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D i s a p p o i n t i n g r e s u l t s…s t r o n g f u n d ame n t a l s…
Exide Industries (EIL) posted disappointing Q2FY12 results that were
below our estimates with net sales at | 1176.1 crore (I-direct estimate: |
1271.3 crore), a decline (5.4% QoQ) from ~| 1244 crore in Q1FY12. The
revenue performance was marred by weak replacement offtake in the
four-wheeler segment, industrial battery sales. The biggest shock came in
terms of EBITDA margins, which contracted (down 1400 bps YoY and
1020 bps QoQ) to 7.7%. This was due to rolling high cost inventory of the
previous quarter at ~| 134/kg in terms of finished goods and WIP to the
tune of ~| 142 crore, which was consumed in this quarter. The inventory
mismatch was due to the high ~90% utilisation levels in Q1FY12 in
anticipation of strong market demand. The remaining rolling high cost
inventory is expected to be cleared by December 2010. Post this, Q4FY12
is expected to witness the benefits of lower lead costs. The PAT came in
at a mere | 51.1 crore, which was further reduced as dividend income
from smelters was down due to lower profitability.
Highlights of the quarter
The major point of disappointment stemmed from the fact that high
margin four-wheeler replacement market sales dipped 7.2% YoY at 10.5
lakh units even as overall automotive replacement sales grew ~1.5% YoY
at ~19 lakh units. The four-wheeler OEM grew modestly at ~7.7% to 9.6
lakh units while two-wheeler sales were robust with ~40% jump at 25.8
lakh units. The industrial segment has witnessed de-growth of ~5% YoY
at 391.4 million amp-hr driven by both inverter and telecom witnessing
weakness. EIL has raised its capacities in FY12E and is expected to touch
~3.3 crore units by the end of the fiscal. The inventory setback that EIL
received was more in pre-anticipation of strong OEM, replacement
demand in challenging times with higher interest rates.
V a l u a t i o n
The battery sector is witnessing a short-term (~one or two quarters)
overcapacity issue with domestic demand remaining a challenge. At the
CMP of | 108, the stock is trading at 11.1x FY13E EPS. We have valued
the stock on an SOTP basis with the core business at 14x FY13E EPS of |
8.4, valuing other subsidiaries and investments at | 19/share to arrive at a
target price of | 137. We maintain our BUY rating on the stock
Result analysis
Profits marred heavily by production over-exuberance …
EIL’s performance for Q2FY12 was weaker than earlier anticipated as
sales slowed down in the replacement market. Recovery of previous
market share losses remained sticky and finally the inventory pile-up. This
led to a triple whammy as profits came down drastically. Topline growth
remained tepid with replacement sales in the high yielding four-wheeler
segment also declining 7% YoY even as OEM sales in both the twowheelers and four-wheelers segment witnessing growth of ~7.7%, 40%
respectively. Sales in the industrial segment have been slowing down
with weak telecom and inverter offtake, declining ~5% YoY.
The problem came in from the fact that management was pro-active in
running capacities at high 90% utilisation levels in anticipation of high
demand in both the OEM, replacement segment. However the sudden cut
in OEM growth in the PV segment has hit the company hard and led to
the high cost inventory pileup. The average inventory cost for Q2FY12
was higher by ~24% at |133/kg even as lead prices corrected to ~| 110-
115/kg levels. Q3FY12E would also witness higher cost inventory being
consumed by December 2010 post which the normality on margins and
profits should be resumed.
EIL has been in a funny situation as in Q3FY11 it was challenged by low
capacity and burgeoning OEM demand, as EIL raised capacities,
utilisations through Q4FY11, H1FY12 in anticipation of similar demand the
trend of demand waned out. This has led to the high overhead costs on
account of lower utilisations and inventory costs. We believe this situation
is one which has some portion of sales deferment involved due to macro
uncertainty as well as slower recovery of market share losses (~8%) from
in H2FY11. Going ahead, we expect the situation to again reverse and
surprise the street on the upside in FY13E.
The industrial segment again registered lower offtake with ~5% YoY
decline at ~392 million Am-hr led by telecom, inverter segment declines
of ~56%, 39% respectively. The management commented on the fact
that though inverter segment has witnessed better growth in October
2011 the reasons and trend going ahead for the same remained unclear.
In the submarine segment, the order flow from the Indian Navy has been
and is expected to flow through by H2FY12. In terms of revenue
contribution, it would be adding ~| 50 crore for FY12.
Outlook and valuation
Outlook
Exide Industries has not performed up-to expectations in the last couple
of quarters with capacity constraints and market share loss issues
plaguing it. This time around EIL has rightly paid the price of over
anticipating demand and leading to inventory pile-up and the related
declines in Q3 margins. However, even with all these negatives the major
crux remains that EIL with its ~40,000 odd touch points and strong
branding franchise in the auto-ancillary segment (having low branding
value in general) remains one of the strongest brands in the industry.
We believe the recent stock price underperformance has rightly justified
the immediate concerns. However, keeping in mind the long term growth
story in both OEM, replacement market we still believe it has strong
possibility to perform in line with its historical margins.
The management has turned cautious and given out muted guidance on
the margins for Q3FY12E with inventory issues. However, replacement
market share recovery and volume up-tick is expected by H2FY12E. We
have modelled in lag impact of previously expected replacement sales by
~1 quarter and, thus, leading to declining FY12E performance. We have
revised our FY12, FY13 estimates downwards factoring in all the
negatives.
V a l u a t i o n
Battery sector is witnessing a short term (~1-2 quarters) overcapacity
issue with domestic demand remaining due to challenging domestic
macro. However, on a longer term horizon with interest rates expected to
peak out the demand for PV segment could see a bounce back in
H2FY12E, FY13E higher than market expectations. Thus, we remain
positive on EIL considering the trough valuations and strong business
franchise which remains intact. At the CMP of | 108, the stock is trading at
15.8x FY12E core EPS of | 6.0 and 11.1x FY13E of | 8.4. We have used
the SOTP methodology to value the stock. We value the standalone
business at 14x FY13E EPS of | 8.4 to arrive at a per share value of | 118
for the core business. The other smelting subsidiaries are valued in
discount to Hindustan Zinc which is the market leader in the business. In
light of improving performance of Insurance business we have valued the
50% stake in ING Vysya at | 13/share using an NBAP multiple of 14x, the
same value for ING Vysya is also making a buzz on the street. Our target
price of | 137 implies an upside potential of 26%. We continue to
maintain our BUY rating on the stock, suggest investors to make
staggered entry into the stock at all lower levels.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
D i s a p p o i n t i n g r e s u l t s…s t r o n g f u n d ame n t a l s…
Exide Industries (EIL) posted disappointing Q2FY12 results that were
below our estimates with net sales at | 1176.1 crore (I-direct estimate: |
1271.3 crore), a decline (5.4% QoQ) from ~| 1244 crore in Q1FY12. The
revenue performance was marred by weak replacement offtake in the
four-wheeler segment, industrial battery sales. The biggest shock came in
terms of EBITDA margins, which contracted (down 1400 bps YoY and
1020 bps QoQ) to 7.7%. This was due to rolling high cost inventory of the
previous quarter at ~| 134/kg in terms of finished goods and WIP to the
tune of ~| 142 crore, which was consumed in this quarter. The inventory
mismatch was due to the high ~90% utilisation levels in Q1FY12 in
anticipation of strong market demand. The remaining rolling high cost
inventory is expected to be cleared by December 2010. Post this, Q4FY12
is expected to witness the benefits of lower lead costs. The PAT came in
at a mere | 51.1 crore, which was further reduced as dividend income
from smelters was down due to lower profitability.
Highlights of the quarter
The major point of disappointment stemmed from the fact that high
margin four-wheeler replacement market sales dipped 7.2% YoY at 10.5
lakh units even as overall automotive replacement sales grew ~1.5% YoY
at ~19 lakh units. The four-wheeler OEM grew modestly at ~7.7% to 9.6
lakh units while two-wheeler sales were robust with ~40% jump at 25.8
lakh units. The industrial segment has witnessed de-growth of ~5% YoY
at 391.4 million amp-hr driven by both inverter and telecom witnessing
weakness. EIL has raised its capacities in FY12E and is expected to touch
~3.3 crore units by the end of the fiscal. The inventory setback that EIL
received was more in pre-anticipation of strong OEM, replacement
demand in challenging times with higher interest rates.
V a l u a t i o n
The battery sector is witnessing a short-term (~one or two quarters)
overcapacity issue with domestic demand remaining a challenge. At the
CMP of | 108, the stock is trading at 11.1x FY13E EPS. We have valued
the stock on an SOTP basis with the core business at 14x FY13E EPS of |
8.4, valuing other subsidiaries and investments at | 19/share to arrive at a
target price of | 137. We maintain our BUY rating on the stock
Result analysis
Profits marred heavily by production over-exuberance …
EIL’s performance for Q2FY12 was weaker than earlier anticipated as
sales slowed down in the replacement market. Recovery of previous
market share losses remained sticky and finally the inventory pile-up. This
led to a triple whammy as profits came down drastically. Topline growth
remained tepid with replacement sales in the high yielding four-wheeler
segment also declining 7% YoY even as OEM sales in both the twowheelers and four-wheelers segment witnessing growth of ~7.7%, 40%
respectively. Sales in the industrial segment have been slowing down
with weak telecom and inverter offtake, declining ~5% YoY.
The problem came in from the fact that management was pro-active in
running capacities at high 90% utilisation levels in anticipation of high
demand in both the OEM, replacement segment. However the sudden cut
in OEM growth in the PV segment has hit the company hard and led to
the high cost inventory pileup. The average inventory cost for Q2FY12
was higher by ~24% at |133/kg even as lead prices corrected to ~| 110-
115/kg levels. Q3FY12E would also witness higher cost inventory being
consumed by December 2010 post which the normality on margins and
profits should be resumed.
EIL has been in a funny situation as in Q3FY11 it was challenged by low
capacity and burgeoning OEM demand, as EIL raised capacities,
utilisations through Q4FY11, H1FY12 in anticipation of similar demand the
trend of demand waned out. This has led to the high overhead costs on
account of lower utilisations and inventory costs. We believe this situation
is one which has some portion of sales deferment involved due to macro
uncertainty as well as slower recovery of market share losses (~8%) from
in H2FY11. Going ahead, we expect the situation to again reverse and
surprise the street on the upside in FY13E.
The industrial segment again registered lower offtake with ~5% YoY
decline at ~392 million Am-hr led by telecom, inverter segment declines
of ~56%, 39% respectively. The management commented on the fact
that though inverter segment has witnessed better growth in October
2011 the reasons and trend going ahead for the same remained unclear.
In the submarine segment, the order flow from the Indian Navy has been
and is expected to flow through by H2FY12. In terms of revenue
contribution, it would be adding ~| 50 crore for FY12.
Outlook and valuation
Outlook
Exide Industries has not performed up-to expectations in the last couple
of quarters with capacity constraints and market share loss issues
plaguing it. This time around EIL has rightly paid the price of over
anticipating demand and leading to inventory pile-up and the related
declines in Q3 margins. However, even with all these negatives the major
crux remains that EIL with its ~40,000 odd touch points and strong
branding franchise in the auto-ancillary segment (having low branding
value in general) remains one of the strongest brands in the industry.
We believe the recent stock price underperformance has rightly justified
the immediate concerns. However, keeping in mind the long term growth
story in both OEM, replacement market we still believe it has strong
possibility to perform in line with its historical margins.
The management has turned cautious and given out muted guidance on
the margins for Q3FY12E with inventory issues. However, replacement
market share recovery and volume up-tick is expected by H2FY12E. We
have modelled in lag impact of previously expected replacement sales by
~1 quarter and, thus, leading to declining FY12E performance. We have
revised our FY12, FY13 estimates downwards factoring in all the
negatives.
V a l u a t i o n
Battery sector is witnessing a short term (~1-2 quarters) overcapacity
issue with domestic demand remaining due to challenging domestic
macro. However, on a longer term horizon with interest rates expected to
peak out the demand for PV segment could see a bounce back in
H2FY12E, FY13E higher than market expectations. Thus, we remain
positive on EIL considering the trough valuations and strong business
franchise which remains intact. At the CMP of | 108, the stock is trading at
15.8x FY12E core EPS of | 6.0 and 11.1x FY13E of | 8.4. We have used
the SOTP methodology to value the stock. We value the standalone
business at 14x FY13E EPS of | 8.4 to arrive at a per share value of | 118
for the core business. The other smelting subsidiaries are valued in
discount to Hindustan Zinc which is the market leader in the business. In
light of improving performance of Insurance business we have valued the
50% stake in ING Vysya at | 13/share using an NBAP multiple of 14x, the
same value for ING Vysya is also making a buzz on the street. Our target
price of | 137 implies an upside potential of 26%. We continue to
maintain our BUY rating on the stock, suggest investors to make
staggered entry into the stock at all lower levels.
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