive unit.

VALUATIONS:

The expected demand boom for automobiles is going to act as catalyst for higher earnings in the coming years with better growth in industrial segment providing topline growth. Rationalisation of cost through use of captive smelter will add more value in the bottom line. At the current market price of 158, the scrip trades at 22 times its profit for the twelve months ended June 30 on a standalone basis. This is high compared with an earnings multiple of just 12 for its closest peer Amara Raja Batteries.

   We expect the company to close the year, ending March 2011, with a net profit 650 crore and grow it further to 800 crore in FY12. Exide is a reasonable bet for the long term.