Exide Industries - "Recharging for the next fiscal" -LKP

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Weak quarter led by lower inverter sales and auto replacement underperformance

Exide’s Q1 FY12 results were below our expectations as lower inverter sales and auto OEM slowdown impacted the financials. Alos on the replacement side the company lost ~8% market share as competition from unorganized players intensified. Net sales were up by 8% yoy, and 1.4% qoq. Auto volumes grew by 4% on the 4W side, while the 2W volumes surged 40% yoy. On the industrial side, volumes declined by 26% yoy, which would have grown by 12% excluding inverter volumes which were significantly down due to better power supply and pleasant weather conditions. EBITDA margins were down by 500 bps yoy while they were up by 50 bps qoq at 17.8% on higher lead costs and auto replacement underperformance. Net profits were almost flattish at Rs.1.63bn.

Margin growth witnessed sequentially, but at a slower pace

Exide’s Q2 margins were up by 50 bps sequentially as lower high volume-low margin inverter sales enabled the company to improve their margins in the industrial business by 200 bps, while on the auto side the margins were up by 50%. While lead costs jumped by 21% yoy, the company was able to raise its prices by ~5% yoy due to stiff competition. This led to a significant yoy margin decline of 500 bps to 17.8%.

Recovery expected in H2 FY12 on capacity constraints getting addressed

Management has guided for a subdued second quarter as it is seasonally weak. However, Q3 onwards, the recovery is likely to happen as the company will be completely expanding their capacities on both auto (21.6 mn for 2W and 12mn for 4W) as well as industrial side, thus overcoming the capacity constraints it has been facing over the past few quarters. Any further slowdown on the OEM side will aid Exide to cater better to the high margin replacement business where it has been losing its market share. The auto replacement to OEM proportion has gone down to 1:1.13 in Q1, v/s 1:1.33 yoy, which can improve with lull in OEM coupled with fresh capacities coming on stream, thus aiding margin performance significantly (replacement margins are 3x times OEM margins). Also, with the traction observed three years back post the downturn in 2008, will translate into a good replacement demand in the latter half of FY 12 and complete FY 13. Also, the expansion of dealer network from 206 to 250 will enable the company to regain its market share. Procurement of lead from its in-house smelters which is at 52% currently may move up to targeted 70% by FY13 post capacity expansion at the smelter side, thus providing margin enhancement.

Outlook and valuation

On the back of weak Q1, we are cutting our FY 12E/FY 13E earnings estimates by 10%/6%, while we are expecting the company to make a comeback in Q2 with strong auto replacement demand. We now cut our target price to Rs.175 (Standalone price of Rs.163 @16x times FY 13E EPS of Rs.10.2 and ING Vysya value of Rs.12) while maintaining our BUY rating as the stock price decline post results captures the disappointment.

Conference call highlights –

Ä     Management expects auto revenues to grow by 15-18%, while industrial segment to grow by 10-15%, while assuming the total top line to grow at 12-15% in FY 12.

Ä     Auto price hike of 2-2.5% taken in the quarter, while on the industrial side there was no price hike.

Ä     Auto OEM: Replacement proportion went down to 1:1.13 from 1:1.33 a year back, while on the 2W side, it has gone up to 1:0.38 from 1:0.35 yoy.

Ä     Capacity expansion is on track as 2W capacity was at 18.6mn from 16mn at the end of March and is expected to move up to 21.6 mn by December. On the 4W side, capacities were at 10.1mn up from 9.7mn at March end and will move up to 12mn by December.

Ä     Inverter sales a % of industrials has gone down to 38% from 51% yoy.

Ä     Volumes in Q1 – Auto- 5.11mn (4W- 2.03mn, up 4% yoy, and 2W – 3.08mn, up 40% yoy), Industrial (153MAh, 26% down yoy).