Hi amit,
your take on Exide industries.?
Honestly, I have been interested in Exide and Amaron both, but not completely.
My logic is that, India is a growing economy and in such an environment anything energy related is bound to "sell". Be in natural gas or secondary.
Exide is the leader, chased by Amara Raja, in this sector and is hence best positioned to capture any upcycle in the auto industry, which is closely connected to the cycles of the economy, which is believe is and will be down for about 5 years. In the meantime if Exide correct comfortably then it will be a candidate for purchase.
Opinion on the Management:
It has it has a good head on its shoulders. This is shown by the figure of Free Cash Flow. Even before calculating it I knew what to expect. It has posted a positive and a strong figure of Free cash Flow. It is not consistently growing, which is very tough keeping in mind the down cycle.
Management is wise to invest a portion of this Free Cash Flow into expansion and not rely on debt or Eq.Dil.
Moreover, the debt has been almost eliminated in the last three years. Whereas, its competitor Amara Raja has 1/3rd of its Sales revenue and a fairly decent debt (of 77 Cr) to service, which eats into the profits. But, exide has no such problem.
Opinion on numbers:
1) Although sales have almost doubled there has been no equity dilution in the last 5 years. This is a big plus. Most well positioned mid sized companies fall for the trap of Eq. Dil. and lose investor charm.
2) The business model is a stable one. Company has met its sales target and has a good grip on the finance. Inventory days and debtor days are stable.
3) A big plus: It has focused on reducing debt, bringing it down to almost zero in the last three years. Meaning, the management is its head on level shoulders. It has chosen not to take radical steps like foreign acquisitions and multiplying production capacity by taking on more debt. It wants to grow organically. This one single reason makes Exide outshine most others in the mid-cap section.
4) Its Net Profit margin is mediocre around 7%. Thanks, but no thanks, to Amaron.
All in all, I think Exide is a company with a good product and in the hands of a sensible management. Now, the question is of purchase price.
Currently, Exide's PE is 6. It has seen a PE of around 24 in better times. Meaning, Exide is out of investor charms. Not because of a scam, bad management, increasing debt days or liquidity issues (unlike other leaders like OCIL, Sintex) , but because of the cyclical nature of the industry. This makes Exide vulnerable to sharp down moves like the one it saw in the month of Jan '14
It is my belief that Mid-Caps fall hard, really hard. When they start to collapse the price sees no support it just goes crashing down. This is because the Equity is small and cannot absorb the selling momentum of FIIs. I will wait for such a crash. I see two good supports
1) Rs.100
2) Rs.40
Rs.100 was touched this Friday. But, I think it is too early to buy ANY mid-cap now. The worst is yet to come. Lets wait and watch. But, one will have to invest atleast 50% of his allocation when Nifty reaches lower levels.
PS: I wish Exide stopped giving dividends entirely for the next few years. Investors are already disenchated and it is pointless using precious FCF on luring them. Instead use that money on aggressively trying to oust Amaron and boost the Net profit margin to atleast 15%.
