Citi maintains ‘Buy’ on Exide shares, target price Rs 225

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Published: January 28, 2017 3:32:40 AM

Third quarter revenues at Rs 1,700 crore illion were 2% ahead of our estimate. Gross margins rose 120 bps q-o-q despite a 15% q-o-q increase in lead prices – we think it’s a combination of better mix (more replacement sales vs. OEM vols) and delay in pass through of lead costs.

Third quarter inverter volumes are insignificant due to onset of winter in most markets. We maintain ‘buy’ on Exide. Replacement demand should continue to be the main driver for revenues and profits. (Reuters)Third quarter inverter volumes are insignificant due to onset of winter in most markets. We maintain ‘buy’ on Exide. Replacement demand should continue to be the main driver for revenues and profits. (Reuters)

Third quarter revenues at Rs 1,700 crore illion were 2% ahead of our estimate. Gross margins rose 120 bps q-o-q despite a 15% q-o-q increase in lead prices – we think it’s a combination of better mix (more replacement sales vs. OEM vols) and delay in pass through of lead costs. We think this is driven by mix shift (more replacement vs. OEM sales), some timing difference in lead-procurement and inventory fluctuations, and cost reduction steps mgmt has been alluding to. The demonetisation impact on OEM volumes resulted in negative operating leverage, which should reverse – and boost margins slightly going forward.

Management noted that auto replacement demand continues to be healthy. However, OEM demand, esp in 2W segment, was extremely weak. UPS and solar batteries volumes have been healthy.

Third quarter inverter volumes are insignificant due to onset of winter in most markets. We maintain ‘buy’ on Exide. Replacement demand should continue to be the main driver for revenues and profits.

We are positive on cost reduction initiatives and believe that as OEM volumes recover, the gross margin improvement will translate into EBITDA margin expansion as well.

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We tweak our FY17 estimates very slightly reflecting higher gross margins, partly offset by an increase in SG&A.

We also increase our other income estimate, resulting in a ~2% increase in our FY17 earnings estimate. Our FY18-19 estimates are broadly unchanged. We retain our target price of R225. Exide is our top pick in the Indian auto parts.

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