Exide Industries Ltd’s shares have more than doubled so ar this fiscal year, on the back of strong earnings growth and a revision in the value of its insurance subsidiary.
The company’s better than expected December quarter results and news that it would get an order for Tata Motors Ltd’s Nano cars has led to a minor re-rating in the last two trading sessions. Adjusted for the value of its holdings in its insurance subsidiary (about Rs18 per share), the core battery business’ valuation has risen nearly 20% in just two trading sessions.
Motilal Oswal Securities Ltd had estimated Exide’s earnings at Rs50 crore in the December quarter, while the company reported a net profit of Rs55 crore, 10% higher than the estimate. Moreover, operating margin was maintained at year-ago levels of 15%, which is commendable considering that lead prices during the period had nearly doubled.
The price increases taken by the company earlier in the fiscal year has certainly helped ease the pressure from rising lead prices. What’s more, the hike in prices hasn’t affected volume growth, as is evident from the 58% rise in the firm’s revenues last quarter. According to an analyst with a domestic brokerage, the higher than expected jump in revenues could be on account of higher industrial battery sales, demand for which has been strong on account of power shortages in various parts of the country.
Lead accounts for 70% of the company’s raw material costs, and hence has a large bearing on its margins and profit growth prospects. As things stand, lead prices have corrected from a high of around $4,000 (Rs1.57 lakh then) per tonne in October 2007 to $2,550 currently. Given the price increases this fiscal in the replacement segment, the drop in lead prices would add significantly to profit margins. The original equipment segment for automotive batteries normally has a price variation clause, and so wouldn’t benefit as much from the drop in lead prices.
Analysts are set to revise Exide’s earnings estimates after the better than expected profit last quarter and the large order from the Tatas. But it must be noted that most analysts’ price target for the stock has been breached after the sharp rise in the last two trading sessions. Also, with the core business now valued at more than 20 times FY08 earnings, the upside from current levels may be limited.
SBI rights issue
State Bank of India’s (SBI) rights issue had already been more or less priced in by the market, which knew the amount to be raised and also the ratio at which the rights would be issued. Nevertheless, the news that the sale will be completed by March will be welcomed by investors. That’s probably the reason it moved up 1% or so on Monday, in a weak market.
The money will be used to shore up the bank’s capital adequacy, provide for its requirements under Accounting Standard 15 (the new norms for accounting for pensions) and to comply with the Basel II standards. The funds inflow will also expand net interest margins, which have been under pressure because the proportion of current and savings account deposits has been declining, although it remains high. In the second quarter, there had been nominal growth in net interest income. The funds will also come in handy for the bank’s strategy of reclaiming market share in advances. Also, SBI’s recent increase in deposit rates had led several analysts to worry about funding pressures at the bank and the inflow of fresh funds will allay those concerns.
The rights issue will be of one share for every five held, or an equity dilution of 20%. But equity dilution has ceased to be a concern in current market conditions, especially in the banking industry, where the stocks of banks that have raised capital, ICICI Bank Ltd being a prime example, have soared. With money being the raw material for the industry and with no shortage of lending opportunities in a buoyant economy, experience has shown that the dilution in earnings can be rapidly made up. Analysts have already factored in higher growth in profits as a result of the inflow of funds.
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