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Not just capacity
Exide's reported disappointing results for 3Q with Ebitda margin erosion of
880bps YoY and net profit decline of 5% (26% below estimates). Whilst the
poor performance can partially be attributed to near term capacity
constraints, we are concerned about possible erosion in Exide’s pricing power
and headwinds in the industrial segment. We cut our forecasts and valuation.
With management guidance looking too aggressive, we downgrade the stock
to OUTPERFORM and anticipate better entry points ahead.
3QFY11: disappointing performance
Financial performance was lacklustre in 3QFY11 with decelerating growth and
falling margins. Sales increased 15% YoY but declined 7% QoQ – the second
consecutive decline. Ebitda declined 27% YoY (40% below our estimates) as a
710bps decline in gross margins underpinned an 880bps Ebitda margin decline.
QoQ Ebitda margin decline was 660bps, driven by material costs. The results were
boosted by high other income from dividends (Rs330m - 33x of 3QFY10 and
+75% on 2QFY11). Overall PAT declined 5% YoY and was 26% below estimates.
Auto batteries – beyond just product mix
The product mix in auto batteries continued to shift towards lower margin OEM
sales due to capacity constraints. Exide has also refrained from taking
replacement market price hikes despite rising lead prices in order to boost dealer
retention until the supply improves. To us this is a concern as the company seems
to be ceding its historic price leadership position – something which may not
automatically recover once the supply situation improves.
Industrial batteries – bigger worries
Industrial battery profitability halved on a YoY basis and contributed nearly 60%
of the Ebitda decline. This was driven by a weak power backup and inverter
battery market as well as intense competition in telecom batteries. Our channel
checks indicate that Exide has been aggressive in pricing on some categories of
inverter batteries. With the seasonal recovery in inverter sales expected to be
weak this year and longer term pressure on the segment from a narrowing power
deficit, we see continuing headwinds in the segment.
Guidance too high, downgrade to O-PF
Given that both industrial and auto batteries may continue to face challenges, we
find management guidance of 20% Ebitda margins and 25% profit growth too
aggressive. We downgrade revenue by 2-6%, Ebitda by 18-21% and net profit by
12-17% for FY11-13. We have decreased our target multiple for Exide’s
standalone earnings from 18x to 16x to reflect concerns around management
guidance, cutting our SOTP based price target to Rs140, 7% upside. We expect
stock performance to remain weak in the near term due to earnings
disappointments. We downgrade our recommendation to OUTPERFORM.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Not just capacity
Exide's reported disappointing results for 3Q with Ebitda margin erosion of
880bps YoY and net profit decline of 5% (26% below estimates). Whilst the
poor performance can partially be attributed to near term capacity
constraints, we are concerned about possible erosion in Exide’s pricing power
and headwinds in the industrial segment. We cut our forecasts and valuation.
With management guidance looking too aggressive, we downgrade the stock
to OUTPERFORM and anticipate better entry points ahead.
3QFY11: disappointing performance
Financial performance was lacklustre in 3QFY11 with decelerating growth and
falling margins. Sales increased 15% YoY but declined 7% QoQ – the second
consecutive decline. Ebitda declined 27% YoY (40% below our estimates) as a
710bps decline in gross margins underpinned an 880bps Ebitda margin decline.
QoQ Ebitda margin decline was 660bps, driven by material costs. The results were
boosted by high other income from dividends (Rs330m - 33x of 3QFY10 and
+75% on 2QFY11). Overall PAT declined 5% YoY and was 26% below estimates.
Auto batteries – beyond just product mix
The product mix in auto batteries continued to shift towards lower margin OEM
sales due to capacity constraints. Exide has also refrained from taking
replacement market price hikes despite rising lead prices in order to boost dealer
retention until the supply improves. To us this is a concern as the company seems
to be ceding its historic price leadership position – something which may not
automatically recover once the supply situation improves.
Industrial batteries – bigger worries
Industrial battery profitability halved on a YoY basis and contributed nearly 60%
of the Ebitda decline. This was driven by a weak power backup and inverter
battery market as well as intense competition in telecom batteries. Our channel
checks indicate that Exide has been aggressive in pricing on some categories of
inverter batteries. With the seasonal recovery in inverter sales expected to be
weak this year and longer term pressure on the segment from a narrowing power
deficit, we see continuing headwinds in the segment.
Guidance too high, downgrade to O-PF
Given that both industrial and auto batteries may continue to face challenges, we
find management guidance of 20% Ebitda margins and 25% profit growth too
aggressive. We downgrade revenue by 2-6%, Ebitda by 18-21% and net profit by
12-17% for FY11-13. We have decreased our target multiple for Exide’s
standalone earnings from 18x to 16x to reflect concerns around management
guidance, cutting our SOTP based price target to Rs140, 7% upside. We expect
stock performance to remain weak in the near term due to earnings
disappointments. We downgrade our recommendation to OUTPERFORM.
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