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The stock of Exide Industries is down nine per cent in three trading sessions, on earnings downgrades brought on by weak March quarter results and the jump in capital expenditure for FY16.
Analysts have cut their earnings estimates by four to eight per cent for the next couple of years. The number of buys for the stock has also come down from 51 per cent a week ago to 47 per cent. At the current price of Rs 164, the stock trades at about 17 times its FY17 earnings estimate, in line with competitor Amara Raja’s multiples.
The key disappointment for the Street has been the reported earnings for the March quarter, about 20 per cent lower than estimates. This was due to slowing growth and lack of operating leverage. Revenue growth of only two per cent year-on-year against an average of 20 per cent over the past three quarters was due to poor sales of both inverters and to original equipment manufacturers (OEMs) or automobile makers. OEM sales for Exide were lower in both in four-wheelers and two-wheelers on the back of a weak quarter for manufacturers, resulting in a fall in market share of the company.
The positive takeaway, however, has been that the replacement market for four-wheelers and two-wheelers continues to be strong, with growth of 22 per cent and seven per cent, respectively. The replacement segment fetches higher margins than automobile OEM sales. The drag in the quarter has been weaker sales of inverters (20 per cent of sales) due to a less harsh summer and better power supply, delaying demand.
Going ahead, higher competition from Amara Raja, which is planning to enter the home inverter segment in FY17, would have an impact on the company's profitability. For, Exide would have to spend more on marketing expenses and price its products lower, say analysts at Spark Capital.
Exide's capital expenditure was Rs 300 crore in FY15 and this is expected to jump to Rs 800 crore in FY16. A large part of the capex is for technology upgradation, as well as capacity additions. These will increase its four-wheeler capacity to 13.8 million units (from 12.2 mn) and two-wheeler capacity to 26 mn (from 22 mn). Analysts at Spark Capital say the capacity expansion plans are steep, as utilisation is still only 75 per cent.
Apart from healthy sales in the replacement segment, another positive in the quarter has been the improvement in operating profit margins on the back of falling prices of lead, a key raw material, and cost reduction measures. Average lead prices declined 8.5 per cent in the December quarter and by a further 9.2 per cent in the March quarter. This helped the company improve its operating profit margin by 300 basis points year-on-year to 14.4 per cent.
If the trend in lead prices continues, analysts expect another 20-30 basis points improvement in margins. Analysts at IIFL Institutional Equities, however, say these margins are unlikely to sustain beyond the June quarter, as lead prices have bounced back 15 per cent from the March quarter average. The company’s inability to pass on the increase in excise duty in January also indicates a lack of pricing power, believe analysts. It remains to be seen how Exide manages the current pricing situation.
Analysts at Emkay say a number of structural issues remain and these will limit earnings growth and re-rating for the stock. Higher OEM sales on demand revival is likely to impact the margins; the company is also likely to cede market share to Amara Raja in the replacement and OEM segments. Further, lower inverter sales as power supply improves in the country and technology upgradation costs over the next three years, a drain on cash flows, would impact the trading multiples.
