Exide Industries shrugged off a disappointing last year, posting a strong top line growth in the December quarter, above the Street’s unsurprisingly muted expectations. Profit margins, too, improved after the steep fall seen in the September quarter. The management believes it will expand further. The margin gains are expected to be supported by higher volumes and better revenue mix.
These, along with improving demand and revenue mix, should help the company report strong top line and profit growth in 2012-13, with earnings per share (EPS) seen surging about 50 per cent to Rs 8.2. Anticipating an improvement in fundamentals, the stock (up 27.6 per cent) has outperformed broader markets in the last one month — it had risen 12 per cent since the results were announced on January 20. However, at the current level of Rs 135, it trades at a fairly pricey 16 times 2012-13 consolidated EPS estimates. While it is expected to track broader markets, investors may consider the stock on meaningful correction from a year’s perspective.
Q3: Margins recover
Exide’s auto segment revenues increased 11 per cent, led by volume growth of 4.6 per cent, while the industrial segment grew about 2 per cent on a volume growth of 3 per cent over the September 2011 quarter. Price cuts taken earlier for the four-wheeler replacement segment helped a recovery in demand in the auto segment. Replacement volumes incre-ased to 37 per cent of total sales, from 34 per cent in the September quarter. Sales in the industrial segment were boosted by higher home inverter and power back-up volumes (up 40 per cent year-on-year) while the low margin telecom segment sales almost halved in this period.
| FULLY CHARGED | |||||
| In Rs crore | Q3' FY12 |
% change | FY12E | FY13E | |
| q-o-q | y-o-y | ||||
| Net sales | 1,250 | 6.3 | 19.2 | 4,971 | 5,745 |
| Ebitda margin (%) | 13.2 |
548 bps |
-201 bps | 13.9 | 17.4 |
| Reported PAT | 104 | 104.0 | -16.2 | 462 | 693 |
| EPS (Rs) | 1.2 | 104.0 | -16.2 | 5.4 | 8.2 |
| E: Estimates Source: Analyst reports | |||||
The favourable mix change to replacement sales (relatively a higher margin business) helped expand operating margins to 13.2 per cent, up about 550 basis points sequentially. The price increases taken last quarter for four-wheeler batteries sold to original equipment manufacturers (OEMs) also helped improve margins. However, this, an Antique Broking report pointed out, seemed unsustainable.
Positively, the volume leverage played into the margin expansion, with capacity utilisation in the auto segment at 82 per cent and industrial battery segment at 74 per cent. Softer lead prices in the December quarter helped, dipping 1.7 per cent sequentially to Rs 1,31,500 a tonne.
Currently, captive smelters provide about half its lead requirement, while Hindustan Zinc provides 28 per cent and imports 24 per cent. Sahil Kedia and Sahil Sheth of Enam Research say in a recent note: “Exide has entered into a collaboration with East Penn Co (USA) for technical assistance in the manufacturing and smelting facilities. The company will now expand its smelting operations (currently at 53 per cent of requirement), with a target of 70 per cent over the years.”
While this should prove helpful in the long run, the medium-term outlook also appears positive. The management is optimistic about its margin expansion outlook over 2012-13 and expects lead prices to further fall to Rs 1,25,000 a tonne this quarter because of a relative depreciation of the rupee sequentially, according to Spark Capital. Margins will also benefit from the company exhausting the higher cost inventory build-up over recent quarters, even as volume growth brings added operating leverage, with further improvements in the business mix. Thus, Spark Capital sees Ebitda margins expanding to 18 per cent in FY13.
However, at the net level, while profits jumped sequentially, a 70 per cent fall in other income (last year’s results included gain on transfer of leasehold land) led to a fall in profits on a year-on-year basis.
The road ahead
The volume growth potential is still the mainstay of the pitch for the company, in line with the uncontested longer-term growth story for two-wheeler and four-wheeler sales, say analysts. An increased cross-selling by its large automotive segment dealer network should also boost inverter and industrial sales. The two-wheeler replacement demand seen this quarter comes within 15 months of the two-wheeler battery sales to Hero MotoCorp in April 2010, says ICICI Securities’ Karan Mittal in a report. The strong auto sales in 2009-10 and 2010-11 are expected to fuel replacement demand over the next couple of years. This may, however, necessitate capacity expansion.
One the flip side, the risk comes from the potentially unsustainable replacement segment margins, given the low entry barriers and increasing competition. This has already resulted in a gradual market share loss (62 per cent in the March 2010 quarter to about 50 per cent in the September 2011 quarter), which Exide partly regained in the December quarter (about 56 per cent). The management is looking to enhance this to 60 per cent.
