Exide Industries - Initiating Coverage - Motilal Oswal

We recommend to BUY Exide Industries with a target of Rs. 166.

GROWTH DRIVERS :

Higher auto sales = better OEM demand, terms & margins : Domestic auto sales rose by 2.6% in FY13 given tight liquidity, poor consumer sentiments and relatively high interest rates. Due to pressure on Auto manufacturers, Exide's OEM margins declined from 12% at FY12 end to nearly 1% at FY13 end. OEM sales for Exide dropped 4% in FY13 as a result of pressure on OEMs. SIAM & MOSL estimates for industry sales in FY14 are for a high single-digit growth. We estimate Exide's OEM sales to rise 8% and 17% in FY14E and FY15E respectively. Price hikes and lead price declines should see OEM margins move back into the double digit range.

Replacement demand driving strong sales growth : Replacement sales grew 25% in FY13 as 4-year rolling vehicle sales rose from 4.7cr to 5.5cr units. The FY14 4-year rolling vehicle sales number rises marginally to 6.3cr units and this slowdown in potential first-time replacement market is likely to slow replacement sales to 14% in FY14 before a slight rise to 20% as pick-up in the economy contracts the replacement cycle. With higher margins in the replacement segment, we see improvement in margins in FY14.

Industry sales growing even in a weak demand environments : Sales to the Industrial segment contributed 34% of EXIDE's revenues in FY13. This segment has seen a 11% growth in FY13 and should continue to grow in the 8-12% range for the next 2 years.

Backward integration adds to margins : In-house smelters met ~40% of lead requirements with a price advantage of 6-8%. This cost advantage (in addition to benefits of recycling lead) boosts margins.

RISKS to our Investment Recommendation: (1) Spike in international lead prices or sharp depreciation of the INR vs the USD (2) Prolonged slowdown in OEM sales and (3) Hyper competition between Amara Raja and Exide.

Valuations & View: Exide trades at 22.9xFY13A and 18.4xFY14E earnings. We value the company based on an average of 2.2xFY14 sales and 20xFY14 earnings (in line with historical average) to get a target price of Rs. 166.

Investments even at book value would add a further 10-15% over this target. However, we ignore the upside from the investment and will consider the same when the ING Insurance NBAP value moves above cost, or sale of stake in the Insurance business to a new partner lightens the book and leads to a spike in valuations for EXIDE.

Source : Equity Bulls

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