Exide’s Q4FY19 revenue growth (6% YoY) was slightly lower than our estimate due to muted auto OEM growth and likely pass-through of lower Lead prices to OEMs. However, EBITDA margin at 14.4% beat our/consensus estimate of 13.4% on lower staff costs. Lead prices were down 17% YoY in Q4, but gross margin expanded by only 30 bps, as unfavourable currency appears to have partially offset the benefit.
We like Exide for its structural growth in after-market. Further, CV and tractor battery segments are benefitting from shift to organised plays. Benign Lead prices and favourable mix (higher replacement share) should support margin going ahead. Our FY20/FY21E earnings are largely unchanged. We have ‘Add’ rating with target price of `228 (core business at 17x FY21E EPS and insurance business at `33/share).
Management indicated volumes in automotive, UPS, solar and other infrastructure segment batteries posted good growth during Q4. However, revenue growth from auto OEMs is likely to have been weak given the sluggish production coupled with pass-through of lower lead prices.
The company continues to focus on cost control and technology upgradation as strategies to improve the bottom line. Exide is investing heavily in Haldia facility to upgrade manufacturing technology and cutting down on manual intervention. This should lead to better consistency, less wastage, lower warranty costs ( 2% of sales) and lower staff costs.
We expect revenue growth to pick up in H2FY20 given pick-up in Auto OEM volumes (on a low base and driven by BS-VI pre-buy) coupled with steady growth in replacement segment. Further, there has been pricing discipline between both Exide and Amara Raja (at least for now).
While batteries have less to gain from the upcoming safety and emission norms, it will relatively outperform the industry in FY21 as replacement can cushion any slowdown in OEM volumes.