Exide Industries Limited - Finally, margins get priority... Upgrade to BUY! - ANTIQUE

We have always liked Exide's business model (asset light/hedge against an OEM slowdown), but have been negative on the stock for almost two years as the pricing discipline during that period didn't do justice to the brand - from selling to OEMs at a loss (fearing that they would lose market share) to being a price follower in the replacement market (despite being the leader).

This has somewhat changed in the last couple of months with the company again capitalizing on its pricing power (we feel it has something to do with the new MD). The company has 1) taken two price increases (~5% each) in the replacement market, in quick succession, 2) taken a 5-7% price increase with OEMs (over and above the lead cost pass through), and 3) actually let go of Auto OEM market share (down from 75% to 66%) as it didn't want to succumb to some OEMs who were trying to squeeze them. The management has decided to be a price maker (till the time they are a market leader) and is prepared to lose further market share in order to protect margins. We've waited a long time for this new-found aggression - a far cry from their previous strategy. While our target price increases marginally (from INR145 to INR150/sh), we upgrade the stock to BUY!

1Q results - Margins finally reflect favourable mix

PAT at INR1.58bn (up 4% YoY/8% QoQ) beat our estimate of INR1.4bn. Surprise stemmed from better EBITDA margins - at 16.1% (up 120bps YoY/286bps QoQ) vs. our estimate of 13.5%.

Owing to sluggish OEM sales, the Auto mix was favourable - 4W OEM : replacement ratio was at 1.74x (1.48 QoQ/1.4x YoY) and 2W OEM : replacement ratio was at 0.49x (flat QoQ/0.35x YoY). More importantly (and unlike previous quarters), the company was able to retain this benefit, reflected in the gross margins improving 86bps YoY/277bps QoQ.

Mix should remain favourable… Intent to retain benefit a positive

With OEM sales expected to remain weak, the product mix within Auto is expected to remain favourable. Furthermore, given that inverter sales (~25% of total sales - down 23% YoY) were impacted by an early monsoon, growth should recover next quarter onwards.

Post recent price hikes, margins are protected till a USD-INR rate of 60. Any INR appreciation from here will not only result in better margins, but also be a strong stock catalyst. Furthermore, with Amara Raja having capacity constraints, we expect some pricing sanity in the replacement market. Previous price wars didn't do both players any good. They too have announced price increases recently.

Upgrade to BUY (from HOLD previously)

At the CMP of INR127, core battery business trades at an FY14/15 P/E of 15.2x/12.5x. The stock is a good hedge to a prolonged OEM slowdown (a strong likelihood). We upgrade the stock to BUY with a target price of INR150 (15x FY15e EPS + INR13 for the company's stake in ING).

Source : Equity Bulls

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