Exide Industries : Q2FY15 Update: ICICI Securities, PDF link

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Margin pressure unlikely to persist…
• Exide Industries (EIL) reported revenues of | 1763 crore (~23% YoY
higher), in line with estimates. This was driven by only volume
growth as there was no pricing action (despite higher lead prices)
• EBITDA margin at 11.8% (~230 bps QoQ decline) was the major
disappointment with other expenses growing ~27% YoY on account
of expenses related to technology upgradation and higher charging
expenses due to higher inverter battery sales
• Subsequently, PAT also came below estimates at | 125.8 crore
What happened in battery space?
The battery business was considered to be a strong RoCE generator with
high margins and strong pricing power with EIL considered a safe proxy
play to the automotive space as it had enviable characteristics in FY10
(EBITDA margins>20%, RoCE>35%, organised market share>40%,
efficient cost controls). Expectation of strong replacement demand, a
diminishing unorganised segment coupled with limited competition made
the segment attractive. However, Exide’s performance had been
disappointing from FY12 onwards with margins slipping <13 and="" nbsp="" p="" roce="">falling <20 being="" exide="" expected="" leader="" market="" nbsp="" on="" p="" pass="" the="" to="" was="">cost side pressure to the market. However, it sacrificed gross margins
(dipped ~6% to 34%) to satisfy the OEM demand at very low margin and
expanded capacity (~1.5x in two years), leading to low utilisation levels
(~70%), loss of pricing power and a systemic downgrade of margins.
Technology upgrade, focus on margins augur well for profitability
Now, with the focus on technology upgrade to improve efficiency and
reduce costs, Exide’s focus has shifted to profitable growth. The
management has guided for ~16% margin profile in the coming years.
With the estimated registered vehicles in India nearly doubling to 12.3
crore in FY03-10 (up 83%), ~9 crore batteries are likely to be sold from
FY15-17E (considering a three-phase replacement cycle). EIL has strong
growth opportunities due to its dominant position in the organised
replacement market, which is likely to ensure that capacity utilisation
levels stay at elevated levels in the coming years.
Improvement in non-auto business prospects to be important trigger
In recent times, the power demand mismatch situation has improved with
the deficit reducing from ~12% in FY10 to >5% in FY14, which is a
structural negative for EIL as the industrial segment constitutes ~35% of
revenues. Thus, Exide re-entered the low margin telecom segment to
boost utilisation levels. EIL has also invested more than ~| 1300 crore in
the 100% owned insurance business. An increase in FDI limit for
insurance would be a positive, if passed on, not only on valuations of the
business but also ease meeting the future capital needs of the business.
Good recent performance; improving macros to drive valuations further
Amid competition, a fall in industrial segment revenues and de-focusing
insurance had hurt Exide’s performance. However, in the past two
quarters, aided by the industrial segment there has been a definitive
improvement in performance. We believe that after about three years of
underperformance, Exide’s growth appears to be on a steady footing.
We, thus, upgrade our earnings estimates on the back of higher growth in
both auto/non-auto segments and operating leverage leading to higher
margins. We value EIL’s core business at 18x two-year rolling forward
EPS of | 11.6 & other subsidiaries at | 12/share to arrive at a TP of | 220.

LINK
http://content.icicidirect.com/mailimages/IDirect_ExideInds_Q2FY15.pdf