Inverter segment gains to aid Exide's growth

Recovery in sales to auto makers likely to help volume growth

The Exide scrip has gained 24 per cent since May on expectations of better performance of its inverter business, as well as recovery in the automobile sector. Power shortage in key states such as Uttar Pradesh has also helped increase sales. Exide's inverter segment accounts for about a quarter of the company's revenues. Inverter sales, down 20 per cent year-on-year (y-o-y) in FY14, are expected to record a 15-20 per cent growth in FY15.

The increased sales are expected to have a twin impact of improving revenues and margins for the June quarter. While Exide's revenues are expected to rise 8-10 per cent y-o-y, margins are expected to improve 62 basis points to 16.8 per cent. Revenue growth (15 per cent) and margin improvement (450 basis points) are much steeper on a sequential basis. Rise in margins is driven by operating leverage as well as increasing share of higher-margin inverter sales. Further, a 4.5 per cent fall in prices of lead (a key input) on a sequential basis, too, might add 100 basis points to gross margins.

In the coming quarters, too, the firm is expected to post better performance. A revival in auto volumes will boost revenues as it has two-thirds market share in sales to auto makers. Improvement in consumer sentiment and rise in freight rates in the first half of CY14 are positives for the company.

According to Bank of America Merrill Lynch analysts, Exide has been able to maintain its market share on the replacement front by enhancing sales and distribution efforts. A focus on smaller dealers and better service turnaround could help boost growth in this segment. The analysts prefer Exide to Amara Raja as they believe the former will record an earnings growth of 22 per cent, compared with Amara's 12 per cent in FY15, due to narrowing of the margin gap and better capacity utilisation.

Analysts at Motilal Oswal Securities have upgraded their estimates of Exide for FY15 and FY16 by 12-27 per cent. Another trigger would be when Exide monetises its stake in the life insurance business, worth Rs 1,000 crore. Last year, it had bought 50 per cent stake of ING Group for Rs 550 crore.