Exide Industries: Fully charged

Exide Industries (Exide) has underperformed Amara Raja Batteries over the past three months by 17%. This has been on the back of slowdown in OEM sales where Exide has a larger market share. Weak industrial activity, slow pickup in replacement demand and depreciating rupee have added to the woes. We believe that markets have over reacted to some of these concerns.

Battery replacement demand for passenger cars will see a strong growth in the near future as the strong growth in car sales during FY09-12 (CAGR of 18.2%) and replacement cycle of 30-36 months will start entering the markets. The two-wheeler replacement market has already seen a lot of traction in Q1 FY14 with a 22% growth. We believe this momentum would be sustained as proportion of switch-start 2-wheelers in the domestic sales has increased considerably.

With regards to OEM sales, while FY14 will continues to be muted FY15 could see modest revival if the consumer sentiment improves and interest rates are cut by 50-100bps over the next 12 months. Nevertheless, weak OEM sales are margin accretive as OEM sales command substantially lower margins when compared to replacement and industrial segments.

The concern over rupee and lead prices has been abated with recent appreciation in rupee and the price hikes implemented over the past few months. We expect the company to maintain its gross margins in the medium term.

Given the strong performance in FY13, where margins achieved some stability, return ratios improved and investment in expansion was made, we expect the financial performance to improve from here on. Sale of stake in insurance business could be an additional trigger. With earnings FY13-15E CAGR of 22.6%, we find the valuations of 13.5x FY15E P/E attractive. Retain BUY with a revised 9-month target price of Rs155.