Market share, margin gains ahead for Exide

Benign raw material prices and strong replacement demand seen as key drivers in FY14

The Exide stock was down 3.4 per cent in three trading sessions after slowing OEM (original equipment manufacturers) sales, disappointed the Street, in the numbers for the March quarter. Net sales grew six per cent year-on-year to Rs 1,541 crore, about five per cent below what analysts had estimated.

While the replacement market has been strong and the company has been able to gain market share, the automobile slowdown impacted overall growth. According to the Exide management, the full impact of the replacement market gains could not be realised due to muted performance in the four-wheeler segment and the less than expected growth in the two-wheeler space.

However, things are likely to get better. Ambit Capital’s Ashvin Shetty says with rival Amara Raja likely to face capacity constraints in this financial year, Exide will have room to take pricing action, as well as gain share in the four-wheeler replacement market. Margins are also likely to be boosted by price rises and falling lead prices.

Aashiesh Agarwaal and Ashish Poddar, analysts at Edelweiss Securities, say mid-FY13 was tough, as lead prices were high and the company did not pass on the cost to consumers in a bid to regain market share (lost during 2010-11), thereby impacting Ebitda (operating earnings) margins, which were below 12 per cent.

“We believe margins will improve on the back of softening lead prices (a key raw material, down about 18 per cent in the last four months), improving OEM demand and replacement demand, higher realisation (Exide took a price rise of about five per cent in January, the full benefit of which will come in FY14) and lower other expenses,” they said.

The two estimate Exide’s Ebitda margin to improve from 13.1 per cent in FY13 to 14.4 per cent in FY14. They’ve upgraded the stock from ‘hold’ to ‘buy’, with a target price of Rs 158.

For the stock, at Rs 134.45, it is trading at 16.7 times its FY14 estimates. Given the upsides on the margins, as well as replacement demand trends, analysts have pegged a consensus target price of about Rs 150, giving an upside of 11 per cent from these levels.

Replacement demand steady
While the OEM segment continues to face headwinds, reflecting on the lower sales of suppliers such as Exide, the replacement segment is expected to replicate the 15 per cent year-on-year growth seen in FY13 in this financial year, too. On the OEM front, analysts expect a recovery in the second half. Shetty of Ambit says automobile sales are likely to see a seven per cent growth in FY14, which should help boost OEM sales of Exide. In the industrial segment (40 per cent of overall revenue), while the home UPS battery section is experiencing a demand pick-up, the outlook for other segments continues to remain subdued.

Lower costs to aid margins
The company has taken a few price increases, the latest being a five per cent increase in January, both in the OEM and the replacement markets. Cumulatively, price rises to the tune of 13 per cent has been taken in the second half of FY13. This, coupled with the fact that lead prices (67 per cent of cost) have fallen 15-17 per cent in the past two months, should aid margins.

Nirmal Bang’s Gaurant Dadwal believes the combination of recent price rises in December and February, and the softening of lead prices, should help the company register an Ebitda margin of 14.1 per cent in FY14, about 80 basis points more than the number in the March quarter. Profitability was hampered in the first half of FY13, as it did not pass on the cost of higher lead prices with a view to regaining market share. Ebitda margins in the June and September quarters were 11-12 per cent.