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Earning surprises! Exide back on track…
Exide Industries (EIL) reported its Q4FY11 results that were above our
estimates with net sales at | 1226.1 crore (I-direct estimate: | 1146.2
crore), up 19.3% YoY and 16.9% QoQ. The jump in revenues was due to
realisation improvements supported by higher replacement market sales
(~5% jump QoQ) as capacity constraints eased a tad. The EBITDA
performance improved as RM costs declined (190 bps QoQ). This was
mainly due to higher cost efficiencies from the in-house smelting units
leading to an EBITDA margin rise (390 bps QoQ). EIL’s performance was a
welcome surprise after the Q3FY11 disappointment and leaves more
headroom for growth. The PAT came in at | 163.7 crore (I-direct estimate:
| 133.4 crore) boosted further by dividend income of | 21.6 crore. On a
consolidated basis also, FY11 PAT was reported at | 618.82 crore boosted
by the insurance JV with ING reporting lower losses at | 35 crore (| 68.3
crore loss in FY10).
Highlights of the quarter
EIL has bounced back strongly after a sluggish Q3FY11 performance as
higher margin after-market sales increased by ~4% QoQ from 1.17:1 ratio
to 1.22:1 between replacement and OEM sales. This has been helped as
new capacities have been added in Q4 and with the new Ahmednagar
plant ramping up capacity. The industrial segment continued to witness
lower offtake in the telecom and power segment. The company has seen
lower RM costs with the increase of in-house sourcing of lead continuing
to increase, which has ~10-15% pricing benefit in comparison to LME
prices. The company also received higher dividend income (| 21.6 crore)
due to better subsidiary performance.
Valuation
Exide as a market leader in the battery business acts as a strong proxy to
expanding auto OEM and replacement demand. Going ahead, we expect
the capacity constraints to ease with a better margin performance. At the
CMP of | 150, the stock is trading at12.5x FY13E EPS of | 10.6. We have
valued the stock on an SOTP basis with the core business at 14x FY13E
EPS of | 10.6 to arrive at a per share value of | 149 valuing other
subsidiaries and investments at | 20/share. We maintain our target price
of | 169. We have changed our rating from STRONG BUY to BUY.
Result analysis
Replacement volume improves as capacities flow through…
Unlike the Q3FY11 results, EIL improved its ratio for sales to aftermarket
in relation to OEM sales. The ratio of replacement sales to OEM improved
to 1.2:1 (~5% QoQ rise) mainly due to incremental capacity addition and
improved utilisation of the newly commissioned Ahmednagar facility.
However, the company plans to improve this ratio towards 1.6:1 by
H2FY12E. This would lead to a significant boost to its margins at the
EBIDTA and PAT level. The demand outlook towards OEM remains
positive with 12-15% growth expected in FY12E. The management
remains confident of improving its margin performance with higher
replacement sales share by H2FY12E.
The increasing auto-OEM volume contribution has been a problem in the
short-term with capacity constraints. However, post H2FY12E, this would
provide EIL a strong position in both the OEM as well as aftermarket
sales. EIL is expected to raise further capacity in the PV and two-wheeler
segment by 0.44 crore units and 0.2 crore units, respectively, by
H2FY12E. EIL would greatly benefit from the fact that the strong growth of
battery led self starting vehicles in the two-wheeler OEM segment in the
past two or three years would see a replacement cycle in FY12-13
providing strong replacement demand.
The industrial segment has remained sluggish in FY11 with demand from
the telecom, railways and even UPS segment not witnessing strong
traction. The telecom segment continues to be worst hit in both volume
terms as well as lower per ampere realisations. The UPS segment, which
under normal circumstances witnesses strong growth in H1 of any
calendar year, has witnessed tepid pick-up due to slower onset of
summer in the northern region and improvement in the power supply
situation. We remain cautious on the industrial segment growth and
would wait for H1FY12 to view the demand growth and future outlook for
the same.
Outlook and valuation
Outlook
Exide Industries is one of the most suitable proxy plays to the auto sector
demand juggernaut. The duopolistic nature of the battery business, with
EIL leading the charge in the OEM space along with the replacement
market, makes us confident over the outlook. We are confident of seeing
a further recovery in sales towards the replacement segment with
incremental capacity coming through by H1FY12E. The replacement
segment continues to have a significant unorganised presence. Exide has
recovered a certain portion of the loss of market share (~4-6%) in
Q3FY11.
On the input costs front, we have witnessed rising lead LME prices (up
~8% QoQ). However, EIL continues to increase its backward integration
through its smelting arms. FY11 has witnessed ~50-55% in house supply
(to be raised to ~70% by FY13E) of lead requirement through its own
lead smelters. We expect adequate cushion on the raw material front.
We have revised our FY12 estimates upwards factoring in the
improvement in replacement sales and a gradual improvement in market
share in FY12 along with higher dividend income from subsidiaries. We
have raised our EPS estimates for FY12 by 10.6% to | 9.1 and introduced
our FY13E EPS at | 10.6.
Valuation
We believe the automotive demand witnessed till now is more structural
in nature this time around. We 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 | 150, the stock is trading at 14.6x FY12E core EPS of | 9.1
and 12.5x FY13E of | 10.6. We have used the SOTP methodology to value
the stock. We value the standalone business at 14x FY13E EPS of | 10.6
to arrive at a per share value of | 149 for the core business. The smelting
subsidiaries are valued at | 10/share (assuming 85% discount to
Hindustan Zinc’s market cap/sales multiple for smelting businesses) along
with a P/BV valuation of 1.0 for the 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 13%. We
have changed our rating on the stock from STRONG BUY to BUY.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Earning surprises! Exide back on track…
Exide Industries (EIL) reported its Q4FY11 results that were above our
estimates with net sales at | 1226.1 crore (I-direct estimate: | 1146.2
crore), up 19.3% YoY and 16.9% QoQ. The jump in revenues was due to
realisation improvements supported by higher replacement market sales
(~5% jump QoQ) as capacity constraints eased a tad. The EBITDA
performance improved as RM costs declined (190 bps QoQ). This was
mainly due to higher cost efficiencies from the in-house smelting units
leading to an EBITDA margin rise (390 bps QoQ). EIL’s performance was a
welcome surprise after the Q3FY11 disappointment and leaves more
headroom for growth. The PAT came in at | 163.7 crore (I-direct estimate:
| 133.4 crore) boosted further by dividend income of | 21.6 crore. On a
consolidated basis also, FY11 PAT was reported at | 618.82 crore boosted
by the insurance JV with ING reporting lower losses at | 35 crore (| 68.3
crore loss in FY10).
Highlights of the quarter
EIL has bounced back strongly after a sluggish Q3FY11 performance as
higher margin after-market sales increased by ~4% QoQ from 1.17:1 ratio
to 1.22:1 between replacement and OEM sales. This has been helped as
new capacities have been added in Q4 and with the new Ahmednagar
plant ramping up capacity. The industrial segment continued to witness
lower offtake in the telecom and power segment. The company has seen
lower RM costs with the increase of in-house sourcing of lead continuing
to increase, which has ~10-15% pricing benefit in comparison to LME
prices. The company also received higher dividend income (| 21.6 crore)
due to better subsidiary performance.
Valuation
Exide as a market leader in the battery business acts as a strong proxy to
expanding auto OEM and replacement demand. Going ahead, we expect
the capacity constraints to ease with a better margin performance. At the
CMP of | 150, the stock is trading at12.5x FY13E EPS of | 10.6. We have
valued the stock on an SOTP basis with the core business at 14x FY13E
EPS of | 10.6 to arrive at a per share value of | 149 valuing other
subsidiaries and investments at | 20/share. We maintain our target price
of | 169. We have changed our rating from STRONG BUY to BUY.
Result analysis
Replacement volume improves as capacities flow through…
Unlike the Q3FY11 results, EIL improved its ratio for sales to aftermarket
in relation to OEM sales. The ratio of replacement sales to OEM improved
to 1.2:1 (~5% QoQ rise) mainly due to incremental capacity addition and
improved utilisation of the newly commissioned Ahmednagar facility.
However, the company plans to improve this ratio towards 1.6:1 by
H2FY12E. This would lead to a significant boost to its margins at the
EBIDTA and PAT level. The demand outlook towards OEM remains
positive with 12-15% growth expected in FY12E. The management
remains confident of improving its margin performance with higher
replacement sales share by H2FY12E.
The increasing auto-OEM volume contribution has been a problem in the
short-term with capacity constraints. However, post H2FY12E, this would
provide EIL a strong position in both the OEM as well as aftermarket
sales. EIL is expected to raise further capacity in the PV and two-wheeler
segment by 0.44 crore units and 0.2 crore units, respectively, by
H2FY12E. EIL would greatly benefit from the fact that the strong growth of
battery led self starting vehicles in the two-wheeler OEM segment in the
past two or three years would see a replacement cycle in FY12-13
providing strong replacement demand.
The industrial segment has remained sluggish in FY11 with demand from
the telecom, railways and even UPS segment not witnessing strong
traction. The telecom segment continues to be worst hit in both volume
terms as well as lower per ampere realisations. The UPS segment, which
under normal circumstances witnesses strong growth in H1 of any
calendar year, has witnessed tepid pick-up due to slower onset of
summer in the northern region and improvement in the power supply
situation. We remain cautious on the industrial segment growth and
would wait for H1FY12 to view the demand growth and future outlook for
the same.
Outlook and valuation
Outlook
Exide Industries is one of the most suitable proxy plays to the auto sector
demand juggernaut. The duopolistic nature of the battery business, with
EIL leading the charge in the OEM space along with the replacement
market, makes us confident over the outlook. We are confident of seeing
a further recovery in sales towards the replacement segment with
incremental capacity coming through by H1FY12E. The replacement
segment continues to have a significant unorganised presence. Exide has
recovered a certain portion of the loss of market share (~4-6%) in
Q3FY11.
On the input costs front, we have witnessed rising lead LME prices (up
~8% QoQ). However, EIL continues to increase its backward integration
through its smelting arms. FY11 has witnessed ~50-55% in house supply
(to be raised to ~70% by FY13E) of lead requirement through its own
lead smelters. We expect adequate cushion on the raw material front.
We have revised our FY12 estimates upwards factoring in the
improvement in replacement sales and a gradual improvement in market
share in FY12 along with higher dividend income from subsidiaries. We
have raised our EPS estimates for FY12 by 10.6% to | 9.1 and introduced
our FY13E EPS at | 10.6.
Valuation
We believe the automotive demand witnessed till now is more structural
in nature this time around. We 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 | 150, the stock is trading at 14.6x FY12E core EPS of | 9.1
and 12.5x FY13E of | 10.6. We have used the SOTP methodology to value
the stock. We value the standalone business at 14x FY13E EPS of | 10.6
to arrive at a per share value of | 149 for the core business. The smelting
subsidiaries are valued at | 10/share (assuming 85% discount to
Hindustan Zinc’s market cap/sales multiple for smelting businesses) along
with a P/BV valuation of 1.0 for the 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 13%. We
have changed our rating on the stock from STRONG BUY to BUY.
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