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Exide Industries – 3QFY2011 Result Update
Angel Broking recommends an Accumulate on Exide Industries with a Target Price of Rs157.
Exide Industries (Exide) posted a weak performance in 3QFY2011, missing our
sales and EBITDA estimates by 9.6% and 34.4%, respectively. Performance was
affected by 1) capacity constraints in the automotive batteries segment, forcing the
company to divert capacities to meet demand from the low-margin OEM segment
2) lack of buoyancy in the industrial batteries segment and 3) EBITDA margin
contraction due to a substantial increase in raw-material costs. We maintain our
positive outlook on the battery industry due to changing demographics, which in
turn will support secular consumption growth in Indian markets. However, we
have revised our earnings estimates downwards to account for lower-thanexpected
3QFY2011 results. Owing to the recent decline in the stock price, we
recommend Accumulate (from Neutral) with an SOTP Target Price of `157.
Operating performance nosedives; other income saves the day: For 3QFY2011,
Exide reported lower-than-expected yoy growth of 15% (down 7% qoq) in net
sales to `1,050.2cr. Growth was led by ~13% yoy growth in volumes. EBITDA
margins fell substantially by 871bp yoy (down 653bp qoq) due to higher
raw-material costs, thus leading to a 26.8% dip in operating profit. However,
higher other income of `33.1cr restricted the fall in net profit to a certain extent.
Thus, the bottom line reported a 4.6% yoy decline (down 42% qoq) to `124.4cr.
Outlook and valuation: We estimate Exide to post a 16.9% CAGR in revenue over
FY2010–12E, leading to a 15.7% CAGR in the bottom line. At `138, the stock is
trading at 18.8x FY2011E and 16.3x FY2012E earnings. We recommend
Accumulate (from Neutral) on Exide with an SOTP Target Price of `157. Owing to
Exide’s defensive appeal and healthy and consistent fundamentals, we value its
core operations at 16.5x (10% premium to its five-year average of 15x) its
FY2012E earnings at `140. We value Exide’s stake in ING Vysya Life Insurance at
`11/share on FY2012E NBAP and have assigned a value of `6/share to its lead
smelters (8x FY12E PAT).
Net sales up 15%, lower than expectations: For 3QFY2011, Exide reported 15%
yoy growth in net sales to `1,050cr (`913cr), which was below our expectation of
`1,161cr. Net sales growth was aided by a ~13% yoy jump in volumes.
Sequentially, net sales declined by 7%. Overall, sales growth was restricted as the
company was unable to meet the unprecedented and sustained surge in demand
for auto batteries. Further, due to capacity constraints, the company diverted its
production volumes to the less profitable OEM segment at the cost of the more
profitable replacement segment, which affected its market share in the
replacement segment. This, as guided by management, was to sustain the
company’s long-term relationship with OEMs.
Moreover, lack of buoyancy in the industrial batteries segment affected the
company’s top-line performance. However, management is optimistic about
regaining the lost market share in the replacement market and mitigate
capacity-constraint problems once additional capacities go on stream from
April 2011. Meanwhile, in 2QFY2011, Exide commissioned operations at its new
plant in Ahmednagar for motorcycle batteries.
EBITDA margins decline substantially, down 871bp: During 3QFY2011, Exide
witnessed a significant 871bp yoy decline in EBITDA margins to 15.2%, due to a
717bp yoy increase in raw-material costs, which accounted for around 63.7% of
sales (56.6% in 3QFY2010). On a sequential basis, margins contracted by 653bp,
leading to a 34.8% qoq decline in operating profit. Raw-material costs were also
affected during the quarter, largely because of the ~4.5% yoy and ~17% qoq
increase in prices of lead, the company’s key input component. Margins also
declined due to the product mix, which was inclined more towards OEMs during
the quarter. Moreover, subdued performance in the industrial batteries segment
affected the company’s operating margins, as industrial batteries command higher
margins. Additionally, due to its vulnerable position in the replacement segment,
the company was cautious in passing on the lead price increase, further
pressurising margins.
Net profit declines 4.6%: Exide reported a 4.6% yoy decline (down 42% qoq) in net
profit to `124.4cr (`130.5cr) during the quarter, as against our estimate of
`150.6cr. Net profit margin declined by 279bp yoy to 11.8% in 3QFY2011, as
against 14.3% in 3QFY2010. However, higher other income at `33.1cr (inclusive
of net exchange gains of `11cr), up substantially from `1cr in 3QFY2010,
restricted the fall in net profit to a large extent
Investment arguments
Robust demand scenario for auto and industrial batteries: The auto and
industrial battery segments have been witnessing strong growth post the
economic downturn, driven by robust demand-pull on account of higher auto
and industrial production and increased consumer spending. We expect the
auto and industrial battery segments to continue to grow, generating robust
revenue CAGRs of ~16.9% and ~15.8%, respectively, over FY2010–12E.
Hence, we forecast Exide to register strong revenue CAGRs of 17.2% and
17.7% in the auto and industrial battery segments, respectively.
Market leader with wider reach and strong pricing power: Exide is a dominant
player in the auto battery (OEM and replacement) and industrial battery
segments with market share of 60–65% and 40–45%, respectively. Exide has
leveraged upon its brand equity, better quality proposition and wider reach to
consolidate its position in the market, which gives the company a superior
pricing power compared to peers. Over the years, Exide has been able to
improve its realisation across the auto and industrial battery segments, which
has more than offset the movements in input prices. We expect Exide to
continue to leverage upon its market leadership position and pricing power,
which would enhance the company’s ability to pass on cost increases in the
future as well. Hence, we expect average realisation to grow at a ~3.3%
CAGR over FY2010–12E.
Captive sourcing reduces impact of lead price volatility: Exide acquired
Tandon Metals (FY2008) and Leadage Alloys (51% in FY2009 and 49% in
2QFY2011) to recycle used lead and lessen the vulnerability of rising lead
prices. This reduced the company's dependence on imported lead in FY2010
to ~32% (~36% in FY2009). Total lead supplied by the captive smelter
increased to ~50% in FY2010 from ~35% in FY2009. Exide has benefitted
from its captive sourcing strategy, as lead sourcing from captive smelters is
10–15% cheaper compared to market rates.
Going forward, Exide plans to increase sourcing from its smelters to ~55% in
FY2011E and ~70% by FY2012E. Hence, the company will be expanding its
lead smelter capacity to 100,000tpa by March 2011. Our sensitivity analysis
suggests that for every 10% increase in sourcing from captive smelters, the
company’s EBITDA margins expand by ~50bp (assuming stable lead prices).
Capacity expansion to increase volume growth: Exide has been operating at
~90% utilisation levels over the past five years. The company plans to increase
its battery capacity with an investment of `400cr in FY2011E to cater to the
growing demand. The company also plans to increase its two-wheeler and
four-wheeler battery capacity by 60% and 28%, respectively, by FY2011. As a
result of increased capacity, we believe Exide is well placed to meet the rising
auto battery demand. We estimate the overall utilisation level to remain at
78–80% in FY2012E. Further, we expect Exide to post volume CAGRs of
13.5% and 14.4% in the auto and industrial battery segments, respectively,
over FY2010–12E.
Outlook and valuation
We estimate Exide to post a 16.9% CAGR in revenue over FY2010–12E, leading to
a healthy 15.7% CAGR in the bottom line. Moreover, the company’s strong brand
image has been creating value, while continuously improving its RoCE, due to
better asset turnover on incremental capacities. We believe Exide will continue to
achieve higher return ratios and better margins on the back of pricing power and
assuming increased in-house lead supply, which in turn would reduce the impact
of volatility in lead prices going forward. Further, a strong balance sheet and lower
debt-to-equity ratio will aid the company in sustaining strong cash flows.
We have revised our EPS estimates downwards to `6.8 (`7.4 earlier) and to `8.5
(`9.1 earlier) for FY2011E and FY2012E, respectively, owing to lower-thanexpected
performance during 3QFY2011. At `138, the stock is trading at 18.8x
FY2011E and 16.3x FY2012E earnings. Owing to the recent decline in the stock
price, we recommend Accumulate (from Neutral) with an SOTP Target Price of
`157. Owing to the company’s defensive appeal and healthy and consistent
fundamentals, we value its core operations at 16.5x (10% premium to its five-year
average of 15x) its FY2012E earnings at `140. We value Exide’s stake in ING
Vysya Life Insurance at `11/share on FY2012E NBAP and have assigned a value
of `6/share to its lead smelters (8x FY2012E PAT).
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