Exide Industries (Q3 FY13)

India Infoline News Service | Mumbai |

The management guided for sustained pressure on margins in near quarters on back of its deteriorated pricing power in a weak auto OEM market and rising pressure from competition.

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CMP Rs127, Target Rs141, Upside 11%

Exide (EIL) reported disappointing Q3 FY13 results wherein it sharply missed the consensus estimates both at topline and bottomline. Net sales were reported at 14.6bn which were 8% below our estimates. While the auto replacement segment reported robust volumes, UPS segment volumes were affected by early onset of winters. In the weak OEM segment management informed of establishing higher volumes at the cost of margins in order to maintain high utilization levels. In the product mix, the Automotive and industrial mix deteriorated to 66:34 from 63:37 in Q2 FY13 on back of lower UPS volumes, however in the automotive segment the replacement to OE sales ratio improved to 1.56 from 1.49 in Q2 FY13.
OPM at 12.4%, much below ours and street expectations, contracted by a disappointing 261bps sequentially over the previous quarter. The continued underperformance at operational level was led by falling pricing power in OEM segment (constitutes 45-50% of EIL volumes), wherein the gross margins fell to abysmally low 1.3% in the quarter. The material costs rose sharply in quarter on back of ~8% increase in lead prices and power costs were noted higher by ~35-40%. Mainly owing to beat at operational level, the PAT for the quarter at Rs1,041mn was far below the estimates (-22%) and saw a contraction of 13.4% qoq.
On capex, management informed of not having crystallized the final plan for FY14 but guided for less capex with intent to substitute the low margin segment (OE’s) with the high margin segment (Replacement) in case of capacity constraints. Present utilization levels were observed to be ~80-85% across segments.
The management guided for sustained pressure on margins in near quarters on back of its deteriorated pricing power in a weak auto OEM market and rising pressure from competition. Further management indicated against taking any price hikes in the replacement market as it does not want to increase the price premium to the #2 player ARBL. However the significant positive remains the decent visibility in the volume growth which is expected to continue on back of strong sales of VRLA batteries made to OE’s in FY10 and FY11. Additionally the recovery in volumes in the high margin UPS segment post the winter season is expected to support the margins.
We build in revenue CAGR of 17% over FY12-15E on back of robust replacement demand but moderate our assumptions on the operating level and forecast 17% PAT CAGR over the same period. Assigning 14x to standalone business FY15E EPS and adding Rs15 for 50% stake in ING Vysya we achieve a price target of Rs141 and thereby upgrade the stock to BUY on recent price correction.

Result table

(Rs m)	Q3 FY13	Q3 FY12	% yoy	Q2 FY13	% qoq
Net sales	14,632	12,467	17.4	15,317	(4.5)
Material costs	(9,836)	(8,321)	18.2	(10,071)	(2.3)
Personnel costs	(855)	(752)	13.6	(897)	(4.7)
Other overheads	(2,295)	(1,769)	29.7	(2,467)	(7.0)
Operating profit	1,647	1,625	1.3	1,882	(12.5)
*OPM (%)*	*11.3*	*13.0*	*(178) bps*	*12.3*	*(103) bps*
Depreciation	(289)	(250)	15.5	(282)	2.7
Interest	(11)	(14)	(27.1)	(10)	7.1
Other income	121	99	22.1	125	(3.2)
PBT	1,469	1,460	0.6	1,716	(14.4)
Tax	(428)	(417)	2.5	(514)	(16.8)
*Effective tax rate (%)*	*29.1*	*28.6*	56 bps	*30.0*	(83) bps
Reported PAT	1,041	1,043	(0.2)	1,202	(13.4)
*Adj. PAT margin (%)*	*7.1*	*8.4*	*(125) bps*	*7.8*	*(73) bps*
Ann. EPS (Rs)	4.9	4.9	(0.2)	5.7	(13.4)

Source: Company, India Infoline Research

Cost analysis

As a % of net sales	Q3 FY13	Q3 FY12	bps yoy	Q2 FY13	bps qoq
Material costs	67.2	66.7	48	65.7	147
Personnel Costs	5.8	6.0	(19)	5.9	(2)
Other overheads	15.7	14.2	150	16.1	(42)
Total costs	88.7	87.0	178	87.7	103

Source: Company, India Infoline Research

Financial Summary

Y/e 31 Mar (Rs m)	FY12	FY13E	FY14E	FY15E
Revenues	51,070	61,480	71,931	82,721
yoy growth (%)	12.3	20.4	17.0	15.0
Operating profit	6,839	7,758	9,724	11,348
OPM (%)	13.4	12.6	13.5	13.7
Pre-exceptional PAT	4,612	5,035	6,431