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Exide Industries Ltd.
Margin outlook improving
Margin expansion & capex peak off to drive re-rating
FY11 annual report illustrates (1) adverse impact of jump in lead cost on smelting,
and (2) adverse impact of capacity constraint on profit margin. These concerns
are likely to ease owing to stable lead prices and the addition of capacity, along
with an OEM slowdown. We expect Exide to re-rate owing to expansion of the
EBITDA margin by 130bp q-o-q, to 20%, in Q1FY12e. We also expect the stock to
re-rate on stronger cashflow from H2FY12e, owing to a decline in capex.
Stable lead price to ease cost pressure & boost smelters
EBITDA margin of Exide’s lead smelters declined to 5% in FY11 from 10% in
FY10, owing to a sharp jump in the cost of scraps. We expect the profit margin of
smelters to bounce back in FY12, driven by (1) a decline in cost of scrap relative
to lead, owing to the reduced volatility of lead price and higher in-house collection
(2) cost savings from proposed smelter modernization.
Stronger replacement sales to boost product mix & margin
Exide is seeing stronger replacement battery growth, as the current slowdown in
OEM demand on account of higher interest rates has freed up capacity. We
expect the ratio of replacement-to-OEM batteries to rise from 1.11 in Q4FY11 to
1.56x in Q1FY12e. This situation is temporary, but additional capacity will become
available in H2FY12 that will lead to a sustained rise in replacement battery mix.
Strong visibility for FY13e & FY14e earnings is compelling
While we expect Exide to benefit from expansion of market share in FY12, owing
to an easing of capacity constraints, the company should benefit from a stronger
replacement cycle in FY13 and FY14, which is linked to 25% car sales growth in
FY10 and FY11.
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