Something Fishy in Exide?
When retained earnings are diverted into Non-Core ventures, it makes me doubtful. EiL is a leader in its field and it cannot find growth there, how is it going to compete in other fields where it is new? History shows that this often does not bode well for the minority shareholders.
EiL used 550 Crores to buy insurance business. Lets discuss its + or - impact.
This is around 3 years of Free Cash Flow for EiL.
If this venture does not give returns, then the share price will see a correction. I do not anticipate a complete loss of capital, but yes growth will be almost surely be stemmed. This goes to show how rare it is for a company to translate accumulated FCF onto the share price (or further boosted growth in EPS).
On the other hand, I feel it was a smart thing to do:
The Auto sector is on the de-growth. Car sales are dropping. It being the biggest customer, it would add pressures of all sorts if EiL's production capacity was increased. Then what else could it do with accumulated cash?
1) Keep it in FD or such instruments?
Investors do not like this. They see this as the weakness of the management. It drags important ratios.
2) Give Dividends?
Attracts Tax. Plus, to a mid-sized company like Exide FCF is precious and the only "organic" source of liquidity to fuel growth (when the time is favourable). With increasing competition which has shrunk net profit margin below 10%, it is not wise to take on debt. (One reason why I prefer Eil over Amara-Raja).
3) Clear debt?
It has been doing that for last 5 years. Now its (almost) debt free.
In that light, getting into something safe and fairly hassle free business such as Insurance seems like a smart thing to do. It has less operational challenges. It may or may not generate good return on this 550 Cr investment, but safety of capital and decent growth is probable.
Tks to my kind friends CEO Craytheon Rahul, Jain.err TJ, Einstien TJ who are open to such valuable discussions.
Regards.
PS: I see the share price at 2011 low of 98. Its EPS has reduced YoY and there is little hope for a turnaround. A correction is imminent.