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EXIDE INDUSTRIES
Disappointing quarter, Structural drivers intact
Results way below expectations
Exide’s Q3FY11 net profit, at INR 1.24 bn (down 5% Y-o-Y and 42% Q-o-Q), was
significantly below our and Street estimates. Dip in top line and steep increase in
commodity costs led to profit decline.
Slowdown in industrial segment impacts top line
Net revenue at INR 10.5 bn (up 15% Y-o-Y, down 7% Q-o-Q), was impacted by
weakness in the industrial segment, particularly the power backup space. The
proportion of the industrial business declined to 32% (from 38% in Q2FY11).
Top line was also affected by a lower proportion of the higher value replacement
automobile volumes.
Shift in product mix and higher lead prices dent margin
Exide’s EBITDA margin declined 650bps Q-o-Q led by higher–than-expected raw
material cost (up nearly 600bps Q-o-Q). This can be attributed to two factors:
(a) Negative shift in product mix: Faced with constrained capacities, the
company shifted its supplies to the low margin auto OEM segment
(b) Increase in lead prices: Despite production from the company’s own
smelters rising to over 50% (42% in FY10) of its total demand; the average
lead cost for the company increased. There was a negative impact of
shortening of the imported lead procurement cycle to less than two months
(versus 3-4 months previously).
Outlook and valuations: Structural drivers intact; maintain ‘BUY’
We are revising down our EPS estimates for FY11 and FY12 by 13% and 17%,
respectively. However, going forward, we expect EBITDA margins to show an
uptrend on account of: (a) shift in product mix towards the replacement market
as the company increases capacities from Q1FY12 (b) potential price hikes and
(c) Increased procurement from its own smelters; persist.
We believe the key structural factors for Exide: (i) strong brand/distribution
network with pricing power in a fast growing passenger car market; and (ii)
backward integration which provides sustainable cost advantages, persist. We
maintain our ‘BUY’ recommendation on the stock with a target price of INR164
(implying a core 18x FY12E earnings).
Company Description
Exide is a leading battery producer in India and one of the largest power storage
producers in South Asia. It supplies batteries to the automotive, industrial, infrastructure
development, information technology and defence sectors in India. It has six battery
manufacturing facilities located across India. In addition, through its subsidiaries, the
company has two lead smeltering facilities that supply a significant amount of the
company's lead requirement. The company also has a 50% stake in ING Vysya Life
Insurance Company (IVL), a joint venture with ING Group, Netherlands, a significant
player in the global life insurance industry. IVL began its operations in 2001 and
currently services more than 1 mn customers.
Investment Theme
Brand centric businesses to the fore
The company’s branded businesses—automobile battery replacement and inverter
segment (>65% of revenue; ~80% of EBITDA)—with strong brand recall, robust
distribution and high FCF generation,
Key beneficiary of robust replacement demand
With strong growth in car volumes in the past few years (CAGR of 16% in FY06-11E) and
a gradual shift towards organized sector, we expect the automotive replacement battery
market to grow at a CAGR of 17% in FY10-12E. With the company continuing to invest in
its distribution network, we expect Exide to be a key beneficiary of the growth.
Backward integration gives further competitive edge
Exide’s acquisition of two smelter companies gives it access to a stable supply of low cost
raw material - a clear competitive advantage. Further, the proportion of in-house
smelters in lead supplies is likely to increase to 70% by FY13E (45% currently); the cost
benefits provide a buffer to our estimates.
Key Risks
Increase in competition by backward integration/ entry of foreign players
Incremental competition from foreign players or on account of backward integration by
existing OEMs (Tata Motors which now has its own battery brand) could be detrimental
to Exide’s profitability/volumes.
Change in technology
Exide spends a minimal (0.3% of revenues) on R&D, making the position of the company
vulnerable and in the medium term with a potential shift to environmentally friendly
technologies particularly in the electrical vehicle space.
Life insurance business could prove to be a dampener
Given, the high gestation period of the insurance business, there is a possibility of
continued investments in the joint venture without a commensurate return for
shareholders.
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