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Exide Industries -OEM loyalty causes stock to pay the price…
Exide Industries (EIL) reported its Q3FY11 results that were below our
estimates with net sales at | 1049.1 crore (I-direct estimate | 1160.9
crore), up 15.0% YoY and down 6.9% QoQ. The decline in revenues is
attributable to robust OEM demand (~27% YoY) causing a capacity
crunch and lower sales in the high yielding replacement segment. The
decline in topline coupled with increased RM costs (2.1% jump QoQ) led
to a steep drop in EBITDA margins (650 bps QoQ decline). EIL was
unable to cushion margins through price hikes due to capacity
shortages. PAT came in at | 124.4 crore with margins at 11.8%
cushioned through dividend income of | 33.3 crore. We believe EIL was
caught off-guard by the volume growth in the OEM space. As additional
capacity comes on stream post Q4FY11, we envisage capacity
constraints easing and resurgence in after-market sales.
Highlights of the quarter
EIL has witnessed a quarter of lacklustre performance on the topline front
with a sequential decline as higher margin aftermarket sales were
sacrificed to supply to OEMs. In the industrial segment, the declining
telecom and lower uptick from the railways segment has depressed
margins and revenues in Q3FY11. The company has entered into capacity
expansions in the auto segment and is expected to have sufficient
capacities post Q4FY11 to meet the rising OEM and replacement demand.
Lead prices have also increased ~17% QoQ. However, with strong
backward integration, RM costs QoQ moved up ~2.1% only. We believe
that even if lead prices continue to remain stiff, increasing smelter
contributions would provide stronger margin cushion.
Valuation
Exide has a unique position as a market leader in the battery business and
acts as a strong proxy to auto demand. We expect the capacity
constraints to ease leading to better margins post Q4FY11. At the CMP of
| 138, the stock is trading at 16.4x FY11E core EPS of | 8.2 and 14.8x
FY12E of | 8.2. We have valued the stock on an SOTP basis with the core
business at 18x FY12E EPS of | 8.3 to arrive at a per share value of | 149
valued other subsidiaries and investments at | 20/share. Our target price
of | 169 implies an upside potential of 22%. Due to recent decline in the
price, our rating is changed from BUY to STRONG BUY.
Result analysis
Automotive segment continues to drive volumes…industrial slackens
The automobile industry has seen robust YTD growth of ~29%. However,
EIL was unable to ramp up capacity across all segments in sufficient time.
This situation of OEM demand outstripping supply has led to the
company being unable to fully capitalise on its unique position as a
market leader in the duopoly battery business as it has been grappling
with capacity outages.
The increasing auto-OEM volume contribution has led to lesser sales of
the more profitable aftermarket segment where it has seen a decline of
market share of ~4-6% points. In response, EIL has set up its 0.7 million
capacity two-wheeler plant, which is operational and in the process of
ramping up production. It has also spent | 180 crore on capex YTD. It
plans to spend another | 120 crore in Q4FY11 to increase capacity by
Q1FY12 and ease the demand-supply mismatch.
The industrial segment has lacked significant growth for the past 2
quarters. The telecom and railways segments continue to be laggards in
volume contributions overall, leading to erosion of margins in the
industrial segment. The UPS segment has also seen a tepid pickup due to
severity of the winter season in the Northern region and temporary
improvement in power condition for the Commonwealth games. We
expect industrial segment to witness stronger growth in Q1FY12 with
onset of the summer season across India and stronger replacement
requirements in the telecom tower space.
Outlook and valuation
Outlook
Exide Industries is one of the most suitable proxy plays to the auto-sector.
Also, considering the duopolistic battery business structure in the OEM
space, we are confident of seeing a recovery in sales in the replacement
segment post Q4FY11. The management sees the immediate problem of
short-term realisations, margins dipping as a temporary phenomenon. It
is focused on increasing the OEM market share vis-à-vis Amara Raja due
to the stable nature of demand from this segment. The replacement
segment has a significant unorganised presence, which has gained on the
loss of ~4-6% market share for Exide. The management is confident of
regaining the market share after the capacity bottlenecks clearance post
Q4FY11.
The increasing input costs have seen an upswing with rising lead prices
(up ~17% QoQ) and would be a challenge for the company. However,
with the more than 50% (to be raised to ~65% by FY12) lead requirement
being backward integrated through its own lead smelters, we expect
adequate cushion on the raw material front.
We have revised our estimates for FY11 and FY12 factoring in the tepid
replacement sales till the next quarter with a gradual improvement in
market share in FY12 along with higher expectation on the input prices
front. We have cut down our EPS estimates for FY11 and FY12 by 9% and
9.1% to | 7.5 and | 8.3, respectively
Valuation
We believe the automotive demand witnessed till now is more structural
in nature this time around and expect EIL to reap the benefits of the same
since it is the market leader in the duopolistic organised battery business.
At the CMP of | 138, the stock is trading at 16.4x FY11E core EPS of | 8.2
and 14.8x FY12E of | 8.2. We have used the SOTP methodology to value
the stock. We value the standalone business at 18x FY12E EPS of | 8.3 to
arrive at a per share value of | 149 for the core business. The smelting
subsidiaries are valued at | 10/share (assuming 80% discount to
Hindustan Zinc market cap/sales multiple for smelting businesses) along
with a P/BV valuation of 1.0 for rest of the subsidiaries. We have valued
the 50% stake in ING Vysya at | 10/share using an NBAP multiple of 14x.
Our target price of | 169 implies an upside potential of 22%. We have
changed our rating on the stock from BUY to STRONG BUY
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Exide Industries -OEM loyalty causes stock to pay the price…
Exide Industries (EIL) reported its Q3FY11 results that were below our
estimates with net sales at | 1049.1 crore (I-direct estimate | 1160.9
crore), up 15.0% YoY and down 6.9% QoQ. The decline in revenues is
attributable to robust OEM demand (~27% YoY) causing a capacity
crunch and lower sales in the high yielding replacement segment. The
decline in topline coupled with increased RM costs (2.1% jump QoQ) led
to a steep drop in EBITDA margins (650 bps QoQ decline). EIL was
unable to cushion margins through price hikes due to capacity
shortages. PAT came in at | 124.4 crore with margins at 11.8%
cushioned through dividend income of | 33.3 crore. We believe EIL was
caught off-guard by the volume growth in the OEM space. As additional
capacity comes on stream post Q4FY11, we envisage capacity
constraints easing and resurgence in after-market sales.
Highlights of the quarter
EIL has witnessed a quarter of lacklustre performance on the topline front
with a sequential decline as higher margin aftermarket sales were
sacrificed to supply to OEMs. In the industrial segment, the declining
telecom and lower uptick from the railways segment has depressed
margins and revenues in Q3FY11. The company has entered into capacity
expansions in the auto segment and is expected to have sufficient
capacities post Q4FY11 to meet the rising OEM and replacement demand.
Lead prices have also increased ~17% QoQ. However, with strong
backward integration, RM costs QoQ moved up ~2.1% only. We believe
that even if lead prices continue to remain stiff, increasing smelter
contributions would provide stronger margin cushion.
Valuation
Exide has a unique position as a market leader in the battery business and
acts as a strong proxy to auto demand. We expect the capacity
constraints to ease leading to better margins post Q4FY11. At the CMP of
| 138, the stock is trading at 16.4x FY11E core EPS of | 8.2 and 14.8x
FY12E of | 8.2. We have valued the stock on an SOTP basis with the core
business at 18x FY12E EPS of | 8.3 to arrive at a per share value of | 149
valued other subsidiaries and investments at | 20/share. Our target price
of | 169 implies an upside potential of 22%. Due to recent decline in the
price, our rating is changed from BUY to STRONG BUY.
Result analysis
Automotive segment continues to drive volumes…industrial slackens
The automobile industry has seen robust YTD growth of ~29%. However,
EIL was unable to ramp up capacity across all segments in sufficient time.
This situation of OEM demand outstripping supply has led to the
company being unable to fully capitalise on its unique position as a
market leader in the duopoly battery business as it has been grappling
with capacity outages.
The increasing auto-OEM volume contribution has led to lesser sales of
the more profitable aftermarket segment where it has seen a decline of
market share of ~4-6% points. In response, EIL has set up its 0.7 million
capacity two-wheeler plant, which is operational and in the process of
ramping up production. It has also spent | 180 crore on capex YTD. It
plans to spend another | 120 crore in Q4FY11 to increase capacity by
Q1FY12 and ease the demand-supply mismatch.
The industrial segment has lacked significant growth for the past 2
quarters. The telecom and railways segments continue to be laggards in
volume contributions overall, leading to erosion of margins in the
industrial segment. The UPS segment has also seen a tepid pickup due to
severity of the winter season in the Northern region and temporary
improvement in power condition for the Commonwealth games. We
expect industrial segment to witness stronger growth in Q1FY12 with
onset of the summer season across India and stronger replacement
requirements in the telecom tower space.
Outlook and valuation
Outlook
Exide Industries is one of the most suitable proxy plays to the auto-sector.
Also, considering the duopolistic battery business structure in the OEM
space, we are confident of seeing a recovery in sales in the replacement
segment post Q4FY11. The management sees the immediate problem of
short-term realisations, margins dipping as a temporary phenomenon. It
is focused on increasing the OEM market share vis-à-vis Amara Raja due
to the stable nature of demand from this segment. The replacement
segment has a significant unorganised presence, which has gained on the
loss of ~4-6% market share for Exide. The management is confident of
regaining the market share after the capacity bottlenecks clearance post
Q4FY11.
The increasing input costs have seen an upswing with rising lead prices
(up ~17% QoQ) and would be a challenge for the company. However,
with the more than 50% (to be raised to ~65% by FY12) lead requirement
being backward integrated through its own lead smelters, we expect
adequate cushion on the raw material front.
We have revised our estimates for FY11 and FY12 factoring in the tepid
replacement sales till the next quarter with a gradual improvement in
market share in FY12 along with higher expectation on the input prices
front. We have cut down our EPS estimates for FY11 and FY12 by 9% and
9.1% to | 7.5 and | 8.3, respectively
Valuation
We believe the automotive demand witnessed till now is more structural
in nature this time around and expect EIL to reap the benefits of the same
since it is the market leader in the duopolistic organised battery business.
At the CMP of | 138, the stock is trading at 16.4x FY11E core EPS of | 8.2
and 14.8x FY12E of | 8.2. We have used the SOTP methodology to value
the stock. We value the standalone business at 18x FY12E EPS of | 8.3 to
arrive at a per share value of | 149 for the core business. The smelting
subsidiaries are valued at | 10/share (assuming 80% discount to
Hindustan Zinc market cap/sales multiple for smelting businesses) along
with a P/BV valuation of 1.0 for rest of the subsidiaries. We have valued
the 50% stake in ING Vysya at | 10/share using an NBAP multiple of 14x.
Our target price of | 169 implies an upside potential of 22%. We have
changed our rating on the stock from BUY to STRONG BUY
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