Looking at exide industries

I came across a few research reports on exide industries and liked what I saw . In a nutshell

• Exide industries is in the business of  Automotive batteries with brands such as Exide and Standard furukawa.
• Exide supplies to OEM customers in cars ( Maruti, Hyundai, Ford etc), 2 wheelers ( Bajaj, Honda etc ) and has now made an considerable in roads in the tractor segment too. It has a very high market share of around 80%+ in the OEM segment
• Exide has a dominant position in the replacement market ( 60%+) market share and a strong brand and extensive distribution network ( Read  competitive advantage )
• Exide has a strong balance sheet with ROE in high teens and consistent topline and bottomline growth inspite of increases in lead prices ( lead account for around 65 % of Raw material costs )
• Exide seems to have a reasonable pricing power due to its strong brand and is a preferred vendor for a number of OEM customers
• The company is now expanding into the export market ( which accounts for only 5 % of the topline currently )
• The next few years look good for the company as the Automotive sector ( cars, CV and 2 wheelers) has seen good growth and as the replacement cycle is around 18-24 months, strong demand from the both the OEM segment and replacement segment  should kick in.

A few negatives

• Lead pricing would have an important bearing on the margins going forward. However over the next 2-3 years the impact of higher lead prices could be reduced if Exide is able to pass through the cost increases.
• Valuation – The company is priced at around 15 times FY06 earnings. For me it is on the higher end of the price range. If I am able to get more comfortable and confident of the  business (need to read about other companies in this industry), then 15 times FY06 earnings may have a margin of safety. But for the time being, I am still evaluating and trying to get my arms around it.