Exide Industries: Invest


Steep discount to market

Diversified product portfolio

Attractive pricing and strong prospects make this rights offer a good option.



Parvatha Vardhini C

Shareholders can subscribe to the rights offer from Exide Industries. The offer is attractively priced at Rs 30, a steep discount to the market price of Rs 78. The company is raising Rs 150 crore through a 1:15 issue (one share for every 15 held) to meet its working-capital requirements. This is part of its Rs 400-crore capex plans announced in April 2007.

The rollout of new models by passenger car makers, the continued buoyancy in the automotive replacement segment and the potential for high growth in the telecom and UPS battery segments lend a positive outlook to the company's earnings prospects. The stock has run up sharply with a return of over 70 per cent in the last six months. At the current market price, the stock trades at 29 times the estimated FY-08 and 22 times the estimated FY-09 earnings per share.

Business

Exide is the market leader in the storage batteries business, selling mainly under the Exide and Standard Furukawa brands. While the automobile batteries segment generates 60 per cent of the revenues, the industrial batteries division chips in with the rest. Exide batteries power most of the models of Toyota, Honda, Hyundai, Tata Motors, Maruti and Mahindra and Mahindra. The company also supplies two-wheeler batteries. The industrial applications extend to power, telecom, mining and railways. They also export batteries to West Asia, Japan and CIS countries.

Prospects

As telecom service providers expand their networks and foray into infrastructure sharing, the company will benefit from the increased demand for batteries that support tower and exchange infrastructure.

UPS battery sales will be propelled by growth in the IT and ITES industry, which requires back-up power, and the demand from households and offices due to the continued power shortage situation.

Besides, the company is also engaged in the production of the high-margin miner's cap lamp and submarine batteries, which are likely to improve the product mix.

In the automotive segment, a key positive for the company is its diversification — it caters to the passenger car, two-wheeler, commercial vehicle and tractor markets. This de-risked sales mix will help the company tide over a slowdown better.

The introduction of new models by OEMs (Original Equipment Manufacturers) provides an opportunity to become sole suppliers for that model, ensuring a steady revenue stream. Such supplies will also help boost volumes and make up for the lower margins (margins in OE are lower than replacement segment). Exide, which has been the key supplier for Tata Motors, is likely to be the chief supplier to the Tata Nano (Rs 1-lakh car) as well. This inspires confidence and bodes well for volume growth.

Financials

The last few quarters have seen prices of lead, a key raw material, shoot up by more than 100 per cent. This explains the steady decline in the operating margins from 20 per cent in the June quarter to 17 per cent in the September quarter and 15 per cent now.

However, buoyant replacement market sales and periodic price increases (to partially pass on increase in raw material costs) have seen both the net sales and profits grow by a robust 60 per cent on a year-on-year basis to Rs 722 crore and Rs 55 crore respectively.

Concerns

Raw material costs account for about two-thirds of sales and lead constitutes 70 per cent of the raw material used. Although lead prices appear to have peaked, any unfavourable movement in prices will affect the company. Also, any future price increase may not be welcomed by OEMs, who are themselves surviving a slowdown and are focused on cost cutting.

To reduce dependence on imported lead, Exide has recently acquired the Pune-based Tandon Metals, a lead smelting company that will help Exide use more recycled lead in its battery manufacturing facilities. Until the company is able to put this facility to full use, input costs will remain a concern