Exide Industries - Strong performance in a challenging environment - Standard Chartered Securities

OUTPERFORM, EXID IN, CMP INR 122, Price Target INR 152

- 1QFY14 earnings were ahead of estimates at INR 1.6bn (est. INR 1.24bn) on improved margins (led by lower RM) and higher-than-estimated revenue growth (led by better replacement demand).

- Earnings growth was limited by lower other income and a higher tax rate.

- IER has refrained from upgrading its estimates despite the outperformance, due to an uncertain revenue outlook and the lagged impact of INR depreciation in the subsequent quarters.

- Valuations at 12x FY15E earnings appear attractive

- Retain Outperform with a PT of INR 152 per share.

Revenue up despite a weak demand scenario. 1QFY14 revenue grew 5% YoY to INR 16.3bn (ahead of IER estimate of INR 14.6bn), led by strong auto replacement demand. Demand continued to remain weak in both auto OEMs and the industrial segment due to slowdown in the economy. Even Home UPS sales were subdued, due to the advance onset of the monsoon.

Margins on an improving trend. Exide's operating margins improved 140bps YoY (+310 bps QoQ) to 16.4%, primarily on lower input cost pressure. RM/sales declined 80bps YoY (down 280bps QoQ) to 64.3% as Exide enjoyed the benefit of low-cost lead inventory in the quarter.

Earnings above estimates on improved margins. Other income fell substantially in 1QFY14 to INR 62 mn (INR 147 mn in 1QFY13), due to decline in current investments (down to INR 1.8bn as of FY13 end from INR 6.5bn in FY12). Investments declined as Exide had bought out the remaining 50% in ING Life for INR 5.5bn in 4QFY13 from internal accruals. Even the tax rate increased to 33.3% for 1QFY14 (from 30.4% in 1QFY12). Despite these, PAT for the quarter grew 6% YoY and ahead of our estimates (of INR 1.24bn) to INR 1.6bn.

Valuations. Despite the strong outperformance in 1QFY14, IER has refrained from revising up its estimates as: (1) the revenue outlook continues to remain uncertain; and (2) the lagged impact of INR depreciation is likely to be felt from 2Q onwards. Exide has taken a price increase of 5-7% in the replacement category to offset the cost increase. Also, valuations at 12x FY15E earnings appear attractive, given RoE of c.21%. We maintain Outperform with a PT of INR 152 per share - the core is valued at 14x one-year forward earnings.

Source : Equity Bulls

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