Exide Industries - In Recovery Mode - Nirmal Bang

After six quarters of disappointing earnings following the loss of market share and lower EBITDA margin, Exide Industries (EIL), in our view, has hit the bottom and is now on a recovery mode. Its share in the replacement market has recovered from a low of 25% in May 2012 to ~33% in 3QFY13 and the two price hikes over the past three months should aid improvement in EBITDA margin. Top-line growth over the past few quarters has been in double digits and is likely to show a CAGR of 17% over FY13E-FY15E backed by strong replacement demand, while earnings are expected to post a CAGR of 21% over the same period. The overhang of recent acquisition of the remaining stake of ING Vysa in its insurance joint venture is likely to ease over a period of time and we believe the company will be successful in finding a new partner. We have valued EIL's core business at 14.5x, in line with Amara Raja Batteries' (ARBL) multiple (as both the companies are expected to report similar earnings CAGRs over FY13E-FY15E), assigning a value of Rs18 for its insurance venture. We have assigned a Buy rating to EIL with a target price of Rs153 valued on SOTP methodology (14.5x FY15E EPS plus Rs18 for the insurance business).

The worst is behind: FY12-FY13 has been a tough period for EIL as it faced capacity problems, which coupled with frequent pricing action led to loss of share in the replacement market. However, its market share recovered from a low of 25% in May 2012 to 33% in 3QFY13, close to its peak of ~35%-36%, while margins failed to show any significant improvement due to a 11% QoQ rise in lead prices in 3QFY13. The company went for two price hikes over the past three months, which coupled with a better product mix should aid EBITDA margin expansion going forward. Its current capacity utilisation level stands at ~ 80%-83%, which makes us believe that the chances of FY12-like market share loss is unlikely. With its margins set to improve, we believe the worst is behind for EIL

Double-digit top-line and earnings growth likely: Strong automobile sales in FY10-FY12 will drive replacement demand for batteries over FY13-FY15. EIL, being the market leader, is set to reap the benefits of the same and hence we expect the company to report net sales CAGR of 17% over FY13E-FY15E. On the margins front too, there is comfort emerging with two recent price hikes over the past three months coupled with a better product mix comprising higher sales in the replacement market. We expect EBITDA margin to improve to 14.1% in FY14E/FY15E from a low of 11.3% in 3QFY13. Backed by strong top-line growth and improved margins, we expect the earnings to show a CAGR of 21% over FY13E-FY15E.

Stock valuation attractive: Historically, the stock traded at 18x one-year forward earnings, but because of lower margins in the past few quarters it has corrected and is trading below its five-year average. With a strong earnings CAGR of 21% likely over FY13E-FY15E on the back of expected improvement in margins, the stock trading at 13.7x FY15E earnings, in our view, looks attractive as it factors in all the negatives. We have valued the stock on SOTP basis, valuing the core battery business at 14.5x FY15E earnings plus Rs18 for its insurance business. We have assigned a Buy rating to EIL with a target price of Rs153.

Source : Equity Bulls

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