Buy Exide Industries - ""Still charging"":: LKP

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Slowing demand from OEM to spur high margin replacement business

With macro headwinds slowing down the OEM segment of the auto sector, Exide can now cater more to the replacement market where the demand continues to be robust driven by slew of 4W and 2W launches during the last few years. Management had earlier stated that their topline growth is inversely proportional to the growth in the OEM auto industry. It implies that replacement business which is a high margin business can contribute higher to the total topline. At the end of FY 11, this proportion which had come down to 1.11:1 due to robust OEM demand can move up again, thus aiding the margin performance. Management expects this ratio to go up to 1.35:1 by the end of FY 12.

Cooling lead prices to support margins

LME Lead prices have come down from the highs of $2741 seen in April by 11% in May to $2418, a drop of 11%. In June it averaged out close to the levels of May. Management expects a further decline in lead prices going forward with commodity prices softening, however they are comfortable even if lead prices continue to range at current levels of $2400-2500. This coupled with higher replacement demand may enable Exide to show an improvement in margins. With in-house smelters expected to supply 60% and 70% of lead requirement in FY 12E and FY 13E (priced lower by ~15% than LME lead prices) we may witness robust profitability in the coming years.

Absence in CV segment a blessing in disguise

Exide has a miniscule presence in the CV segment.Exide’s absence in this segment is automatically insulating it from the macro headwinds thereby providing it an edge over peers. Furthermore, the 2W industry, the major revenue driver of Exide in the auto segment, is expected to be the last to face the pressure of slowdown in auto and post the highest growth among the various auto segments in FY12. Strong rural demand, expectations of a good monsoon and insignificant impact of interest rates- the positives for 2W in weak markets will drive Exide’s business, in which the company is expanding its capacities by more than double this year. Also the launch of new VRLA batteries is finding good demand among 2W makers.

Improvement in telecom industry  augurs well for industrial business

Telecom industry which had seen rough times in the past 2 years has started improving recently with competition slowing down, volumes still going robust and regulatory issues taking a back seat. Exide had reduced their focus on telecom business significantly. It now forms 12-15% of the company’s revenues from 20% two years back. However, with the increase in its industrial capacities, Exide can easily accommodate higher demand from telecom industry. With summers still harsh in most of the parts of the country, and with a probability of a delayed monsoon across India, inverter demand may go up.

Outlook and Valuation

We like the robust free cash generating business of Exide and have slightly increased our earnings estimates by 2%/6% for FY12E/FY13E and now value the standalone business at a higher multiple of 16x to value it at Rs.174. Adding subsidiary value of  Rs.13 and insurance business at Rs.11, we arrive at a TP of Rs.196, up from our earlier target of Rs.176. We reiterate our BUY rating on Exide with a higher price target of Rs.196, which is a 20% upside from current levels.