Exide Industries

Investors with a two-three year perspective can consider buying shares in Exide Industries. Until the market correction in January, the stock had moved up sharply, delivering a 75 per cent return in a span of six months. From a 52-week high of Rs 90 in mid-January, the stock has declined to Rs 68 currently. We consider this fall a good entry point as the company’s earnings prospects remain intact.

The potential for high growth in the telecom and UPS battery segments, capacity expansion and the rollout of new models by passenger carmakers (indicating higher volumes) lend a positive outlook to the earnings for Exide. Besides, the company’s focus on increasing exports of higher-margin industrial batteries and its acquisition of two lead smelting units to combat rising international lead prices and improve margins, inspire confidence. At the current market price of Rs 68, the stock trades at a PE of around 20 times trailing 12-month earnings.
Business

Exide is the market leader in the storage batteries business, selling mainly under the Exide and Standard Furukawa brands. While the automobile batteries segment generates 60 per cent of the revenues, the industrial batteries division chips in with the rest. Exide batteries power most of the models of Toyota, Honda, Hyundai, Tata Motors, Maruti and Mahindra and Mahindra.
Prospects

A key positive for Exide in the automotive segment is its diversification — it caters to the passenger car, two-wheeler, commercial vehicle and tractor markets. This sales mix will help the company tide over a slowdown, such as the current one, better. Exide will also power at least 50 per cent volumes of the soon-to-be launched Tata Nano. Robust sales growth for automobiles over the last few years, will also translate into buoyant replacement demand for Exide.

Besides, as telecom service providers expand their networks and new players chart pan-India telecom forays, the company will benefit from the increased demand for batteries that support tower and exchange infrastructure. UPS battery sales will benefit from growth in the IT and ITES industry, which requires back-up power, and the demand from households and offices, amid continued power shortages. To cater to this increasing demand, the company is investing in expanding capacities for both the industrial and automotive batteries this year. The miner’s cap lamp and submarine batteries may also help to better the product mix and improve realisations.
Focus on exports

With the acquisition of a stake in Ceil Motive Power, Australia, last year, the company aims to be the market leader in the traction battery segment in Australia by 2010. To serve this end, the company has set up a plant at Haldia with the capacity to manufacture one million traction batteries per year. Besides, the company is also setting up a distribution network in Europe and expects Germany and the Scandinavian countries to be major contributors to its export growth this year. An entry into the US markets in 2009-10 is also on the cards.

All these plans bode well for volume growth for the company as it aims to increase its share of exports in the total production from 13 per cent to about 20 per cent in the next two years.
Margins to improve

For the first quarter of 2008-09, net sales grew by 34 per cent to Rs 1,135 crore and profits by 17 per cent to Rs 82 crore. As lead prices showed signs of peaking out, operating margins improved to about 17 per cent. Spiralling lead costs during the last financial year saw the company’s operating margins steadily decline from 20 per cent in the June quarter to 17 per cent in September and to about 15 per cent in the third and fourth quarters.

Being the market leader, Exide had periodically raised prices to pass on part of the increase in raw material (lead) costs to its customers. The company has also sought to shield itself from lead price volatility and reduce dependence on imported lead by acquiring two smelting companies — Pune-based Tandon Metals and Leadage Alloys India — near Bangalore. Through these acquisitions, the company aims to save 10 per cent on raw material costs by sourcing 50 per cent of its total lead requirement captively over the next three years.

Though this move will help profit margins, until the capacities in the smelters are fully utilised, any escalation in lead prices will remain a concern.