Stock Review: Exide Industries

THE scrip of the country's largest automobile and industrial battery maker, Exide Industries, dropped 4% on Tuesday despite the firm posting a robust 42% increase in net profit to Rs 212.9 crore in the September 2010 quarter over the year-ago period. Investors seem to have discounted the one-time gain that boosted profit, even as operating margins contracted due to higher raw material cost.

   Excluding the exceptional item of sale of a piece of land and dividend earned from its investments, the company's net profit declined 1% year-on-year. This is a significant deterioration in bottomline compared with over 30% growth in earnings in the previous quarter. The dip is largely due to shrinking margins.

   Raw material costs rose 28% in line with the price of lead, a key input for making batteries. The firm has, over the last one year, increased its captive consumption capacity for lead, but that has not been enough to insulate it from the impact of rising input price. Its raw material to net sales ratio increased to 61%, resulting in 400 basis points (bps) contraction in operating margins for the three months to September 30. Another cause for concern is the decelerating growth in demand. So far, the demand has been riding high on the back of relatively low base of last year. While demand from automobile companies allowed Exide to clock double-digit growth in revenues, the firm is already showing signs of slower growth now. This became evident from the slowing topline growth. The company's sales grew by 19% year-on-year to Rs 1,126 crore in the September quarter compared with a robust 30% rise in the previous quarter. This was despite Exide being the market leader in automotive batteries.

   This is going to be a concern even in the coming quarters as the overall growth in the automotive industry is expected to average out in the next six months. Industry projections for the year ending March 2011 peg sales growth of cars at 20% to 21% . Sales in the first half of the fiscal had increased by over 30%. Moreover, if lead prices move up from hereon it will further shrink margins.

   On the other hand, what could come handy for the company is the fact that it has a strong market presence in its segment. Also, the absence of large-scale competition in a sector that is growing consistently for the past few years has brought steady returns for Exide shareholders. This is due to growth in both new vehicle sales as well as replacement demand from an expanding universe of automobiles. Going ahead, however, it needs to be seen how well Exide can take advantage of its market leadership amidst tepid demand