Exide Industries: Buy

Recommendation: Buy

S. Vaidya Nathan

WHILE the stock market continues to be overshadowed by negative sentiment, the present subdued trend could be used to pick up equity stake in fundamentally sound companies. Storage battery major -- Exide Industries -- is one such company which could turn out to be a long-term winner.

Though there is no evidence of a pick-up in the auto sector, the recent policy changes could have positive impact for the company and the battery industry as such. Long-term investors could take exposure in the company at the current price level of Rs 67.

Backed by strong brands and wide spread distribution network, the company has managed to dominate the storage battery industry. It has a presence in both the automobile and industrial battery segments of the industry. With production facilities dispersed across various parts of the country, Exide is in a position to effectively cater to the demand from the original equipment market.

After a strong growth in performance in the late 1990s, Exide has had to contend with a rather sedate trend in earnings growth in the recent quarters. The slowdown in the replacement segment of automobile battery market, coupled with the overall industrial slowdown, has affected the company's performance. Moreover, the sharp decline in automobile production for over a year now has also played a part in affecting Exide's performance.

For the year ended March 2001, the turnover remained almost stagnant at Rs 770.15 crore (Rs 762.21 crore), while the post-tax earnings fell 15 per cent to Rs 41.55 crore. Apart from demand dry-up, the increase in price of key inputs, including lead, has also affected the performance and profitability of Exide.

In the meantime, the entry of Amara Raja Batteries into the automobile battery segment has fostered competition. This has also played a part in affecting Exide's performance in the recent months.

Taking into account that the automobile industry is still in the midst of a major slowdown, the performance of the company is unlikely to improve much this fiscal. However, the government's decision to implement regulations pertaining to collection and recycling of used batteries is likely to have a positive impact on the organised sector producers including Exide.

Consequent to the above regulation, the unorganised sector players would find it difficult to source used batteries that can be recycled. Considering that the unorganised sector producers still have a share of over 30 per cent in the battery market, the recent government regulation would dilute the presence of unorganised sector producers in the industry.

The recent imposition of anti-dumping duty and the above regulation would have a positive impact on the industry players. Being the market leader, Exide would be a major beneficiary. The company's performance could stabilise and see an improvement if there is a revival in the automobile sector and industrial production.

Recently, Exide has also commenced production of automobile batteries at its Hosur unit, which hitherto had facilities to produce industrial and two-wheeler batteries. As a result, Exide is now in a position to effectively tap the demand in the southern market.

From an investment perspective, strong fundamentals, popular brands and extensive distribution network are the major positive factors. Though the competition within the industry is hotting up, Exide is well-positioned to retain its position in the industry. Though the near-term performance may be flat, the long-term prospects appears positive. Long-term investors could take exposures in the company.