Exide Industries (Q1 FY15)

• Net sales at Rs19.1bn was substantially higher than our and street estimates; represented a growth of 17.5% yoy and 18.6% qoq

• Sequential improvement in revenues was primarily on the back of volume growth in the inverter segment (particularly telecom) and modest growth in automotive replacement demand

• OPM at 15.2% was much higher than our expectations owing to benefits of operating leverage and strong control on costs

• PAT registered a rise of 40.2% qoq and 16.7% yoy

• Automotive industry fortunes are expected to revive from H2 FY15 and further strengthen in FY16, however replacement demand will be weak given the muted OEM sales in the past three years

• In spite of expected 23.4% earnings CAGR during FY14-16E, we assign an Accumulate rating as recent rally in the stock more than adequately factors the upsides

Net sales better than expectations

Exide Industries for Q1 FY15 reported revenue of Rs19.1bn compared to our estimates of Rs17.9bn. Growth was at 17.5% yoy and 18.6% qoq. This was driven by a sharp revival in the inverter segment volumes especially so for the telecom sub segment where the company saw substantial sequential jump in volumes. Automotive segment value growth was at 9% driven by 8% and 5% volume growth in 2W and 4W batteries respectively. Industrial value growth was at 33% driven by sharp volume growth in Telecom, railways and UPS. Overall volume growth for the inverter segment was at 10% qoq.

OPM better than expectations driven by operating leverage

During Q1 FY15, OPM for Exide Industries was at 15.2% better than our expectations of 14.2%. While operating profit was higher by 10.9% yoy it jumped 33% qoq. OPM increased 165bps sequentially while it fell by 90bps yoy. Better than expected performance was owing to benefits of operating leverage as the chunk of topline growth was driven by volumes. Price hikes implemented over the past few quarters, stable lead prices and appreciating rupee allowed RM cost to decline by 58bps qoq as a percentage of sales. Although RM costs were higher by 196bps yoy. Personnel costs were lower by 53bps yoy and overheads were down 52bps as a percentage of sales driven by benefits of operating leverage.

PAT too was better than estimates

The company reported a PAT of Rs1.8bn which was substantially ahead of our expectations of Rs1.5bn. Profit was up 16.7% yoy and 40.2% qoq. Depreciation was higher by 7.6% yoy owing to expansion of capacities during the year across the segments.

While we expect 15.8% revenue CAGR and 23.4% PAT CAGR for Exide during FY14-16E, we believe recent rally in the stock more than adequately factor in the upsides. Risk to earnings and margins exist from expected increase in contribution of Auto OEM and telecom segments which are low margin business. Hence, we assign Accumulate rating with a price target of Rs170.