Equalweight rating on Exide shares, target price Rs 133: Morgan Stanley

Jan 15 2014, 10:11 IST
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SummaryRemain EW on the stock, but keep a close eye on the replacement demand outlook for batteries.

Exide’s Q3FY14 revenues, Ebitda and net profit missed our expectations by 9%, 20% and 25%, respectively. Net profit was down 26% y-o-y and 35% sequentially. The earnings miss was largely on account of weaker revenues as demand for both automotive and industrial batteries remained subdued.

We remain EW on the stock, but keep a close eye on the replacement demand outlook for batteries. A weak outlook may pose downside risk to our numbers. Exide’s revenue was down 11% y-o-y. Subdued demand in the replacement market especially for commercial vehicles and contraction in the auto original equipment manufacturer (OEM) segment, coupled with sluggish demand across the industrial segments led to the revenue decline. With auto sales showing little signs of recovery and inverters likely to enter seasonally weak period, replacement demand in the automotive segment will be the key driver of revenues in the near term.

Ebitda declined 13% y-o-y as margins contracted to 10.9%. Steady lead prices (+0.4% q-o-q) coupled with price hikes helped Exide keep gross margins intact (34.9% versus 34.5% in Q2FY14) but higher other expenses (+7% q-o-q) and staff costs (+5%) put pressure on costs as ebitda margins slid to 10.9% versus 14.1% in the previous quarter. In our view, margin recovery will depend largely on improvement in capacity utilization which slid below 70% (Q2FY14) as volumes declined.

The company is due to host a post-results conference call on January 15. We await more colour on factors that led to the weak revenues and higher expenses, and will revert with more details after the call.

- Morgan Stanley

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