Exide Industries- Loses pricing power, premium valuation unjustified :: Standard Chartered Research,

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 Exide’s 1Q revenue was lower than our estimate due to
lower inverter sales and slower auto OE growth.
 Market share loss and declining pricing power limited
margin expansion – up 100bps qoq to 17.9%.
 It reported net profit of Rs1.6bn, lower than our estimate
of Rs1.76bn.
 We lower earnings estimates by 9.5%/8% for FY12/13
to factor in slower-than-expected margin recovery.
 We believe the premium valuation is not justified;
Downgrade to IN-LINE, with price target of Rs160
(Rs193 earlier).
Revenue muted on slower auto OE and inverter sales.
Net sales grew 8% yoy to Rs12.4bn vs. our estimate of
Rs13.8bn, mainly because of lower inverter sales and
slower auto OE growth.
Margin up 100bps qoq; lower than estimates. Higher
lead prices continued to exert pressure on margin –
RM/sales rose 350bps yoy (+40bps qoq) to 63.5%. This
coupled with no improvement in product mix (replacement /
OE ratio remained flat qoq) led to lower-than-expected
margin expansion – up 100bps qoq to 17.9%.
Earnings 7% below estimate. Other income at Rs308m
(Rs216m in 4Q) was above our estimate on account of
dividend income from mutual funds and subsidiaries.
Overall, earnings at Rs1.6bn (flat yoy, +13% qoq) were
lower than our estimate.
Outlook. Over the past three quarters, capacity constraints
have led to market share losses. This coupled with more
competition has substantially impacted Exide’s pricing
power. In-house lead sourcing has remained steady at 51%,
further limiting the scope for margin expansion. Thus, we
believe margin recovery would be a much longer drawn
process than earlier anticipated. We hence lower our FY12
earnings by 9.5% for FY12 to Rs8.6 per share and by 8%
for FY13 to Rs10.7 per share.
Outlook. Market share losses and declining pricing power
are likely to lead to a de-rating of the stock. We believe the
stock no longer warrants a premium to its average trading
multiple. We value the stock at its historic one-year forward
multiple of 16x. We downgrade to IN-LINE with a revised
price target of Rs160 (earlier Rs193).



1Q FY12: Key results highlights
 Revenue was lower than our estimate on account of a lower-than-expected ramp up of
inverter batteries and slower OEM sales. Inverter battery sales declined 25% yoy to 206m
Amp hrs. Overall industrial sales (ex-inverter) declined ~6% yoy due to a better sales ramp up
from other segments like UPS, traction, etc.
 While 2W battery sales grew 40% yoy (led by ramp up of new Ahmednagar facility), overall
auto sales were up only 4% yoy due to a slower ramp up of OE volumes and inverter sales.
 Lead consumption in the quarter was at 54,200 tonnes.
 Other income has been higher in the quarter – constitutes Rs90m in dividend from mutual
funds while the balance is dividend income from its two smelters.
 Exide has lost about 7-8% market share in the 4W replacement category yoy to competition
(primarily un-organised).
 In order to gain lost market share from this segment, the company is planning to double its
adspend for the fiscal to increase awareness amongst customers – clearly signs of
heightened competition.
 Exide has also lost market share in the inverter segment. It now plans to backward integrate
into inverter manufacturing by investing ~Rs500m in one of its subsidiaries. The company is
planning to adopt the latest tubular technology in inverter manufacturing whose marketing will
be done by Exide. This is not expected to be a highly profitable venture, however, it will give
the company a ready customer base (as customers usually replace batteries of OE brands)
and help recover lost market share.
 Exide has raised prices by ~2% in the auto segment (net of discounts) in 1Q FY12. The price
hike in the industrial segment was neutralised by the discounts given in the inverter segment.
Lower demand and heightened competition forced the company to give discounts in this
segment.
 While average realisations has increased ~5% yoy, lead cost (which constitutes 45% of net
sales) has increased 21% yoy, which amounts to 9.4% increase in cost. Thus, the margin
differential of ~500bps yoy is explained.
 Management has guided to overall volume growth of 12-15% in FY12.
Outlook
While Exide’s operating performance has been improving over the past couple of quarters, it has
been below expectations. Capacity constraints have led to market share losses over the last
three quarters. This coupled with heightened competition has substantially impacted Exide’s
pricing power. Also, the company has not increased smelter capacity as anticipated and hence its
in-house smelter sourcing has remained steady at 51%, further limiting the scope for margin
expansion. Thus, we believe margin recovery would be a much longer drawn process than earlier
anticipated. We hence lower our FY12 earnings by 9.5% for FY12 to Rs8.6 per share and by 8%
for FY13 to Rs10.7 per share.
Valuation
Market share losses and declining pricing power are likely to lead to a de-rating of the stock. We
believe the stock no longer warrants a premium to its average trading multiple. We value the
stock at its historic one-year forward multiple of 16x. We downgrade to IN-LINE with a revised
price target of Rs160 (earlier Rs193)