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Exide Industries (EXID)
Automobiles
Pricing power remains under pressure. Exide’s pricing power in the 4-wheeler
replacement segment continues to remain under pressure as the company lost market
share in 2QFY12 despite reducing prices by 10-12% in September 2011. Company’s 4-
wheeler replacement volumes declined by 6% yoy while its competitors indicated that
their replacement volumes grew by low single digits in 2QFY12. We maintain SELL
rating on the stock and revise our target price to Rs100 (from Rs115 earlier).
We believe Exide’s peak margins are unlikely to revert
We believe Exide’s peak EBITDA margins of 20-22% are unlikely to revert despite factoring in
increase in smelter contribution over the next few years due to the following reasons – (1) Exide
now enjoys only 8-9% premium over Amararaja (which was earlier 15-20%) and is losing market
share as there is no difference in performance of both batteries, (2) both players have increased
capacities which will put pressure on pricing, (3) new players like Southern batteries and Base
batteries are setting up large automotive battery capacities which could further escalate
competition but this is not a near-term threat but more longer term threat in our view and (4)
Exide may also have to take further pricing actions if its competitors cut prices, since lead prices
have declined, to hold on to its market share.
Replacement battery demand for 4-wheelers likely to come back
We agree with the management that replacement battery demand is likely to grow at steady 12-
15% over the next few years and this slowdown in demand could continue only for a few quarters
as customer sentiment is weak but customers cannot delay battery replacement by more than 4
years, in our view. However, we believe Exide’s volume growth will come at lower EBITDA margins
as company will not be able to increase prices ahead of its competitors again in the battery market.
We revise our earnings downwards by 23-34% over FY2012-2013E
We have reduced our earnings estimates to Rs4.5/6.1 from Rs6.8/7.9 in FY2012 and FY2013E,
respectively as we factor in slowdown in 4-wheeler replacement volumes and decline in inverter
battery demand. We have also cut our EBITDA margin estimates by 2.4-4.3% as we factor in
reduced pricing power of Exide.
We maintain our SELL rating on the stock and reduce our target price to Rs100 (from Rs115 earlier).
Our target price is based on sum-of-the-parts valuation methodology. We value standalone
business at Rs86/share and 50% stake in insurance business at Rs12/share.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Exide Industries (EXID)
Automobiles
Pricing power remains under pressure. Exide’s pricing power in the 4-wheeler
replacement segment continues to remain under pressure as the company lost market
share in 2QFY12 despite reducing prices by 10-12% in September 2011. Company’s 4-
wheeler replacement volumes declined by 6% yoy while its competitors indicated that
their replacement volumes grew by low single digits in 2QFY12. We maintain SELL
rating on the stock and revise our target price to Rs100 (from Rs115 earlier).
We believe Exide’s peak margins are unlikely to revert
We believe Exide’s peak EBITDA margins of 20-22% are unlikely to revert despite factoring in
increase in smelter contribution over the next few years due to the following reasons – (1) Exide
now enjoys only 8-9% premium over Amararaja (which was earlier 15-20%) and is losing market
share as there is no difference in performance of both batteries, (2) both players have increased
capacities which will put pressure on pricing, (3) new players like Southern batteries and Base
batteries are setting up large automotive battery capacities which could further escalate
competition but this is not a near-term threat but more longer term threat in our view and (4)
Exide may also have to take further pricing actions if its competitors cut prices, since lead prices
have declined, to hold on to its market share.
Replacement battery demand for 4-wheelers likely to come back
We agree with the management that replacement battery demand is likely to grow at steady 12-
15% over the next few years and this slowdown in demand could continue only for a few quarters
as customer sentiment is weak but customers cannot delay battery replacement by more than 4
years, in our view. However, we believe Exide’s volume growth will come at lower EBITDA margins
as company will not be able to increase prices ahead of its competitors again in the battery market.
We revise our earnings downwards by 23-34% over FY2012-2013E
We have reduced our earnings estimates to Rs4.5/6.1 from Rs6.8/7.9 in FY2012 and FY2013E,
respectively as we factor in slowdown in 4-wheeler replacement volumes and decline in inverter
battery demand. We have also cut our EBITDA margin estimates by 2.4-4.3% as we factor in
reduced pricing power of Exide.
We maintain our SELL rating on the stock and reduce our target price to Rs100 (from Rs115 earlier).
Our target price is based on sum-of-the-parts valuation methodology. We value standalone
business at Rs86/share and 50% stake in insurance business at Rs12/share.
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