Exide Industries - " Charging up again ":: LKP

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Margins improved on product mix, to move northwards

Exide Industries (Exide)’s Q4 FY11 results were slightly above our expectations. Margin expansion of 210bps qoq to 17.3% was led by product mix improvement in favor of replacement segment as compared to Q3 FY11(1.2:1 as compared to 1.16:1 in Q3 FY11 - Replacement: OEM proportion). In our discussion with the management, they expect this proportion to move upto 1.4:1,if the auto OEM industry grows at 12-15% in FY 12E, and upto 1.3:1 if the auto OEM industry grows between 15-20% in FY 12 . The company has taken a slight price hike which was overall ~0.5% during the quarter. Furthermore, the LME lead prices in the quarter remained more or less constant i.e. in the range of $2,200/tonne to $2,300/tonne.

The company mentioned that the contribution of lead procured from their own smelters (prices lower by ~10% than LME prices) was at 53% from 50% at the end of Q3 FY11 and is expected to take this number to 57-60% by the end of FY 12 and ~70% by the end of FY 13, thus reducing dependence on imports ( Imports as a % of total lead procured was at 28% at the end of FY 11 from 30% in the previous quarter). Furthermore, significant capacity expansion happening post Q2 FY12 is expected to solve the capacity issues mainly at the replacement markets, thus supporting margins from the high margin replacement battery business.

Capacity issues to get resolved through debottlenecking and set up of new facilities.

Q3 FY11 results were adversely impacted due to capacity constraints mainly on the 4W replacement side, resulting in loss of market share in the replacement business. With the ongoing initiative in the capacity expansion through constant debottlenecking at its various plants, new assembly line at its Hosur plant and a new plant at Ahmednagar, we expect to see significant traction in the top line. The 2W capacity which was at 10mn in April 2010, has moved up to 16mn by April 2011 and is expected to move up to 21mn by December 2011. 4W capacity which was at 8.4mn at the end of April 2010 has gone up to 9.7mn and will move up to 12mn by December 2011. On the industrial side, the current capacity stands at 1.9bn MAh, and is expected to move up to 2.3bn MAh by FY 12 end.

The Auto: Industrial mix in the quarter was at 62:38. The company intends to maintain the utilization rates in the vicinity of 95% post this expansion, whereby Exide can get the advantage of operating leverage thus positively impacting margin performance.

Outlook and valuation

Continuation of strong auto demand along with expansion of capacities will augur well for the top line growth of the company. Increase in the replacement volumes post expansion will improve the margins going forward. Though the growth in the industrial volumes will be low, the growth in the auto segment will be sufficient to provide support to the topline. We expect topline to grow at a CAGR of 17% while EBITDA to grow at 25% during FY 11 and FY 13E. On Exide becoming a zero debt company and capex guidance of Rs.3.5-4bn in FY 12, thereby reducing in FY 13, we expect cashflows to improve thereon. Fall in lead prices will act as a positive trigger for Exide. At CMP of Rs.153, the stock trades at 15 times FY 13E EPS of Rs.10.3. Adding the insurance business value of Rs.11 along with smelter subsidiaries value of Rs.11 to the standalone target of Rs.154, we arrive at a consolidated target price of Rs.176, which is a 15% upside from current levels.