Wednesday, May 9, 2012

>EXIDE INDUSTRIES: Q4 FY12 - In line performance

“On a comeback trail”

Q4 FY12 - In line performance
On the back of strength shown from the 2wheeler segment, Exide was in a position to put up a sequential improvement in numbers. Total income increased by 16% qoq as well as yoy. At the EBITDA levels, there was an increase of 30% qoq and there was a flattish growth yoy. RM to sales moved up slightly sequentially to 67.2% since adverse forex movement offset the slight cut in lead prices. EBITDA margins surged to 14.6%, a growth of 160 bps qoq, as employee costs to sales went down to 5.2% of sales v/s 6% qoq and other expenses surprisingly came down to 12.9% v/s 14.2% sequentially against a difficult Q3. PAT declined 12.9% yoy while rising 37% qoq. The decline came on higher depreciation costs.

Replacement demand may provide the much needed traction in volumes
The volume improvement in the quarter was on the back of strong 2W battery numbers. The volumes grew 26% yoy and 4% qoq to 3.7mn while 4W volumes grew by 6% yoy to 2.38mn a growth of 16% qoq. On the industrial side, volume growth was 15.3% yoy and 20% qoq. On the capacity side, the company is through with 4W capacity expansion at 12mn units, while is still in the process of increasing 2W capacity to 22 mn in FY 13 which was close to 20mn in FY 12 and also the industrial capacity is slated for expansion to 2.5bn from 2.4bn units. The management expects replacement demand to be strong this year and hence expects to grow at 15-18% on the replacement side,higher than the market growth expected. In line with this, they are expecting to gain back their 36% market share in 4W replacement which had gone down to 23%, and currently stands at 30-31%. In Q3 FY12, the company functioned at 82% utilization rate on the 4W side, 73% on 2W side, while 72% on the industrial side. The replacement: OEM ratio in the year on the auto side was 1.14:1 lower than 1.22:1 in FY11. Going forward, we believe that 2W demand on the OEM side will be slightly soft as the sector has seen some slowdown off late, while on the 4W side OEM demand, we believe softness will continue over a couple of quarters with fuel prices moving up, while any further cut in interest rates will spur demand. On the replacement side, we believe that Q1 FY13 will see some turnaround from the demand for automobiles 3 years ago, both on 2W as well as 4W sides.

Margin improvement may come in coming quarters
In Q4, although the industrial margins grew by 380 bps, auto margins declined due to price cuts taken by the management in the 4W replacement side and pricing pressures from OEMs. However, although the company has taken 17% price cuts on car batteries with 5 year warranty, the management said that they have increased the prices on the other batteries in an attempt to realign prices with the industry and push up the demand on replacement side street expectations, the management in fact confirmed that this has led to some savings rather than margin erosion. The improvement seen in margins in this quarter is expected to continue going forward, as replacement demand is expected to pick up. Also softening of lead prices over the last few months is expected to continue. Softening of lead prices as seen in Q3 is expected to continue and help the margins going forward. We have already factored in about 270 bps improvement in margins in FY 13 to 16.1% over
13.4% in FY 12.

Outlook and valuation
We believe FY 13 will be a better year for Exide with replacement demand expected to pick up and OEM demand to improve in second half of the year following festive season, new launches and expected interest rate cuts. Margin improvement is also on the cards with lowering input costs and improving product mix. However, competition may lead to some margin weakness following any further price cuts in the replacement market. In line with positive expectation from the company going forward, we have slightly increased our FY 13E EPS from Rs 7.5 to Rs7.9 and have introduced FY 14E estimates.We have increased Exide's standalone business value at Rs123 (15.5x times FY 13E EPS of Rs 7.9) and insurance business at Rs13 taking the total TP to Rs136, thus upgrading the stock from Underperformer to Outperformer.

To read report in detail: EXIDE INDUSTRIES