Exide Industries (Q1 FY14) - BUY - IIFL

CMP Rs130, Target Rs146, Upside 12%

- Exide (EIL) reported healthy set of numbers in Q1 FY14, wherein its revenue grew by 5% yoy (in-line with estimates) and operating profits jumped 13% yoy (+18% higher than estimates). The revenue growth stemmed from the robust replacement segment volumes and improved price realisations across segments. This was partially offset by declines seen in the automotive-OEM and industrial segment volumes. The automotive segment revenues grew by 6% yoy while the industrial segment revenues registered a slight de-growth resulting in a total revenue growth of 5% yoy. In the automotive segment the replacement to OE sales ratio was 1.74:1 for 4Ws and 0.49:1 for 2Ws.

- Operational profits came in much higher than our expectations at Rs2.6bn (+13% yoy), with sharp expansion coming in at the gross margin level. EIL's recent price hike (effective April 1, 2013) in the OEM segment (constitutes 45-50% of EIL volumes) has resulted in 280bps boost at the gross margin level. The pricing power at the OEM level came in as a positive surprise, though management indicated of having lost some market share here. We note that in Q3 FY13 gross margins in the OEM segment fell to abysmally low levels (~1%) and welcome the strategy change of EIL. Mainly owing to beat at operational level, the PAT for the quarter at Rs1,588mn was ahead our estimates (11%) and recorded a growth of 4.2% yoy. Going ahead, we note that lead costs have moderated by 7% in rupee terms over Q1 FY14 and we expect these benefits to accrue to the Q2 FY14 margins.

- With utilization levels at 70-75%, management hinted at no incremental investments for capacity augmentation in the near term. It plans to spend Rs2.8bn in FY14 largely concentrated on general quality related and pollution control investments.

- EIL has gained market share in the organized replacement market and is now above the comfortable 50% mark. This gain in market share is partly responsible for the pricing discipline evident from recent price hikes taken in the replacement market.

- The significant positive remains the decent visibility in the volume growth which is expected to continue on back of strong sales of VRLA batteries made to OE's in FY10 and FY11. The management guides for ~10% growth in 4W replacement volumes and ~17% growth in 2W replacement volumes in FY14.

- We build in revenue CAGR of 15% over FY13-15E on back of robust replacement demand and 22% PAT CAGR upon slightly upgrading our assumptions at the operational level. Assigning 14x to standalone business FY15E EPS and adding Rs15 for its other businesses, we achieve a price target of Rs146. Recommend BUY.

Source : Equity Bulls

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