Exide Industries

The Exide Industries stock has declined by 37 per cent since our earlier buy recommendation at Rs 68 in August this year. A broad market decline and continued slowdown in the automobile sector, which in the last few months has dampened passenger car sales volumes too, have triggered the decline.

While the slowdown may have led to lower demand for automotive batteries from OEMs (original equipment manufacturers), we feel the company can tide over this, given the strong demand for replacement batteries. Besides, the recent excise duty cuts and steps to make credit cheaper might also boost auto sales over the medium-term.

Besides, growing demand in the industrial batteries segment, moderation in lead prices and the company’s acquisition of lead smelting units to combat volatility in lead prices and improve margins also lend long term earnings visibility.

At the current market price of Rs 43, the stock trades at a price-to-earnings ratio of about 11 times estimated FY-09 earnings. This provides a good entry point for investors with a two-three year perspective.
Replacement demand to drive growth

Exide Industries derives about 55 per cent of its revenues from the sale of automotive batteries. Exide batteries power most of the models including Toyota, Honda, Hyundai and Tata Motors. The near-term growth in supplies to the OEMs may be capped due to the ongoing slowdown in the industryHowever, after-market demand for batteries can boost volumes. Buoyant automobile sales in the past few years implies good demand for batteries currently as the factory-fitted batteries would typically need to be replaced after three-four years. The company will be a beneficiary of this expected rise in demand as it has a share of about 70 per cent in the market for branded replacement batteries.

One trend that has been observed in the last one or two years in automobile sales is the strong demand from the semi-urban and rural markets. Like several automakers, the company too is tapping this rapidly growing market in Tier-2 and Tier-3 cities by setting up its marketing infrastructure. This initiative will help boost volumes and expand margins as retail sales generally yield higher margins than sales to OEMs.
Promising prospects for industrial batteries

The expanding network of telecom service providers could also translate into increased demand for batteries that support tower and exchange infrastructure. UPS battery sales too could see strong demand from households and offices, amid continued power shortages. To cater to this increasing demand, the company is investing about Rs 300 crore in expanding capacities and modernising existing plants for both the industrial and automotive batteries this year.
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 an EoU (Export Oriented Unit) 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. Exide is also looking for a joint venture partner in the US. The company expects all these initiatives to help double its exports this year .
Margins to expand

For the quarter ended September 2008, net sales stood at Rs 900 crore, growing by about 34 per cent year-on-year. For the same period, net profits grew by 26 per cent to Rs 78 crore. Spiralling lead costs during the last financial year saw the company’s operating margins steadily decline from 20 per cent in the June 2007 quarter to about 15 per cent in the third and fourth quarters of FY08. For the first and the second quarters of 2008-09 though, margins have stabilised at about 17 per cent. Operating margins in the next few quarters will improve further as the company expects the full impact of the decrease in international lead prices to kick in then.

Besides, the company has also sought to shield itself from lead price volatility and reduce dependence on imported lead by acquiring two smelting companies — Tandon Metals and Leadage Alloys India. Through these acquisitions, the company aims to save 10 per cent on raw material costs through captive sourcing of up to 50 per cent of its total lead requirement over the next three years.