Exide Industries: Margin gains on lower costs, demand recovery

Lower lead prices, stable pricing & value unlocking in insurance subsidiary could lead to upsides

Prices of lead, a key raw material for battery makers, are down eight per cent from the September quarter. Raw material costs constitute 65.5 per cent of Exide Industries' sales. Analysts at Citi Research believe an one per cent fall in lead prices should boost Ebitda (earnings before interest, taxes, depreciation, and amortisation) margins by 50 basis points. While the price is currently stable, any move to reduce prices to increase market share will dent margins.

The company is looking to improve its market position by launching new models at the lower end and taking share from unorganised and organised entities. Analysts at Bank of America Merrill Lynch (BofA-ML) say the company is trying to protect its flank by launching a cheaper brand in the same category.

Among new products launched over the year, Exide Boss aimed at taking share from unorganised players and Exide Red to counter those in the organised space. Most analysts expect the company to benefit from demand recovery in the automobile space, where it is the largest player (70 per cent share in the original equipment manufacturer market, as well as in the industrial segment.

The other trigger is the unlocking in the 100 per cent insurance subsidiary, Exide Life. What will offer more flexibility to the company is the raising of the foreign direct investment limit in insurance companies to 49 per cent from the current 26 per cent. While the company is well capitalised (solvency margin ratio at 277 per cent versus required 150 per cent) and does not need fresh funds, bringing in a partner is expected to give the business better valuations. Citi Research values the insurance business at 1-time book value or Rs 19 in a target price of Rs 200.

The core business is valued at 18 times its FY16 earnings per share.

While peer Amara Raja is trading at 22 times its FY16 estimates, the consolidated Exide is trading at 16.88 times. Analysts believe the premium is justified, given the superior margin profile and market share gains of the smaller company. Amara Raja has been able increase its Ebitda margins on the back of higher productivity, which has led to lower manufacturing costs and lower distribution costs. BofA-ML analysts expect Amara Raja to gain significant market share in automobile and power back-up batteries by FY17, on the back of new capacity additions. Most analysts have a ‘buy’ on both companies.