Pricing power returning
Upgrading to Buy on likely expansion of margin: We are upgrading Exide Industries to Buy from U/P (under-perform), as we expect it to benefit from an imminent increase in pricing power in automotive batteries. We have raised our price objective by 31% to R160, led by (i) EPS upgrade for FY14/FY15e (estimates) by 8/9% as a price hike should boost margin, (ii) likely re-rating of the battery unit to PE (price-to-earnings ratio) of 17x FY14e, equivalent to its historical average, instead of 14x (times) trough P/E as assumed earlier, & (iii) rise in insurance unit value from R15 to R20/share owing to a recent increase in stake from 50% to 100%.
Immediate triggers are price hike and incentive reduction: We expect Exide to be able to hike prices in its branded battery as well as OEM (original equipment manufacturer) businesses and also cut back on dealer incentives. Key drivers of this price hike are (i) capacity constraint at key competitor Amara Raja, (ii) rise in the cost of lead---key raw material, and (iii) reduced thrust on market share gain given that it has already regained market share to the minimum desired level of 32%.
Decline in competitive intensive to boost pricing power: Key competitor Amara Raja is operating at over 90% capacity now and is unlikely to see significant addition to its capacity before the end of 2013. Amara Raja has recently stated its intention to hike prices owing to
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