It’s annual report reading season…and a constant inflow of new reports is keeping me busy.
I have a habit of making hand-written notes on the annual reports I read (if they are soft copies, I print the important pages). This time, however, I thought of sharing these notes with you…just as an experiment. Maybe, this would nudge you closer to reading annual reports on your own, if you don’t read them.
Anyways, I start this review series with Exide Industries, India’s leading storage battery manufacturer.
Click here to download the PDF review (14 MB file), or read it in the panel below.
Please note that this review is just to help you dig deeper, in case you are interested to read and understand more of the reviewed company. Don’t treat this as an end to your quest for learning more about businesses and industries, and how to analyze them.
In fact, this is just the beginning. 🙂
Let me know your thoughts on this review in the Comments section of this post…and also share any suggestion(s) you may have to make future reviews better and easier for your understanding.
Statutory Warning: This is NOT an investment advice to buy or sell shares. Please make your own decision, as blindly acting on anyone else’s research and opinions can be injurious to your wealth. I do not own the stock, but despite this, my analysis may be biased, and wrong. I have been wrong many times in the past. I am a registered Research Analyst as per SEBI (Research Analyst) Regulations, 2014 (Registration No. INH000000578).
Wonderful is the word, Vishal. Thanks for this annual report review. You have a great knack of explaining things in a simple and very interesting manner, like this review shows.
This surely makes me more interested to read annual reports and make notes of my own. 🙂 Thanks again. Cheers!
Thanks for your kind words, Anand! All the best from your own annual report readings. 🙂
Thank you for the analysis sir however there are few things I want to mention
1. Does MD’s income effect the dividend payout? Basically if he/she takes less salary then he could give more dividend payout and hence reward himself and the shareholders equally. Exide management gets an edge over AR’s there.
2. Does increase in inventory days for Exide imply that there is some unusable stock in the inventory and management is not writing it down ?
3. Can you throw some light on the possible reasons that why operating margins of Exide is lesser than AR because Exide has bigger capacities, lesser income disparity, backward integration for the basic raw material which is lead etc.
Thanks
Kanv Garg
Thanks Kanv!
1. Not really, also given that the MD is an outsider and not a founder promoter of the business.
2. Not all inventory must be written down. This inventory rise in FY15 seems part of the normal course of business for Exide.
3. Exide imports a large part of its lead requirement, and is not fully backward integrated. Anyways, the disparity in margins seems a case of better pricing commanded by AR as compared to Exide.
Hope this helps. Regards.
1. Even if the MD is an outsider for EXIDE and founder promoter for AR don’t you think the difference is very high ? Usually founders earn more money through dividends. Even Muken Ambani earns only 15cr. Can you explain me the industry trend.
2. For pricing as I read somewhere in AR’s strategy, their prices are 5 – 10% less than Exide batteries that is how they increased their market share and are still increasing it. See link.
1. Exide + AR are the industry. Yes, AR’s salary levels for top men is considerably higher than Exide’s.
2. AR may have relatively lower pricing, but it seems to be filling in the gap with Exide.
Thank you Sir. I think if they can keep the prices less and operating margin more than Exide then they can capture the entire 4 wheeler and 2 wheeler market. Which makes me conclude that even if the net-net growth in the entire auto space remains 4-5 % then AR can post a pat growth of 15-20% by eating market share of Exide, which makes it the virtual monopoly.
Good beginnings! Like the comparison with competitor.
Suggestion: take the AR of a shady company next. If retail investors simply avoid shady companies, they’ll do much much better 🙂
Thanks for your feedback and suggestion, Shan.
excellent………
Thanks Narsing!
Hi Vishalbhai :),
Thank you , brilliant insights and amongst many learnings from you always, the insights on remuneration and the custodian of enemy property was the icing on the cake 🙂
waiting for more wisdom
warm regards
Deepak
Thanks Deepak! 🙂
Hi Vishal,
This is really helpful. I have a question. On the last page, you have mentioned that capital allocation is poor. Are you infering this from the fact that Exide is going into Insurance Business when margins are getting hurt in core business?
Thanks
Amit
Thanks Amit! Yeah, investing more in the Insurance business, which is not its core competency, even as the core business is yet to show signs of recovery and get back on its feet especially as compared to what its close competitor has been able to achieve, seems like a bad capital allocation decision.
Excellent post indeed! It let’s us into the inner workings of your mind, which is brilliant. The comparison with AR was indeed insightful. However, realized that you have done the analysis tomorrow – 24.07.15 😉
Thanks Vishal! This post was earlier planned to be published tomorrow, and thus the date. 🙂
sir
i had read the annual report too. i also realized that management while being optimistic on business prospects were cautious. they even mention that the rise of competition as biggest threats. however, i found them more honest and forthcoming compared to amra raja. also, exide spent a lot on advertising over the years. but they have kept debt under control. moreover growth of 21% in a weak scenario as admitted by them might not be a bad thing.
Thanks for sharing your thoughts, Sumit.
Excellent Vishal .
Additional inputs
1) That one can do for lot of NSE listed companies is lot of brokerages do there own analysis for each of the data . This can a added cell : My view , Brokerage view
2) Declining Moat and Mks matters more in this business currently rather than any other information . One can prioritize one’s time to focus on what will drive or hold this No 1 Catalyst and look for data for the same . Unfortunately Management does not state it upfront and also does not outline actions to outdo competition , So what is No 1 problem and opportunity and how does AR report it is very critical .
Thanks for your suggestions, Shailesh…though I would not like to take up the first one. I would like to keep it as just plain analyses without any recommendation/view (mine or anyone else’s). Thanks anyways!
This is a great initiative Vishal!
Thanks Akbar!
Loved the way You analysed. Has inspired me to make notes and not just merely read the report.
Thank You
Thanks Cherin. Get going! 🙂
Thank you Sir.
Thanks Manu!
Vishal,
Beautiful analysis. I have few questions here:
1) I know, in general, diversification is bad. But when you remark this as a negative, I want to understand your rationale and process behind this. Did you go through the annual report of 2005 (when management acquired 50% stake) in the first place.
2) What is the rationale behind the negative remark – a) Do you think diversification often leads to diworsification OR b) You think insurance is a very tough business to grow and capital allocation skills matter a lot here OR c) After comparison with AR, you think that there is a scope to grow further in this industry.
Assume that instead of buying a insurance business, had company bought a slightly related business (e.g. casting/plastic moulding business), what would have you thought of this? Or assume the company took a stake in an autocomp manufacturer (lets say Motherson Sumi which has connection with auto theme) or a class business (I am not talking about investment) like Eicher instead of giving out dividend, what would have been your reaction.
Great work again. That helps a lot.
Best,
Gaurav
Thanks Gaurav! Yeah, I went through their FY06 annual report where there mentioned this – During the year under review, your company invested an amount of Rs 2569.87 million acquiring a 50% share of ING Vysya Life Insurance Co. Pvt. Ltd. Your Directors believe that India is largely an under insured market and this industry has the potential to grow manifold. It is believed that this would be in the long term interest of maximizing shareholder value.
A few things worth noting here –
FY06 was when the bull run was in its full swing, both in the economy and the stock market. I see Exide’s investment in a completely unrelated business in this background – that the management gave into the mania in the financial services industry and got into the insurance business. I’m sure they did not ask that if the opportunity was really so alluring, why was ING, which had a long experience in Insurance, selling out? But as you can see from their statement that I mentioned above, they were talking about “future potential” and not about their capabilities in running the insurance business.
Two, all diversification is not bad…but most of it is, and especially one made in a completely unrelated business. Just look at history. Of course, insurance is a growing industry and holds a great potential, but would you, as an investor of your money, buy into a business that is outside your circle of competence even if held a potential? I believe, no. So, you must also be worried about businesses doing the same.
I would’ve been fine if the company had used excess cash to venture into a related area, or if the management had done nothing with cash or maybe returned to shareholders in case they were not finding opportunities in their core business.
Hope this helps. Regards.
Thanks Vishal. That makes sense. Its funny. Many capital allocators will see great potential in unrelated business and get into it hoping they will find someone competent to run that (if not themselves) or other times they will try to buy some company into a related business line but then they will pay a bomb for it for they will see some obvious ‘synergies’ by the virtue of their experience. Maybe being a great capital allocator is not the same as being a great businessman (with due respect to Buffet).
Indeed Gaurav! As Warren Buffett wrote in his 1987 letter…
“…the heads of many companies are not skilled in capital allocation. Their inadequacy is not surprising. Most bosses rise to the top because they have excelled in an area such as marketing, production, engineering, administration or, sometimes, institutional politics. Once they become CEOs, they face new responsibilities. They now must make capital allocation decisions, a critical job that they may have never tackled and that is not easily mastered. To stretch the point, it’s as if the final step for a highly-talented musician was not to perform at Carnegie Hall but, instead, to be named Chairman of the Federal Reserve.
“The lack of skill that many CEOs have at capital allocation is no small matter: After ten years on the job, a CEO whose company annually retains earnings equal to 10% of net worth will have been responsible for the deployment of more than 60% of all the capital at work in the business.”
However, i still feel Amara Raja is better pick in comparison to Exide in battery arms.
Thanks a lot, this really explains and teaches just numbers are not enough you need to dig deep and look at every aspect. After reading your analysis i am planning to go back and look at the reports of all shares in portfolio again and I am sure this time it will be different :). Thanks a lot and please do share such analysis its lessons in itself for us 🙂
Thanks Arif! And all the best for your own analyses 🙂
Interesting Analysis. Especially the comparison with Amara.. 🙂
For me, a major red flag is Di-worsification in Insurance industry. The major insurance companies are still making loss in India except the dominant player LIC. To diversify in totally unrelated field when your recent competitor is breathing down your neck and outgrowing you in every aspect is a big No-No.
The only positive above Amara is the Integrity angle where I am a bit skeptical about Amara. Market perception can do crazy things, just look at the huge difference between Exide’s and Amara’s stock prices 🙂
Keep up the good work.
Thanks Sanjeev…and great to see you back here. 🙂
Super Vishalbhai !
Amara Battery now charged …
Keep it up .
Thanks Chetan! 🙂
Eye opener 🙂
enjoyed reading the Report for the first time.
keep the good work
Regards
Great, Sanjeev…thanks!
The stock market seems to be efficient enough to price in the negatives of Exide. Amara Raja trades at 36 PE and Exide trades at 22 PE.
Vishal the PDF Link is not working, can you post the correct link
Dear Raghavendra, it’s working fine. Please try again.
Dear sir,
thank you,GOD BLESS:
Thanks Wilson!
Thank You Vishalji for sharing your analysis.
Based on your comparison seems like Amara Raja is better choice. do you hold AR? I am not sure if you have shared your holding in any of your post, but do you mind planing to share your holding? Interested to know your holding 🙂
-Balvan
Hi Vishal,
This is a great analysis. Quick question – on your last page you mention that the company has not been a good allocator of capital? How did you arrive at this conclusion – is it because Exide has invested in the insurance business or because the ROE hasnt been as good as AR?
Thanks,
Suneet
Thanks Suneet! Yes, my thought is more related to their diworseification into insurance…and putting more money into it.
Hi Vishal,
I do agree with the “diworsefication” which is usually the case. But it could even be a WIPRO which made the transition from vegetable oils to an IT Giant. Though WIPRO has the advantage of a very committed, driven and hands on promoter, unlike Exide where the promoter is perhaps hoping to capitalise on the insurance business being sold in the future at a significantly higher valuation.
I truly enjoyed your comments on the AR itself. It makes the reading more fun and easy to grasp the comparisons.
Great work!
Thanks Gundeep! Wipro’s success looks great in hindsight, but the probability of failing in unrelated businesses is very high. And especially in case of Exide, they are looking at insurance just because they see a growth opportunity. But insurance is a tough business, as compared to IT…as far as profits are concerned. So scaling up and achieving profitability is a big question mark.
very informative, and the markings by Vishal for Exide and Amaraja is sure a lessson for small investors who get glued to the hype of small cap companies.. at the end of the day fundamentals and disciplined investing will stand in good stead.. hope to enjoy and look forward to further good informative write ups.
Thanks Krishnan!
Vishal, Any idea why Mr. R.G.Kapadia, is being paid 40,00,000/- commission? It would be good if you also did a comparison of the insurance business with some of its peers, as it seems very small compared to others. It may be difficult to scale the insurance busines.