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Exide Industries
3Q results: Capacity constraints and higher lead prices impact earnings
In 3Q FY11, Exide’s earnings fell 33% qoq to Rs1.2bn.
EBITDA margin declined 700bps, impacted by capacity
constraints in auto, slower off-take in industrial and
rising lead prices.
To factor this in, we lower FY11 EPS estimate by 9%
and FY12 and FY13 by 4% each.
We expect capacity constraints to be resolved by 1Q
FY12.
We maintain our OUTPERFORM rating, but lower price
target to Rs193.
Revenue decline led by capacity constraints – In 3Q,
Exide faced capacity constraints in its auto segment and
slower off-take for industrial products. Revenue declined
7% qoq (up 15% yoy) to Rs10.5bn. As Exide had to cater
to strong OE demand in the auto segment (to maintain
long-term relations) during the quarter despite capacity
constraints, low-margin OE sales constituted a larger
portion of its overall product mix.
Refraining from price increase impacts margin – To
prevent any further fall in market share in the replacement
segment, Exide refrained from raising prices despite the
17% qoq increase in lead prices. This led to a sharp
700bps sequential decline in margins, resulting in a 33%
qoq fall in earnings to Rs1.2bn.
Lowering EPS estimates – To factor in the earnings
decline, we lower FY11 earnings by 9%. Capacity
constraints are likely to be resolved once new capacity
comes on-stream by 1Q FY12 and hence we lower FY12 /
FY13 earnings by only 4%.
Long-term view intact – The company is likely to post
normalised margins once the new capacity comes onstream from 1Q FY12, in our view. Furthermore, ramp up
at its in-house smelters is likely to boost operational
performance going forward. Hence, our long-term view
remains intact.
Valuation – We value the core business at 18x FY12E
earnings, yielding Rs172 (Rs179 earlier), and the
insurance business at Rs14 and subsidiaries at Rs8. Our
revised price target of Rs193 (Rs201 earlier) provides 41%
upside.
Capacity constraints impact revenue
Exide’s revenue growth was lower-than-expected given capacity constraints faced in the
automobile segment and slowdown in the industrial segment – 15% yoy growth (7% qoq decline)
in 3Q FY11. On the automotive front, despite capacity constraints, Exide had to cater to
unprecedented demand in the OE segment (23% yoy growth in the passenger vehicle segment in
3Q FY11) to maintain long-term relationships. This led to the high proportion of low-margin OE
sales in the overall product mix (56:44, replacement to OE, against 60:40 earlier). This coupled
with lacklustre industrial battery demand led to a sequential 7% decline in revenue.
Lower off-take and higher lead price leads to sharp margin erosion
To maintain long-standing relationship with OEMs, Exide had to cater to the unprecedented OE
demand in the quarter, which led to higher proportion of low-margin OE sales in the overall
product mix. Furthermore, in a bid to prevent further market share loss in the replacement
segment, the company refrained from raising prices despite the 17% qoq increase in lead prices.
This led to a double whammy on its margins. In addition, in the industrial segment, substantial
pricing pressure from competition further depressed overall margins, dropping it to 14.7%.
Higher other income arrests earnings decline
Absolute EBITDA in 3Q FY11 declined 37% qoq led by the sharp margin decline. However, other
income was higher at Rs331m as the un-utilised funds from the Rs5.4bn QIP issue raised in 4Q
FY10 provided additional income. Led by a sharp decline in operational performance, net profit
for the quarter declined 1% yoy (down 33% qoq) to Rs1.2bn.
Earnings lowered by 9% for FY11, 4% each for FY12E / FY13E
To compensate for the slower-than-expected ramp up in 3Q FY11, we lower FY11 earnings by
9% Rs7.4 per share. However, once the new capacity comes on-stream from 1Q FY12, we
expect the company to gain its lost market share in the replacement segment. Hence, we have
lowered our FY12E / FY13E earnings by a much lower 4% to Rs9.5 per share and Rs11.7 per
share, respectively. Subsequently, we lower our price target to Rs193 per share
Long-term view intact, maintain OUTPERFORM
The company is likely to post normalised margins once the new capacity is on-stream from
1Q FY12. Furthermore, we expect the ramp up at its in-house smelters to boost operational
performance going forward. Hence, our long-term view remains intact. We value the core
business at 18x FY12E earnings, yielding Rs172 (Rs179 earlier), and the insurance business at
Rs14 and subsidiaries at Rs8. Our revised price target of Rs193 (Rs201 earlier) provides 41%
upside. Maintain OUTPERFORM.
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