Exide Industries - Disappoints yet again - Ambit

Results overview: Exide's 3QFY13 results were an all-round disappointment. Revenues increased 17% YoY but contracted 4% QoQ, nearly 9% below our expectations. EBITDA margin at 11.3% was a disappointment yet again (down 199bps YoY and 112bps QoQ and a significant 275bps below our expectations). Higher-than-expected raw material costs (higher by 182bps) as well as 'other expenses' (higher by 98bps) contributed to the margin disappointment. Although absolute EBITDA was below our expectations by 27%, net earnings at Rs1,041mn during the quarter was 29% lower than our expectations. Revenues, EBITDA margin and net earnings were lower than consensus expectations by 9%, 243bps and 26% respectively.

Where do we go from here?

During the quarter, the 4W replacement battery segment's growth was strong at 25% YoY. However, due to the decline in the OEM segment, the overall 4W battery growth was at only 13% YoY. Similarly, in the 2W battery space, although the replacement segment expanded strongly at 53% YoY, the OEM segment's growth was subdued. Furthermore, in contrast with the trends seen in the earlier quarters, the home inverter and UPS segments' sales were subdued in 3QFY13.

Exide's margin performance has been a source of concern in the past several quarters and 3QFY13 was no exception. We were expecting QoQ improvement of 160bps in EBITDA margin due to price increase of nearly 5% taken by the company in the 4W replacement battery segment in October 2012. The company's weak margin performance in 3QFY13 and in the recent quarters has been difficult to decipher, particularly given that: (a) the 4W replacement battery has recovered and in fact increased by 25% YoY in 3QFY13; (b) its smaller peer, Amara Raja has been clocking much better margins (16-17%) consistently in the recent quarters despite Exide having the advantage of scale and much higher proportion of raw material from captive smelters.

Our current FY14 estimate factors in an EBITDA margin of 15%. Given the 3QFY13 and YTD FY13 EBITDA margin of 11.3% and 12.9% respectively, we believe our FY14 EBITDA margin estimate faces significant downside risks. Furthermore, we believe that increased competition has now structurally reduced Exide's pricing power in the past two years leaving the company's operating margin exposed to a higher degree of risk to price volatility in raw materials. A 100bps cut in our FY14 and subsequent years' EBITDA margin assumptions in our DCF based valuation model results in a 7% decline in net earnings and our fair value estimate for the stock.

At the CMP, the stock is trading at 16.4x our existing FY14 net earnings estimate. Whilst we would seek more clarity on the quarterly performance of the company from the conference call scheduled today at 16.00 IST, we maintain our SELL stance on the stock.

Source : Equity Bulls

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