Exide Industries Ltd. : Is it charged up for the future?

Exide’s 10 YEAR X-RAY: Green (Very Good)

Exide in Brief:

Exide Industries is a market leader in the storage battery segment. Let’s see what the company is really about?

Exide is the biggest storage battery manufacturer in India, as well as the South Asian and South-East Asian regions. The products manufactured by the Company include automotive batteries, industrial batteries and submarine batteries.  It is the leader in both organized automotive and industrial segments in India and the only company providing submarine batteries to the Indian Navy. In the Industrial segment it caters to industries like power, telecom, etc. The Company is one of the five companies in the World which has the capability to make submarine batteries for both Russian and German types.
It manufactures the widest range of storage batteries in the world from 2.5 Ah to 20400 Ah capacity, covering the broadest spectrum of applications. The Company has a domestic market share of 45% in Industrial, 72% in Auto OE and 73% in replacement auto.

The Company sells its products under EXIDE, SF, SONIC and Standard Furukawa Brands. In the international market, the products are sold under DYNEX, INDEX and SONIC brands. On the domestic front, Exide has six factories located across India – 2 in the states of Maharashtra, 2 in the state of West Bengal, 1 in state of Tamil Nadu and 1 in the state of Haryana. It is a domestic as well as a global player.

Shareholding Pattern:

The promoter shareholding in the company as on 30th June 2010 is 45.99 % whereas 54% is the non-promoter holding. Foreign Institutional Investors holding stands at 14.01%, Mutual Funds hold 6.82% and Insurance companies 11.05%.

What Does Exide’s Past Say?

Exide Industries has performed robustly in all its parameters over the last 10 years. Its impressive fundamentals in the past form a strong base for its future.

The company has grown its Net sales with a robust CAGR of 20.8% over the last 6 years, showing a consistent increase in demand. The company’s margins has jumped in the last year, mainly due to captive resources of lead (major raw material) This, along with a strong re-investment into business has helped it clock an impressive EPS CAGR of almost 30%.
Exide has an average ROIC of 23.9% indicating efficient management of funds. In fact over the last 6 years its ROIC has been witnessing an increasing trend over the years. It has a comfortable Debt/Net Profit ratio of 0.17, indicating it can pay off its debt well within a year. In the last one year the company has reduced its debt levels from Rs. 300 Cr. to Rs. 90 Cr. which is a positive for the company.

Hence, the 10 YEAR X-RAY of Exide Industries is Green (Very Good).

To view its past 10 year performance in a simple color-coded 10 Year X-Ray, visit Moneyworks4me.com

What is Exide’s short-term outlook?

Looking forward (FY11), what is in store for the company?

•    Capacity expansions to cater to future demand:

The company plans to set up a plant and expand capacities of its existing units at an investment of Rs 350 crore during the current financial year. The company will build batteries for two-wheelers at a new facility in Ahmednagar, Maharashtra, capable of producing 7 million units. It already produces close to 10 million two-wheeler batteries annually, at its plants near Pune and Bawal in Haryana.
The Ahmednagar plant is likely to start production by June-July 2010. After commercial production begins, the installed capacity of two-wheeler batteries will be close to 17 million units per annum.

•    Increased sourcing from smelters likely to support EBITDA margins:

Exide has gone for backward integration by acquiring a stake in two smelters i.e. Tandon Metals and Leadage Alloys. Currently, 45% of the sourcing of lead is done from these smelters where the cost differential is around 10-11% vis-a-vis the current LME lead prices. This sourcing is likely to increase to 50% by end of FY11E. Hence, though the company has covered itself for around 50% of the risk of fluctuation in lead prices, but is yet subject to a certain amount of risk.

With the auto industry recovered and the company giving a good guidance for FY11 sales growth, we can expect the short-term outlook of the company to be Green (Very Good)

What is Exide’s Long-term outlook?

Exide is the biggest storage battery manufacturer in India, as well as the South Asian and South-East Asian regions. It is the leader in both organized automotive and industrial segments in India.

So, what has helped the company maintain its leadership position and does it have enough charge to continue doing so in the future, too?

1) User-Industries to drive growth:

The auto industry which was facing a slowdown in the recent past has now completely recovered and is expected to register double digit growth every year for the next five years. Added to this, the huge expenditure proposed in the industrial sector, both by public and private enterprises, augur well for Company’s business. Due to rise in the disposable income of all sections of the population there would be a shift towards procurement of quality and technological superior products as compared to cheaper substitutes (as far as UPS batteries are concerned). Since the company is diversified among 3 sectors a slowdown in one of the sectors, is usually off-set by the other. Also, the company caters to the biggest clients in the above mentioned industries for eg: Hero Honda & Bajaj Auto in two-wheeler, Tatas in cars & commercial vehicles.

2) Replacement market poised for growth:

Exide commands a market share of around 70% share in the Indian auto battery replacement segment (organised). The average life of a battery is three to four years for passenger vehicles and one to two years for commercial vehicles. The company enjoys healthier margins in the replacement markets compared to the original equipment (OE) segment due to better pricing power. Also, with stricter pollution control and regulatory norms, especially with regard to recycling of toxic waste such as lead, it may be difficult for small scale un-organised businesses to sustain their operations in the long run. Hence, this is likely to assure higher revenues from the replacement segment for organised majors like Exide Industries.

3) Wide Distribution network:

The company has been focusing on improving its distribution strength. The company works through different models of distribution to penetrate into the market. For e.g.:
•    The ‘Hubs & Spokes’ model through which it is present at 206 locations and plans to increase it 250 in the current year itself.
•   ‘Kissan’, another initiative for customers in the rural markets has also achieved popularity in  converting potential customers to subscribe to its products.
•    Its ‘Humsafar’ model under which batteries are sold by the dealers through various motor garages is a way by which the products reach the consumers at their doorstep.

Also, Exide enjoys an edge over its competitors with several manufacturing plants strategically placed across India. This helps the company to be present all over India, which helps increase its brand visibility and hence revenues.

4) Captive sourcing of lead to support margins in future:

Exide has gone for captive sourcing of lead by acquiring a stake in two smelters i.e. Tandon Metals and Leadage Alloys. This protects the company from the continuous fluctuations in lead prices and reduces its  cost by around around 10-11% vis-a-vis the current LME lead prices. This helps the company keeps its raw material costs in check and augurs well for the company’s margins and profitability levels in future.

5) Innovative launches to drive revenues in future:

Exide was the first to launch maintenance-free batteries. Also, it has launched the Deep Cycling E-bike batteries for electric bicycles and scooters and is also in the process of developing batteries for Stop Start Micro Hybrid vehicles. Further, the possibilities of development and marketing of Lithium-ion batteries for the emerging electric vehicle segments is also under active consideration. Electric vehicles have become a rage in countries like China and with the ever-increasing fuel prices, the demand of this is likely to catch up in India after a few years. If that does happen, this product is expected to do well in the long-term future.

So, after looking at its positive points, is there anything you should be concerned about?

The only concern the company faces is that of the big chunk of batteries being sold through unorganized players. The unorganized market in this segment is about three times the size of the organized market.
A legislation was passed in 2001 which made an attempt to curtail the grey market for replacement batteries. However, today, after almost seven years of the legislation coming into force, the unorganized sector still constitutes 40% of the replacement market, particularly for automotive batteries. Also, people are more encouraged to go to the unorganized players to sell their old batteries as they get 25-30% higher amount than that offered by a branded player. This is a major threat that the company faces.

Despite this threat, the company is well-poised for growth in the long-term considering the good growth expected in the Auto and Industrial segment. Being the largest player in this segment the company is well placed to take advantage of these growth opportunities. Hence, we can expect the long-term future of the company to be Green (Very Good).

Conclusion:

Exide Industries is the largest battery manufacturer in India. In the recent past it has registered good growth despite slowdown in auto and industrial segments. Its captive sourcing of raw material, wide-distribution network will help it take advantage of the huge opportunities available in the replacement battery market and the growth expected in auto and industrial segments.

Yes, Exide Industries is an investment-worthy company, but is it at a good price to buy? Or is the market overvaluing it? To find out what investment decision you must take on Exide right now, become a member of www.MoneyWorks4me.com to find its right value.

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