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Exide Industries Ltd.
Worst is behind us
„Maintain PO and FY12/13 EPS despite weaker Q3FY11; Buy
Exide Q3FY11 PAT declined by 4.5% y-o-y and missed our estimate by 24%.
Weaker result was owing to (1) the inability to pass on the impact of rise in cost of
lead, and (2) worsening of product mix in favour of less profitable OEM segment.
We have cut FY11e EPS by 9.7% and FY12e EPS by 5%. However, we have
maintained FY13e EPS. We expect the company to recover product mix following
capacity expansion and achieve 25% PAT CAGR in FY12/13e. Stronger PAT
growth likely to help re-rate the stock to our PO of Rs196, an upside of 42%.
Q3FY11 hit by weak product mix, poor pricing & lead cost
EBITDA of Q3FY11 declined by 27% y-o-y and 35% q-o-q owing to decline in
EBITDA margin to 15.2% compared to 24% in Q3FY10 and 21.8% in Q2FY11.
Detailed account of margin decline and outlook appears on inside page based
Q&A with management. Profit decline was 67% for industrial segment and 12.5%
for automotive. Industrial segment suffered demand slowdown and competition.
Automotive was hit by capacity constraint led by stronger OEM demand growth.
Capacity hike to boost margin back to 20% from Q3 trough
Around 15% EBITDA margin is among the lowest for Exide and is likely to recover
to 18% in Q4FY11e and 21% from Q1FY12e as the benefit of recent increase in
capacity kicks in. We expect the ratio of replacement to OEM to improve from
1.2x in Q3FY11 to 1.4x in Q4FY11 and 1.6x by H2FY12. In addition contribution
of inverter battery likely to improve from Q4FY11 on seasonal upswing.
Re-rating to be driven by margin expansion from Q4FY11e
Exide is trading at PE of 14.4x FY12e and adjusted for Rs12/sh as value of 50%
stake in ING Life, it is trading at PE of 13.1x FY11e. We expect the stock to rerate to 15.5x FY13 (excluding ING Life) in one year time along with margin rise.
Management Q&A
We interacted with Mr T V Ramanathan, MD and CEO of Exide Industries on the
performance of Q3FY11 and outlook. Following is an excerpt of our discussion.
Q. Why EBITDA declined to 15.2% compared to guidance of 20-21%
EBITDA margin didn't decline to 15.2%, but to 17.6%. One should calculate EBITDA
margin after including dividend income of Rs250mn from the lead smelters.
The smelters gave Rs110mn dividend in Q2FY11 and then Rs250mn in Q3FY11
and zero in Q1FY11. One should include dividend income to arrive at operating
margin as the dividend income is a proxy for the consolidated profit.
Other reasons for margin decline are (1) decline in the contribution of
replacement battery as percentage of sales (2) lack of price increase in
replacement battery despite rise in lead cost and (3) sharp decline in profit of
industrial battery.
Q. How has the product mix changed within 4WH?
Traditionally replacement to OEM mix was 1.4:1. In FY09 it had improved to
1.61:1 along with a slowdown in OEM and company's ability to boost replacement
sales. In FY10 the mix fell to 1.55x and subsequently it fell to 1.2x in FY11.
Q. Why replacement sales in 4WH is growing slowly?
In 9MFY11 OEM volume grew by 24% and replacement volume grew by 9%. In
Q3FY11 OEM grew by 30% and replacement grew by 11%. Strong demand
growth OEM having long term contracts and implication affected replacement
sales given the capacity constraint.
Q. Why didn't Exide increase the price of replacement batteries?
Exide currently has about 10-12% price premium compared to competitor. If
Exide hikes its price further then the chance of price premium rising to 15% is
there. Exide is apprehensive that it may end up losing marketshare if price
premium rises to 15% without Exide taking some marketing and brand building
initiative. Given that Exide has capacity constraint it is not in a position to take
new marketing initiative. Hence even though it is counter intuitive still Exide is
holding back the price hike owing to capacity constraint.
Q. What are the capacity expansion plan of 4WH batteries?
Exide began FY11 with 8.4m capacity. Capacity was expanded to 9.5mn in Sep 2010.
Capacity will reach 10.6mn by Apr2011 and will rise further to 12mn by Oct2011.
Q. How is the capacity utilisation ramp up taking place?
In Sep2010 Exide added 1mn pa capacity. In Oct10 incremental capacity had
25% utilisation, Nov2010 45% utilisation and Dec2010 90% utilisation.
Q. Will the capacity be enough to boost replacement to OEM mix?
At the beginning of FY11 Exide started expanding capacity with the intention of
increasing replacement to OEM mix to 1.6x in FY11, 1.75x in FY12 and 2x in
FY13. However, sharper than expected increase in OEM demand and some
delay in capacity ramp up has led to worseing of mix instead of improvement.
However, the trend is reversing now. In 9MFY11 avg monthly replacement battery
sales was 375K which has gone up to 400K in Dec2010. Monthly replacement
sales is likely to rise to 500K. The replacement to OEM mix will improve to 1.4x in
Q4FY11 and 1.45x in FY12.
By Oct2011 Exide will have 1mn capacity per month. Around 1000K will go
towards OEM, 20K will go to institutions, 40K exports, 560K will go towards
replacement including 60K towards warranty.
The mix could improve to 1.6x by H2FY12.
Q. Exide is complaining of capacity constraint in 4wh replacement.
However, our channel check suggests ready availability. What are we
missing here?
Exide is maintaining good availability in cities at the expense of rural areas. Exide
enjoys 12-13% price premium in bigger cities and only 7% premium in rural
markets. Hence this differential strategy.
Q. Why Exide is not raising OEM price sharply given the supply constraint ?
Exide has raised price by 7-8% over and above lead cost pass through for some
of its customers at various price points. Tata Motors agreed for price change from
1st Oct 2010. Maruti has agreed since Apr2010. Hyundai has not agreed for any
price hike though. However OEM margin expansion not enough to neutralize
replacement slowdown.
Q. How was the financial performance of industrial segment in Q3FY11?
In Q3FY10 industrial was 35% of revenue and 36% of PBT. However, in Q3FY11
industrial was 32% of revenue and 14% of profit. Net sales of industrial in
Q3FY11 was Rs3350mn , a growth of 5% compared to net sales of Rs3190mn in
Q3FY10. PBT of industrial declined by 67% y-o-y in Q3FY11.
Within industrial, the sales of inverters declined by 24% from Rs1270mn in
Q3FY10 to Rs970mn in Q3FY11.
Within Industrial Exide has price power in 65% of the batteries comprising of
inverter, traction and electricity boards.
Exide has no pricing power in telecom and railway etc comprising 35% of sales.
Inverter is highly seasonal. Season starts from Early Feb and continues till Mid
Aug. The season sales is 65% of full year sales and offseason is 35%.
Q How was the financial performance of automotive segment in Q3FY11
Automotive segment PBT declined by 12.5% in Q3FY11. Net sales of the
segment had grown by 23% in Q3FY11.
Price objective basis & risk
Exide Indus Ltd (XEDRF)
Our price objective of Rs196 for Exide is based on sum-of-the-parts value
including Rs184 for its lead acid battery business and Rs12 for its 50% stake in
ING Vysya Life Insurance. We have valued its battery business at Rs184 per
share assuming that it will trade at a PE of 15.5xFY13E, similar to one year
forward PE auto OEM as the company's retail sales now forms bulk of profit. We
believe that rising visibility of 16-18% growth sustaining in FY13-15 owing to
strong new car growth being seen now will translate to strong replacement battery
growth in three years time. We have valued the life insurance business at Rs12
per share, based on 13x FY11E NBAP. Value of life insurance business arrived
above is also at an implied valuation of 1.1x the amount to be invested by Exide
by end FY12e. Risks to our price objective are a sharp increase in cost of lead
and increase in competition
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