Back Exide Industries: Buy
B. Krishnakumar
Volumes have received a boost from the vehicle boom.
The company derives close to 60 per cent of the revenues from the automobile market and the balance from the industrial sector. Being the market leader in the automotive battery industry, Exide has benefited from the recent boom in the automobile industry. The increased production of commercial vehicles, passenger cars and two-wheelers has had a positive impact on sales volume.
The contribution of automotive batteries to the total turnover has risen 19 per cent, driven primarily by growth in demand from original equipment manufacturers.
Sales volume in the industrial battery market rose 30 per cent during the quarter ended September 2004. The increased activity in both the information technology sector and telecommunication industry also propped up demand for industrial batteries.
Though the turnover rose by a healthy 26 per cent, the profitability was under pressure. The operating profit margin dropped to 16.1 per cent from 19.5 per cent in the quarter-ended September 2003.
The sharp rise in the price of lead affected Exide's profitability. Lead is the key raw material, accounting for about 70 per cent of the total raw material cost. Raw material cost accounts for about 57 per cent of the turnover.
The price of lead has risen by over 75 per cent from the levels that existed a year ago. Battery makers have limited scope for revising prices to accommodate rise in input cost. This is because of the competitive pressure and the fact that a bulk of the turnover accrues from the original equipment market.
Owing to the pressure on profitability and an extraordinary charge of Rs 1.7 crore, the post-tax earnings dropped 5 per cent to Rs 19.7 crore. The company absorbed Rs 1.7 crore, representing one-time separation cost paid to the employees of the Ahmednagar, Maharashtra, plant on shifting of manufacturing to Bawal, Haryana.
The post-tax earnings would have suffered a bigger dent but for the recent revision in battery prices. The company managed to revise battery prices in the replacement market a few months ago. Aided by the "escalation clause" with respect to batteries sold in the original equipment market, the company has managed to mitigate the impact of the lead price rise.
Exide's prospects appear encouraging. The sustained increase in automobile production and the growing activity and investments in the telecom and information technology sector would drive growth for storage batteries. The recent efforts by the company would also bear results in the coming quarters.
Exide has initiated steps to enhance its presence in the replacement market. It is targeting the rural sector through marketing campaigns and the launch of batteries at relatively lower price points. The company has also identified exports as a focus area.
Exide acquired a production unit in Sri Lanka recently. It has also entered into tie-ups with overseas companies to boost exports. Exports could be another major driver of earnings in the future. The recent growth in automobile production is likely to drive replacement market demand for batteries.
Considering that battery realisation and profitability are relatively higher in the replacement market, the company is likely to register improved earnings in the future. Encouraged by the growing demand for traction batteries, the company has decided to double the capacity at its Haldia (West Bengal) plant by the end of the current financial year.
The firm trend in prices of lead and polymers are the major cause of concern. This can affect the profitability.
However, the growth in volume and the revision in prices should help the company sustain the growth tempo. Long-term investors may include Exide in their portfolio.
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