Revved up for robust growth

India’s largest lead acid battery manufacturer, Exide Industries, came out with a good set of numbers on Tuesday. The company reported a 35 per cent rise in net profit in the June quarter on the back of robust sales growth of 28 per cent.

The profit growth looks impressive in the midst of continued volatility in raw material prices even as competition from cheaper imports continue unabated. Increased demand from both industrial as well as automotive segments has augmented higher growth rates, which looks sustainable.

Automotive sector: Leading the way
Sales from the automotive segment contribute a fair chunk of revenues at around 60 per cent. The demand from the original equipment manufacturers (OEMs) has come back in the last four quarters. In the June quarter, too, car and two-wheeler sales volumes were robust, ensuring a good quarter for Exide.

In the auto segment, OEM supplies account for over half of Exide’s total business, with the rest coming from replacement demand from existing vehicle owners. The company’s penetration strategy in the replacement market for commercial vehicles and tractor helped grow the segment’s volume 14 per cent in the quarter.
 

SPEEDY GROWTH
In Rs cr	FY10	FY11E	FY12E
Sales	3,800	4,700	5,400
Ebitda	890	1,100	1,285
Net profit	537	665	775
EPS (Rs)	6.3	7.8	9.1
P/E (x)	22.0	17.8	15.2
E: Estimates

Among other segments, motorcycle battery sales showed significant volume growth of 27 per cent. Overall, the company’s automotive and industrial battery segment revenues grew 28 per cent and 26 per cent, respectively.

This was faster than volume growth, consequent to higher lead (key raw material) prices, which were up about 30 per cent year-on-year in the June quarter.

What’s even more impressive is that, in spite of higher raw material costs, the company’s operating margins were down just 40 basis points year-on-year in the June quarter.

The gain in margins can be traced to Exide sourcing around 45-50 per cent of its raw material from its smelting and refining subsidiaries (Chloride Metals-100 per cent stake and Leadage Alloys-51 per cent stake), which have provided some cushion against volatile lead prices.

Outlook
Experts forecast a robust double-digit growth in demand for batteries from OEMs as well as replacement markets in the next two years. To meet the rising demand, Exide plans to expand its production capacities, for which it has earmarked Rs 350 crore in 2010-11.

The company also plans to acquire the remaining 49 per cent shareholding in Leadage, a move IIFL analysts say is positive as this subsidiary is larger and more profitable (Rs 54 crore pre-tax profit in 2009-10) than Chloride Metals.

Meanwhile, lead prices have slipped by 10-12 per cent since the March quarter and should provide further support to margins. At Rs 138.65, the stock is trading at 15.2 times its estimated 2011-12 earnings. The stock, which has outperformed broader indices in the last three months, should deliver healthy returns, going ahead.