Exide's operating profit has shot up despite higher raw material costs. It is expected to grow at the rate of 21 per cent in the next three years. | ||||||||||||||||||||||||||||||||
In a market where volatility is the norm, investments should be confined to companies with good growth prospects, high earnings visibility, strong brand recall and standing in the market. | ||||||||||||||||||||||||||||||||
One company that fits these criteria is the Rs 1,800 crore lead acid battery major, Exide Industries, which is confident of outperforming the growth in its user industries. | ||||||||||||||||||||||||||||||||
"Our products have a strong brand recall. The equivalent of battery in Africa is Exide," says Paban Kumar Kataky, the company's director for the automotive battery division. | ||||||||||||||||||||||||||||||||
It is not only the strong brand and a variety of research-based products but also a strong distribution network and instant servicing capability, which has helped the company to ward off competition from imports and the unorganised sector. | ||||||||||||||||||||||||||||||||
The company has an exclusive direct dealer network of 3,000, 30 service stations and 22 mobile service units (a free service) for auto batteries. "You will find an Exide dealer even in a small town," says Gautam Chatterjee, director, industrial battery division. | ||||||||||||||||||||||||||||||||
Market leader Exide Industries has a stranglehold in the automotive and industrial battery market with the former having more than 50 per cent share of the market. | ||||||||||||||||||||||||||||||||
The company caters to the who's who of the Indian auto sector, be it two wheelers, four wheelers or even tractors. | ||||||||||||||||||||||||||||||||
Even in the industrial battery segment (which caters to power, telecom, infrastructure, computer, railways, mining and defence sectors), it is the only company to offer the entire range of capacities from 2.5 to 10,000 Ah (ampere hours) and its nearest competitor is one-third its size. | ||||||||||||||||||||||||||||||||
Though Exide is the leader, price competition cannot be ruled out. The company believes that it is able to counter the threat with a superior product, service, technology, people and higher productivity. | ||||||||||||||||||||||||||||||||
For example, in the last fiscal, despite raw material costs (lead prices) remaining firm, the company was able to record a higher operating profit growth.
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Exide's volumes will jump in 2008 when Tata Motors' world truck and the Rs 1 lakh car project are rolled out. However, the pricing of the products will have a crucial impact on Exide's financial performance. | ||||||||||||||||||||||||||||||||
Customers are doing well The robust 15 per cent CAGR witnessed by the Indian automobile sector in the last three years has created a large replacement market. | ||||||||||||||||||||||||||||||||
Further, the original equipment market (OEM) is expected to grow by 10 per cent in the next three years, which will further add to the replacement market growth. | ||||||||||||||||||||||||||||||||
Being the market leader, the company is well-equipped to capitalise on these opportunities as it sells in the ratio of 1:3 in the OEM and replacement segments. "We are positive on the company's prospects as it has one of the best networks in the replacement market," says an analyst from a broking firm. | ||||||||||||||||||||||||||||||||
Its high margin industrial division is also expected to do well. Demand from growth sectors such as power and telecom will keep the sales of industrial battery segment buoyant. | ||||||||||||||||||||||||||||||||
Analysts expect the division to grow at 25 per cent in the next two years. Industrial batteries market has fewer players as the user industries which are mainly large institutions depend on superior products and brands. | ||||||||||||||||||||||||||||||||
"The company has pricing flexibility as there are not many unorganised players," says Chatterjee. | ||||||||||||||||||||||||||||||||
Promising growth Overall, Kataky expects the company's sales and profits to maintain a CAGR of 18-21 per cent in the next three years. Though exports form a small portion of its revenues, the company has not ruled out the option of beefing it up. | ||||||||||||||||||||||||||||||||
It is already among the top three industrial battery players in countries such as Singapore, Malaysia, Korea and Australia and plans to be among the top two soon. | ||||||||||||||||||||||||||||||||
In FY06, net sales grew 17.3 per cent thanks to price hikes in the replacement market and steady growth in the OEM segment. The company revised automotive battery prices upward by 10-12 per cent and industrial batteries by 8 per cent in FY06. | ||||||||||||||||||||||||||||||||
Operating and net profit grew in the range of 25-28 per cent despite higher raw material (lead) prices and interest costs. "We focussed on efficiency, cost control measures and productivity to maintain realisations as we could not pass on the entire rise in lead prices to customers," says Kataky. | ||||||||||||||||||||||||||||||||
The company was able to weather the volatility in lead prices. After remaining firm for the last year and touching an all time high in early 2006, they are currently quoting at $1120 per tonne. | ||||||||||||||||||||||||||||||||
"Lead prices will be comfortable for us if they decline to $800 per tonne. However, if they go up, we may have to increase prices," he adds. However, according to an analyst, lead prices are expected to remain soft due to commissioning of capacities. | ||||||||||||||||||||||||||||||||
In any case, analysts expect the company's margins to remain stable as it has a price variation clause in the industrial battery segment and its exports (which form 40 per cent of total turnover). Even in the automotive OEM segment (which accounts for one-third of total revenues), the company has a 'price pass through' clause. | ||||||||||||||||||||||||||||||||
Attractive valuations Last year, Exide industries bought a 50 per cent stake in ING Vysya Life Insurance. | ||||||||||||||||||||||||||||||||
According to analyst estimates, the value of the insurance business is pegged at Rs 40 per share. Excluding this investment, the stock trades at 13.3 times (on a conservative view of lead prices) and 12 times (on a more realistic basis) for FY07 and 10.8 times on FY08's estimated earnings. | ||||||||||||||||||||||||||||||||
According to an analyst, the stock is attractively valued as historically it has hovered in the range of 14-15 P/E band. | ||||||||||||||||||||||||||||||||