Exide Industries - Operating metrics improving, but priced-in! - Antique

Operating metrics finally improve...

The much-expected improvement in operating metrics seems to be well underway with an improvement in the replacement:OEM ratio in autos (1.25x currently). This has been on the back of continuous in-roads into the 2W replacement segment, coupled with lower off-take from OEMs overall. Furthermore, the industrial segment (especially UPS/inverters) remains buoyant.

That said, recent growth has been driven by a delayed monsoon (summer being the best time for inverter sales) coupled with a low base - last year same period, inverter sales had fallen by 26% YoY due to an early monsoon coupled with fewer power cuts at the time.

Marginal scope for incremental product mix improvement

Exide's performance over the last year wasn't the fairy tale it was supposed to be. With the lull in OEM sales and capacities coming on stream, the sales mix was expected to improve towards the more profitable replacement segment and the resultant margin swing was expected to be huge. Exide seems to have finally gotten its act together with the much-awaited improvement in the replacement/OEM mix. The management expects the performance to continue improving from here on as it further improves its product mix and exhaust its high cost lead inventory, built over the last 2 quarters.

However, we see less room for any meaningful product mix improvement as OEM off-take could witness an uptick in volumes going ahead. We are only hopeful that replacement would keep pace as the buoyancy in OEM volumes in FY10/11, will translate into strong replacement sales in FY14/15.

Astronomical replacement margins at risk...

Recent market share volatility in the replacement market, coupled with limited pricing power raises questions about the premium that Exide has always commanded for its "brand". Competition in the aftermarkets is on the rise, which coupled with the limited entry barriers in the battery business, makes us cautious on the company's astronomical margins in the replacement segment.

Bull-case target provides less upside... HOLD!

While the company seems to be entering a strong auto replacement cycle and the improvement in operating metrics is also underway, core battery business trading at a P/E of ~15x our fairly optimistic FY14e estimates seems to capture most of the positives. We maintain HOLD with a target price of INR146 (15x FY14e EPS + INR9 for the company's stake in ING).

Source : Equity Bulls

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