Competitive pressures to increase for Exide Industries

Higher raw material costs and pricing pressures might pose risks to margin improvement

The Exide Industries stock hit a 52-week high last week as the September quarter results were better than expected and analysts gave a higher valuation to its insurance business. Led by strong traction in the automotive replacement segment, as well as improving demand from auto makers, the overall revenue growth was higher over the year-ago period by 10.5 per cent.

Demand from two-wheeler and four-wheeler manufacturers was up 20 per cent year-on-year (y-o-y). The inverter battery segment, too, witnessed good demand. The company posted healthy Ebitda (earnings before interest, taxes, depreciation, and amortisation) margins of 15.2 per cent, up 60 basis points (bps) y-o-y aided by a fall in raw material prices as well as tight control on costs.

While raw material cost to sales was down 110 bps to 61.1 per cent, there could be pressure on margins as lead prices are up 10 per cent from the September quarter levels and the company might take a price hike to offset the same. How the competition reacts will be critical for the increase to sustain.

Geojit BNP Paribas Research says the automotive industry is witnessing a structural recovery and given the 60 per cent market share for Exide, it will be a direct beneficiary of auto recovery led by higher income growth in rural and urban India due to Pay Commission payouts, as well as higher crop productivity.

The passing of the goods and services tax (GST) Bill would also help battery makers such as Exide. The organised segment accounts for 40 per cent of the market and sells at a 25 per cent discount due to tax evasion; GST will reduce the tax rate from 28 to 18 per cent.

While there are positives, analysts believe the medium-term outlook due to higher competition is a worry. Elara Capital says the company’s dependence on inverter battery for growth is a concern as the segment contributes 25 per cent to revenues. This will come under threat once Amara Raja ramps up capacities.

Further, higher-margin auto replacement segment, too, could face some pressure, with analysts believing Exide’s premium on pricing is likely to narrow and converge with that of Amara Raja. This is expected to impact both realisations and margins. Spark Capital analysts believe there is minuscule near-term margin benefit while return ratios will be impacted due to ongoing technology upgrades and cost-cutting initiatives.

At the current price, the stock is trading at 21.2 times its FY18 earnings estimate, a significant discount to Amara Raja. Given the run-up in prices, investors should await rebound in auto and industrial revenues before taking exposure to the stock.