This leader will test patience! • Exide Industries :: ICICI Securities, report

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This leader will test patience! • Exide Industries (EIL) reported revenues of | 1559 crore (~20% YoY higher), lower than estimates. This miss was primarily driven on account of lower volume growth (despite higher lead prices) • EBITDA margin at 11.6% (~230 bps QoQ decline) was a disappointment with gross margins showing minimal improvement even as lead prices fell (~5% QoQ) • Subsequently, PAT came much below estimates at | 97.2 crore What’s 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). Strong replacement demand, a diminishing unorganised segment coupled with a duopoly made the segment attractive. However, Exide’s performance has been disappointing from FY12 onwards with margins slipping <13 12.3="" 34="" 83="" a="" aftermarket="" amara="" and="" are="" as="" batteries="" be="" being="" benefit="" between="" capacity="" challenger="" considering="" contrarian="" could="" coupled="" crore="" cycle="" demand="" dipped="" disruptions.="" dominant="" doubling="" downgrade="" due="" ebitda="" eil="" ensure="" estimated="" exide="" expanded="" falling="" focus="" for="" from="" fy03-10="" fy12="" fy15-17e="" gross="" has="" in="" india="" inflicted="" it="" its="" leader="" leading="" legs:="" levels="" likely="" loss="" low="" maintaining="" margins.="" margins="" market="" nearly="" now="" oem="" of="" on="" organised="" power="" pricing="" raja="" recovery="" registered="" replacement="" rise="" roce="" sacrificed="" same="" satisfy="" segment.="" self="" share="" shifted="" slow="" sold="" stable="" steady="" story="" stuck="" systemic="" technology="" that="" the="" this="" three-phase="" three="" to="" two="" up="" upgrade="" utilisation="" vehicles="" was="" while="" with="" x="" years="">85%). This coupled with the focus on technology upgrades for efficiency improvements & cost reduction could EIL the path for management targeted ~16% EBITDA margin profile in coming years. Non-auto business prospects positive by depend on economic recovery! 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 power back-up industry, it constitutes ~15% of revenues. Thus, Exide re-entered the telecom segment to boost utilisation levels in the overall industrial battery (~35%) space and has seen good traction in the same. EIL expects industrial segment demand to be grow vis-à-vis retail and expects to grow business on healthy double digit basis Valuations, auto recovery key reason to maintain BUY Amid competition, a slowdown in automotive revenues hurt Exide’s margin performance. However, keeping in the mind the structural expectation of a recovery in automotive demand EIL remains a play, which has re-rating possibilities in case expected story plays out. We believe EIL’s business would see better days in coming quarters ahead and operating leverage would be king leading to higher margins, better revenue growth. We, thus, value EIL’s core business at 18x (20% discount to ARBL) FY7E EPS of | 11.4 and other subsidiaries at | 15/share to arrive at a target price of | 220. We maintain BUY rating on the stock.

LINK
http://content.icicidirect.com/mailimages/IDirect_ExideInds_Q3FY15.pdf