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Exide Industries (EXID)
Automobiles
Competitive pressures mounting; downgrade to SELL. Exide’s recent pricing actions
in both automotive and industrial business reflect rising competitive pressures which are
likely to moderate earnings growth for the company, in our view. We believe the
company’s ability to price its products at a premium is under threat, which is likely to
impact profitability. We downgrade the company to SELL (from REDUCE), maintaining
our negative stance on the company.
Market share loss coupled with slowdown in inverter volumes to impact earnings
We expect Exide to lose market share to Amararaja over the next two years in the automotive
replacement market due to better product quality and higher warranty offered by Amararaja.
Exide has lost 4% market share to Amararaja in the organized replacement 4 wheeler segment in
the past year. Amararaja has also gained 20% market share in the past three years in the two
wheeler organized automotive battery segment. We expect another 3% loss in market share for
Exide in FY2012 and FY2013E. Inverter battery volumes are also declining at a sharp pace, driven
by reduction in power cuts in India. Exide is also facing stiff competition from Luminous, Sukam
and Microtec which have cut prices significantly to protect their volumes.
Margins could be under pressure in both automotive and industrial battery segments
Exide has cut automotive and inverter battery prices by 10-15%, respectively, in September 2011,
in line with market prices. We believe this pricing actions could reduce profitability of both
businesses. We factor in 3% decline in EBITDA margins over the next two years led by industrial
battery business. We expect flat margins in the automotive battery business as pricing pressure in
automotive business could be offset by increased sourcing from captive lead smelters.
We reduce earnings estimates by 17-21% over FY2012-2013E
We have revised our estimates by 17-21% over FY2012-2013E, which reflects a (1) 4-6% cut in
the automotive battery volumes and automotive battery revenues by 2-7% over FY2012-2013E to
reflect market share loss to competitors, and (2) we also cut industrial battery revenues by 5-8%
over FY2012-2013E to factor in a sharp slowdown in the inverter battery segment and further
increase in competition in UPS segment as excess capacities will be used in the growing UPS
segment.
We reduce our target price to Rs120 (from Rs160) based on a sum-of-the-parts valuation
methodology. We have cut our target multiple on a standalone business from 15X to 14X PE on
our FY2013E earnings estimate to factor in slower earnings growth and lower returns than earlier
forecasted. We keep our Rs 12/share value for insurance business unchanged.
Competitive pressures evident; Downgrade to SELL
We downgrade Exide to SELL (from REDUCE) for several reasons.
(1) We expect to see Exide lose market share in the organized replacement automotive
battery segment. Exide has lost 7% market share to in the organized replacement 4-
wheeler segment in the past year. Amararaja has also gained 20% market share in the
past three years in the two wheeler organized automotive battery segment. We expect
another 3% loss in market share for Exide in FY2012 and FY2013E.
(2) Significant slowdown in the inverter battery segment due to lower power cuts. In
1QFY12, Exide’s inverter battery volumes declined by 26% yoy.
(3) Threat to Exide’s pricing power. Exide has cut automotive battery prices by 10% and
inverter battery prices by 15% in September 2011. Average lead prices have not
changed much since 1QFY12 but have fallen by 9% from peak levels. Lead cost forms
65% of net sales for Exide and hence a 9% correction would have led to a 6% price
correction if it was a case of only passing of lead prices to the customer.
Our channel checks also suggest that Exide batteries were retailing at a premium to
competitors like Amararaja and with the price cuts Exide has aligned its prices with
Amararaja prices. Amararaja is also offering higher replacement warranty batteries in the
market of close to 60 months while Exide gives maximum 36 month warranty on its
products.
We have revised our estimates by 17-21% over FY2012-2013E which reflects (1) 4-6% cut
in the automotive battery volumes and automotive battery revenues by 2-7% over FY2012-
2013E to reflect market share loss to competitors and (2) our cut in industrial battery
revenues by 5-8% over FY2012-2013E to factor in a sharp slowdown in inverter battery
segment and further increase in competition in UPS segment as excess capacities will be
used in the growing UPS segment.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Exide Industries (EXID)
Automobiles
Competitive pressures mounting; downgrade to SELL. Exide’s recent pricing actions
in both automotive and industrial business reflect rising competitive pressures which are
likely to moderate earnings growth for the company, in our view. We believe the
company’s ability to price its products at a premium is under threat, which is likely to
impact profitability. We downgrade the company to SELL (from REDUCE), maintaining
our negative stance on the company.
Market share loss coupled with slowdown in inverter volumes to impact earnings
We expect Exide to lose market share to Amararaja over the next two years in the automotive
replacement market due to better product quality and higher warranty offered by Amararaja.
Exide has lost 4% market share to Amararaja in the organized replacement 4 wheeler segment in
the past year. Amararaja has also gained 20% market share in the past three years in the two
wheeler organized automotive battery segment. We expect another 3% loss in market share for
Exide in FY2012 and FY2013E. Inverter battery volumes are also declining at a sharp pace, driven
by reduction in power cuts in India. Exide is also facing stiff competition from Luminous, Sukam
and Microtec which have cut prices significantly to protect their volumes.
Margins could be under pressure in both automotive and industrial battery segments
Exide has cut automotive and inverter battery prices by 10-15%, respectively, in September 2011,
in line with market prices. We believe this pricing actions could reduce profitability of both
businesses. We factor in 3% decline in EBITDA margins over the next two years led by industrial
battery business. We expect flat margins in the automotive battery business as pricing pressure in
automotive business could be offset by increased sourcing from captive lead smelters.
We reduce earnings estimates by 17-21% over FY2012-2013E
We have revised our estimates by 17-21% over FY2012-2013E, which reflects a (1) 4-6% cut in
the automotive battery volumes and automotive battery revenues by 2-7% over FY2012-2013E to
reflect market share loss to competitors, and (2) we also cut industrial battery revenues by 5-8%
over FY2012-2013E to factor in a sharp slowdown in the inverter battery segment and further
increase in competition in UPS segment as excess capacities will be used in the growing UPS
segment.
We reduce our target price to Rs120 (from Rs160) based on a sum-of-the-parts valuation
methodology. We have cut our target multiple on a standalone business from 15X to 14X PE on
our FY2013E earnings estimate to factor in slower earnings growth and lower returns than earlier
forecasted. We keep our Rs 12/share value for insurance business unchanged.
Competitive pressures evident; Downgrade to SELL
We downgrade Exide to SELL (from REDUCE) for several reasons.
(1) We expect to see Exide lose market share in the organized replacement automotive
battery segment. Exide has lost 7% market share to in the organized replacement 4-
wheeler segment in the past year. Amararaja has also gained 20% market share in the
past three years in the two wheeler organized automotive battery segment. We expect
another 3% loss in market share for Exide in FY2012 and FY2013E.
(2) Significant slowdown in the inverter battery segment due to lower power cuts. In
1QFY12, Exide’s inverter battery volumes declined by 26% yoy.
(3) Threat to Exide’s pricing power. Exide has cut automotive battery prices by 10% and
inverter battery prices by 15% in September 2011. Average lead prices have not
changed much since 1QFY12 but have fallen by 9% from peak levels. Lead cost forms
65% of net sales for Exide and hence a 9% correction would have led to a 6% price
correction if it was a case of only passing of lead prices to the customer.
Our channel checks also suggest that Exide batteries were retailing at a premium to
competitors like Amararaja and with the price cuts Exide has aligned its prices with
Amararaja prices. Amararaja is also offering higher replacement warranty batteries in the
market of close to 60 months while Exide gives maximum 36 month warranty on its
products.
We have revised our estimates by 17-21% over FY2012-2013E which reflects (1) 4-6% cut
in the automotive battery volumes and automotive battery revenues by 2-7% over FY2012-
2013E to reflect market share loss to competitors and (2) our cut in industrial battery
revenues by 5-8% over FY2012-2013E to factor in a sharp slowdown in inverter battery
segment and further increase in competition in UPS segment as excess capacities will be
used in the growing UPS segment.
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