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B. Krishnakumar

HELPED by the robust demand from the automobile segment, battery major Exide Industries recorded a 28 per cent growth in turnover for the quarter ended December 2004. As the leader in the original equipment market of the automobile battery segment, the company benefited from the growth in the automobile production seen in the recent quarters.

The company also has a presence in the industrial battery market, which accounts for about 40 per cent of revenues. The enhanced activity levels in telecom and power sectors have resulted in increased demand for industrial batteries as well.

The profitability was under pressure owing to spiralling input cost. The price of lead, the key raw material, rose by over 40 per cent during the period under consideration. Lead accounts for about 75 per cent of the total cost of production and raw material cost over 50 per cent of revenues. Owing to a sharp spurt in lead price, the operating profit margin dropped to 13 per cent from 19 per cent in the quarter ended December 2003. The competitive environment and the growing demand from the original equipment market have limited the scope for revising battery prices to completely accommodate changes in input cost.

The soft interest rate regime and the low gearing have given the company savings in interest cost. The company's performance depends on the trend in the price of lead. Though sustaining volume growth would not be difficult, the fluctuation in the cost of inputs would be the key determinant of growth in bottomline. The increased automobile production in the last couple of years would translate into enhanced demand from the lucrative replacement market. The efforts to gain access to the rural market would also drive demand from the replacement market.

The implementation of the more stringent norms pertaining to recycling of used batteries is another positive trigger. This is likely to dilute the presence of unorganised sector players in the replacement market.

The company is also implementing capacity expansion projects. This, along with the relocation of the unit from Aurangabad (Maharasthra) to Bawal (Haryana), would have long-term positive implications.

On the flip side, the recent decision to permit duty-free imports of sealed maintenance free batteries could expose domestic players to the threat from cheaper imports. Besides, the removal of anti-dumping duty on lead acid batteries could also affect the prospects of domestic players.

The government had imposed an anti-dumping duty a few years ago on complaints from the domestic companies about the dumping of cheaper imported batteries.

Though Exide has strong brand equity and products positioned across various price points, it would remain vulnerable to the threat from imports, especially in the replacement market segment. There would, however, be a marginal impact in the original equipment market due to relaxed norms for imports.

From an investment perspective, shareholders can retain their holdings Fresh exposures may be considered on evidence of softening of lead price or sustained buoyancy in automobile production. The key risk is the prospective threat from cheaper imports. Besides, any further rise in lead price would also have an impact on profitability.

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