Q3 FY13 – Below par performance, margins shrink on lack of pricing power with OEMs
On the back of lack of pricing power with OEMs, Exide with a market share of 73% with OEMs posted a dismal performance mainly on the margins front. Despite its volumes growing by 18.5% on the auto side (13% on 4W and 21% on 2w businesses) and 5.4% on the industrial side, sales grew by just 19% yoy, indicating weak realizations, while declined by 3.5% qoq as Q3 was a seasonally weak quarter for the UPS business. The weak dynamics on the auto OEM side did not allow the company to take sufficient price hikes on OEMs, while they took a 5% price hike on auto replacement side which showed a robust 25% growth in 4W replacement and 50% in 2W replacement businesses, thus signaling that replacement cycle is on an up-move. However, lead price increase of 8% and currency loss of 4% negated the price hike impact and resulted in EBITDA margins at 11.2%, which was a good dip both on yoy as well as qoq basis. Other expenditure also increased to 15.7% of sales from 14.2% yoy and 15.5% qoq as the company kept market share gain as their top priority ahead of margins. PAT remained flat yoy at Rs1.04bn, while declined 13.4% qoq.
Outlook and valuation
Exide’s underperformance is expected to continue going forward as the company is stuck in a difficult situation of maintaining its relationship with the OEMs by conceding their pricing power. Unless and until the auto industry shows a pullback, things are not going to improve in a hurry for Exide. Although the replacement cycle is improving albeit with a delay, Exide will not be in a position to take full advantage of it as higher lead prices, currency fluctuations and OEM margin squeeze will negate the positives as seen in Q3. Furthermore, fall in smelter utilization rate is a matter of concern, which is expected to get sorted out only after some time. This will add pressures to margins. In line with this, we have trimmed our estimates by about 10-15% and are downgrading the stock from Neutral to Underperformer with a reduced target price of Rs114 (Rs101 from core business + Rs 13 from insurance business) from earlier target of Rs140.
LKP Research
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