After a scorching pace of growth in the last two years, the auto industry is preparing for moderation in the months to come. Apart from the expectations of a slower growth, there are other head winds for the sector in terms of high commodity and oil prices and increasing interest rates. In such a scenario, an investment in Exide Industries, which derives about 70 per cent revenues from the supply of automotive batteries, appears to be a safe bet for investors with a two to three year perspective.

replacement market

Among auto components, batteries and tyres score in terms of the demand for replacement. In the near to medium term, even if OE (original equipment) sales take a back seat, Exide will still witness volume growth from the battery replacement demand for vehicles that were sold in the last few years. This will boost the company's operating margins as the ability to pass on cost escalations to and effect price increases in this market is higher. Among the organised players, Exide is the leader in the replacement market with over 60 per cent market share.

A higher composition of OE sales at the cost of catering to the replacement market (due to capacity constraints) has been one of the reasons for a fall in margins in the recent quarters. From about 8 and 10 million units in March 2010, four and two-wheeler battery capacities, respectively, have gone up to 10 and 16 million units currently. Further additions are also on the cards.

Captive sourcing of lead

Another factor that would support Exide's profitability is increased sourcing of lead from captive smelters. This would help against volatility in lead prices, which have also pressurised margins in recent times. From about 50 per cent currently, the sourcing will reach 70 per cent by FY13.

A final sweetener is Exide's limited exposure to the telecom segment (which constitutes about 10 per cent of industrial segment revenues), where the demand has been sluggish. Inverter and UPS battery sales are, however, expected to pick up.

At the current market price of Rs 142, the stock price discounts its trailing twelve-month earnings by 19 times and estimated FY12 earnings by 16.5 times. For the nine months ended December 2010, net sales grew by 20 per cent to Rs 3,328 crore, year on year. Net profits came in at Rs 503 crore, a 25 per cent growth. Operating margins in April- December 2010 dropped to 20 per cent from 24.5 per cent a year ago.

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