Buy Exide recommends Religare Research

Exide Industries Ltd
Higher OEM sales marginally affects performance
Exide Industries (EXID) Q2FY11 performance was marginally below our
expectations posting a 2.2% QoQ decline in revenue to Rs 11.3bn and a
100bps QoQ decline in EBITDA margins to 21.8%. Management comment
suggests that in light of capacity constraints, the company earmarked significant
part of the production volumes to the OEM customers at the cost of reduced
supplies to the replacement market, in spite of the latter fetching higher
realizations and margins – thus impacting operational performance.
Nonetheless, with new capacities commissioned during the quarter, we expect
increased sales to the higher margin replacement segment going forward. We
maintain our BUY recommendation with a one-year target price of Rs 190.
Marginal disappointment in the operating performance: EXID’s net revenues at
Rs 11.3 bn were up 18.6% YoY but down 2.2% QoQ. EBITDA margin declined
100bps QoQ to 21.8%, as against our expectation of a slight increase. Adjusted
net income (adjusted for Rs 469mn gain on transfer of leasehold land) stood at
Rs 1.7bn, in-line with our and street estimates, aided by higher-than-expected
other income.
New capacity addition to help increase sales in replacement market: Witnessing
capacity constraints during the quarter, the company diverted volumes from the
replacement segment to the OEM segment, which affected its operating
performance. However, commissioning of a new plant for motorcycle batteries and
additional lines at the 4-wheeler battery plants will help the company to increase
sales in the more profitable replacement market in the coming quarters. The
company plans to invest Rs 3,750 mn- 4,000 mn on capacity expansion in FY11.
Maintain BUY: We maintain our BUY recommendation on the stock with an
SOTP based one year target price of Rs 190. The stock (adjusted for subsidiary
valuation) is currently trading at 18.8x FY11E and 15.9x FY12E earnings.