Exide Industries: Growth drivers in place but input costs hold the key to margins
Exide Industries Ltd’s June quarter performance was power-packed in spite of tremendous pressure from the soaring price of lead, the key raw material used in making batteries. It was the growing sales of automobiles that supported battery sales.
On the one hand, sales increased to the growing original equipment segment. On the other, there was a shift of replacement market sales gradually but surely to the organized market, where Exide is the leader.
Therefore, the June quarter revenue growth of 4.6% is a combination of higher sales and price hikes driven by rising lead prices. That said, revenue could have been better but for dullness in the uninterrupted power supply (UPS) battery market.
However, analysts are bullish on Exide’s prospects given the buoyancy in the passenger vehicle and motorcycle market. Brokerages are comfortable assigning a price-to-earnings multiple of 20 for FY2019 earnings, which implies a reasonable rise in the stock price from its current level of Rs223. Higher PE is backed mainly by an estimate of 13-15% growth in sales over the next two years, driven by robust auto sales. Any increase in infrastructure battery sales, that the firm believes is improving, will bring an added edge.
The only dampener so far has been the skyrocketing lead prices that shot up nearly 33% over a year. But Exide’s ability to maintain operating margin at the year-ago level is commendable given the pressures in input costs. And, at 15.7%, operating margin was significantly ahead of Bloomberg’s 14-analyst average of 14.5%. A significant cut back in other expenses during the quarter showed management prudence. Exide is still way ahead of the No. 2 player in terms of market share.
Net profit at Rs189 crore was marginally lower when compared to a year ago. Higher depreciation and tax weighed on it, in spite of decent operating performance.
The good news is that lead prices have inched a bit lower since April. Any reduction from the highs will certainly boost battery manufacturers’ profitability, especially on the back of strong revenue traction.