Exide Industries - Replacement, power back-up to drive growth; visit note; Hold: Edelweiss PDF link

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Exide Industries (EXID IN,  INR 126, Hold)

We met the CFO of Exide. The management maintains its guidance of 15% plus growth and EBITDA margin guidance of 16%-18% for FY13. Volume growth is likely to be driven by replacement and power back-up segment while margin expansion would be aided by the improving product mix and fall in lead prices. Recent price hike of 2.5% exudes the management confidence on the replacement demand. However, weakening INR is the key risk. We retain our TP of INR133 and Hold rating on limited upside.

Auto replacement, power back-up sustain strong demand

The company is witnessing a strong demand from (1) auto segment as new vehicle sales of FY10 kick in for replacement and (2) inverter and UPS as power deficit situation continues in India. The management expects these segments to grow by ~20% each, making up for the weak OEM and industrial demand. We have built in a sales growth of 12.4 for FY13 % vs 15% guidance by the company. 

Favourable product mix, softer lead prices to lift margins

Margins improvement is likely to be driven by (1) a favorable product mix with a higher contribution from power back-up and auto replacement and (2) continuous softening of lead prices. Recent price hike of 2.5% in replacement segment exudes the managements’ confidence on demand and also augurs well for profitability. Performance of smelter subsidiaries is also likely to improve given the falling lead prices and clearance of high cost inventory. Weak INR is the key risk developing as it is limiting benefits of a fall in lead prices. The management is guiding for 16%-18% EBITDA margin vs 13.5% in FY12. We have built in 17% margin.

Outlook and valuations: Balanced risk-reward; maintain ‘HOLD’

Even though the company is on track to report a volume growth and margin improvement, slow-down in OEM and industrial demand is likely to be a drag.  At 15x FY13 core EPS of INR8 (last 5-year average), the current market price captures the improving demand scenario. We maintain our target price of INR133 and ‘Hold/Sector Outperformer’ recommendation/rating on the stock due to limited upside. 

Exide Industries - Replacement, power back-up to drive growth; visit note; Hold

Regards,