India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Exide Industries Ltd. — Margin outlook
improving
Estimate Change
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.
Exide Indus Ltd (XEDRF)
Our price objective of Rs196 for Exide is based on a sum-of-the-parts value
including Rs184 for its lead acid battery business and Rs12 for its 50% stake in
ING Vysya Life Insurance. We have valued its battery business at Rs184 per
share, assuming that it will trade at a PE of 15.5xFY13E, similar to one-year
forward PE auto OEM, as the company's retail sales now forms bulk of profit. We
believe that rising visibility of 16-18% growth sustaining in FY13-15 owing to
strong new car growth being seen now will translate to strong replacement battery
growth in three years time. We have valued the life insurance business at Rs12
per share, based on 13x FY11E NBAP. Value of life insurance business arrived
above is also at an implied valuation of 1.1x the amount to be invested by Exide
by end FY12e. Risks to our price objective are a sharp increase in cost of lead
and increase in competition.
No comments:
Post a Comment