Exide Industries :FY13 annual report: Key takeaways: Credit Suisse

 We report key takeaways from Exide’s FY13 annual report.
Revenue growth was equally driven by automotive and industrials.
Replacement revenue grew 21% with Exide gaining market share,
but OEM revenue declined 7% in a difficult year.
 Profitability of both the smelting subsidiaries and insurance entity
improved significantly. There was no additional investment in any
subsidiary other than the buyout of remaining 50% stake in an
insurance entity that was funded by money raised via a QIP in FY10.
 While return ratios stabilised this year, they are still well below the
levels seen in prior years. This structural decline in ratios has led
to a justified de-rating in Exide’s multiples.
 The company expects the OEM segment to remain challenging in
FY14; replacement should continue to drive demand. The invertor
segment has been weak this year, given lower power cuts in the
summer months and now an early monsoon. There could be some
margin benefit from the price hikes taken earlier this year; lead prices
though have again started increasing due to the INR depreciation.

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Revenue from the automotive business grew 18% YoY. Four-wheeler
volumes grew ~7% YoY to 9.1 mn. Four-wheeler replacement revenue
grew at a robust 21% as Exide largely recovered the lost market share
on account of capacity constraints. However, its OEM revenue declined
7%, given a slowdown in the industry and management defocusing on
the OEM segment, which has lower profitability and difficulty in passing
on cost increases. Two-wheeler revenue grew 19% with volumes at 16.5
mn (up ~15% YoY) despite subdued industry growth indicating a
continued shift towards electric-start vehicles.
Sales of industrial batteries grew 20% YoY with Exide having gained
market share. While the slowdown continued in telecoms and power
applications, there was strong growth in solar (80%), UPS (27%) and
fast-moving industrial battery (28%). Auto exports grew 31%, while
industrial exports declined 22% due to a slowdown in Europe.

Both the smelting subsidiaries witnessed significant growth in profit,
although one of them saw revenue decline, which resulted in the
proportion of lead sourced by Exide from its own smelters dropping from
~55% to ~45%. Exide bought out the remaining 50% stake in ING Vyasya
Life insurance during the year, utilising the funds it had raised through a
QIP. Cash (and equivalents) on its books has reduced from Rs7 bn in
FY12 to Rs2.5 bn in FY13. This should result in reduction in other income.
While return ratios—ROE and ROCE (adjusting for investments)—have
stabilised, they are still below levels seen in prior years, as Exide is no
longer able to price its products at a premium to Amara Raja. Given the
structural decline in ratios, Exide’s multiples have de-rated to ~14.5x from
the historical average of ~17x and should remain here.

In FY14, the company expects its replacement market to grow ~14%;
however, it sees the OEM market remaining a challenge both in twowheelers
and four-wheelers. Invertor sales are weak this year due to
the early monsoon. We lower our earnings estimates by ~2% to
account for this and also lower our estimates for other income.
There could be some margin improvement from price hikes taken in
Feb-13. While lead prices in USD terms are down ~15% since the
beginning of the year, the INR depreciation has largely negated this
benefit. We expect the pricing environment to remain benign in FY14
as Amara Raja is a bit constrained by capacity; however, with a ~30%
increase in Mar-14, FY15 could again witness pricing pressure.