Softened raw material prices, improving replacement market share for automotive batteries and higher capacity utilisation for industrial batteries make the Exide Industries stock a good bet for investors with a two-year perspective.

At the current market price of Rs 148, the stock trades at a price-to-earnings ratio of 18 times its estimated FY13 earnings.

This is at a premium to the valuations of its smaller peer, Amara Raja Batteries, that trades at 10 times its estimated FY13 earnings. However, considering that this is in line with historical valuations, it cannot be considered expensive.

Exide Industries had been through tough times in the last few quarters. First, it was the slowdown in the off-take of telecom batteries. Then there was the pressure on margins due to higher demand from auto manufacturers (called OEMs or original equipment manufacturers). Battery-makers usually earn higher margins on battery replacement sales rather than on direct sale to OEMs. But capacity constraints forced the company to cut down on replacement sales to focus on the increasing supplies to OEMs.

Tough times

By doing this, the company lost out to competition in replacement sales. When OE sales began slowing last year, Exide had to resort to price cuts to regain market share in the replacement segment. Besides, jaded demand for inverter batteries and shooting up of prices of lead, the key raw material also did not help.

All this led to a lacklustre performance by the company in the first nine months of 2011-12. In the April-December 2011 period, net sales grew by 10 per cent to Rs 3668 crore over a year ago while adjusted net profits dropped by 32 per cent to Rs 319 crore for the same period. EBITDA margins came down from 23 per cent to 14 per cent this year.

Beginning now, the company is poised to see better times. Batteries typically have a three-year replacement cycle and the double-digit growth in volumes witnessed by the auto industry in 2008-09 and 2009-10 implies that the demand for replacing these batteries will only increase, going forward.

The company has over 50 per cent market share in the four-wheeler replacement battery market and derives around 45 per cent of its revenues from this segment. After the market share losses in the first half, the company's OE to replacement mix has already improved in the third quarter.

Industrial batteries improve

Capacity utilisation in the second quarter dipped to 62 per cent, thanks to subdued demand both from telecom and the inverter segments.

The company has consciously cut down on supply of telecom batteries due to the unattractive prices of orders. Yet, capacity utilisation has now moved up to 74 per cent in the October-December 2011 period, implying higher demand for inverter batteries.

Considering the continued power shortage situation in the country, this trend can be expected to continue. Besides, the company has recently bought out an undertaking manufacturing inverters in Uttarakhand.

Going forward, it expects to obtain better pricing power in this segment, now that it would be able to sell both inverters and inverter batteries as a bundled product.

Margins to expand

Aside of price cuts and lower capacity utilisation, Exide's margins in the April-December 2011 period also suffered due to volatility in lead prices. While in the beginning of the year lead prices peaked to about $2900 per tonne, the depreciation of the rupee in end-2011 took away the benefits that would have accrued from the softening of prices seen later on.

To shield from such volatility, the company had acquired lead smelters some years ago. Lead supplied by the smelters is expected to improve by ten percentage points to 62 per cent in FY13. This will help margin expansion. Margins will also be aided by improving replacement market sales.

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