Analyst corner: Maintain ‘neutral’ on Exide Industries, raise TP to Rs 193

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November 17, 2020 3:00 AM

While current lead cost, at ~Rs 140k/kg, is largely similar to last year’s average level, product mix is likely to worsen, with a higher mix of OEs. Hence, gross margins might come under pressure, in our view.

In our view, EXID has likely lost share in the auto replacement segment, with single-digit volume growth in Q2.In our view, EXID has likely lost share in the auto replacement segment, with single-digit volume growth in Q2.

Action. Maintain neutral; raise TP to Rs193, implying ~14% upside. EXID’s Q2FY21 revenue (Rs27.5billion, +5.5% y-y) was slightly ahead of estimates (Nomura: Rs 25.8billion, Bloomberg consensus: Rs26.2billion). However, ebitda at Rs 3.9billion (14.2% margin) was below (Nom: Rs 4.1billion, 15.9%). This was mainly due to weaker gross margins (-380bp q-q), despite stable lead costs and better replacement mix, and was a disappointment. EXID continued to underperform AMRJ, which reported 14% y-y revenue growth in 2Q (1HFY21 AMRJ -12% y-y, EXID -20% y-y).

In our view, EXID has likely lost share in the auto replacement segment, with single-digit volume growth in Q2. However, as highlighted earlier (link ), we believe industry demand is largely inelastic, and we maintain our forecasts for volume growth of 3%/10%/8% for EXID in 4W replacement over FY21-23F. We revise 4W OE growth to -13%/+25%/+10% (-15%/+20%/10% earlier) in FY21-23F to factor in faster recovery in the segment.

We believe industrial demand, especially on the inverter side, has recovered back sharply, and we expect 5%/8%/8% volume growth over FY21-23F. Improved power supply and market share loss to AMRJ in telecom remain concerns here, in our View. Overall, we raise our revenue estimates by ~5-7% but ebitda margins remain largely unchanged at ~13.9%/13.8%/13.8% over FY21-23F. Thus, our EPS estimates are revised up by 13%/6%/6% over FY21-23F.

While current lead cost, at ~Rs 140k/kg, is largely similar to last year’s average level, product mix is likely to worsen, with a higher mix of OEs. Hence, gross margins might come under pressure, in our view.

We roll forward our valuation to FY23F EPS from Sep-22F earlier. We maintain our target P/E multiple of 15x, slightly lower than its historical average. We add ~Rs30/share to the insurance business. While based on our assumptions EXID’s current valuation at 12.8x FY23F EPS (ex Insurance) is undemanding, we believe there is a lack of catalysts for the stock given the company’s weak execution track record. Hence, we maintain our ‘neutral’ rating. We continue to prefer AMRJ (AMRJ IN, ‘buy’) in batteries sector.

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