Exide Industries’ Q4FY18 revenue grew a strong 26% y-o-y (21% y-o-y in FY18) to Rs 24.6 bn. This was led by robust volumes in automotive, motorcycle, inverter, UPS, telecom and solar batteries as well as infrastructure. Despite gross margin contracting 180bps y-o-y, Ebitda margin expanded ~80bps to 13.7%. Consequently, Ebitda jumped 34% y-o-y driven by operational efficiencies and operating leverage. We remain positive on Exide anchored by: (i) recovery in auto replacement; (ii) GST benefit (iii) growth in OEMs; (iv) technology upgrade & new product launches; and (v) opportunities in emerging segments (solar, e-rickshaws). Hence, we revise up FY19/20e Ebitda by 4% each, leading to FY18-20e Ebitda CAGR of 19%. Maintain Buy with revised target price of Rs 288.
Robust volume growth across segments
Post a demonetisation and GST hit Q1FY18, Exide’s business momentum has perked up significantly—net sales jumped a strong 26% y-o-y in Q4FY18 (up 33% in Q3FY18, 22% in Q2FY18) driven by volume improvement in automotive, motorcycle, inverter, UPS, telecom & solar batteries and infrastructure segment. In FY18, Life insurance business made a PBT loss of Rs 92 mn against PBT gain of Rs 769 mn in FY17.
Margin expands despite cost pressure
Despite 180bps gross margin contraction (lead price jumped 17% y-o-y), Ebitda margin expanded 80bps y-o-y leading to strong 34% y-o-y Ebitda spurt. This was on account of price hikes, operating leverage and cost control initiatives. Exide is focusing on cost control and technology upgrade to improve profitability. PAT grew mere 15% y-o-y to Rs 1.9 bn impacted by 663bps rise in tax to 34.7% and 34% y-o-y dip in other income. For FY18, despite gross margin contracting 338bps (lead price up 19% y-o-y), Ebitda margin contracted mere 70bps to 13.5% because of manufacturing efficiencies. Lead prices have dipped 5% q-o-q in 1MQ1FY19, which we envisage will support margin. FY18 PAT growth was flat due to higher tax rate and lower investment income.
Outlook and valuations: Positive; maintain ‘BUY’
Riding recovery in auto (OEM & replacement) and industrial segments, we estimate 19% Ebitda CAGR over FY18-20e and maintain Buy with target price of `288. We value standalone at 20x FY20e EPS and insurance business at 2x Sep 2017 embedded value, at 40% plus discount to ICICI Pru Life’s valuation.
Company is well poised for cyclical uptick in OEM within automotives and inverters and telecom segment within industrial batteries. This would result in improvement of margins led by operating leverage with increasing capacity utilisation which is currently at 79% in automotives, 83% in motorcycles. Also company is undertaking technology upgrade and cost cutting initiatives. We expect a 9.9% sales CAGR and 10% PAT CAGR over FY16-18e.
If economic slowdown prolongs, not only would it affect OEM demand but also prolong the replacement cycle, thus affecting the replacement demand. Any increase in competitive activity which triggers price war kind of scenario will negatively impact margins. After a considerable fall, lead prices bounced back recently to some extent.
USD-INR has also been very volatile in recent days. Any significant fall in lead prices in INR term poses upside risks to margin.
Exide is a leading battery producer in India and one of the largest power storage producers in South Asia. It supplies batteries to the automotive, industrial, infrastructure development, information technology and defence sectors in India. In addition, through its subsidiaries, the company has two lead smeltering facilities. The company is servicing 8 mn customers via different types of batteries. The company recently increased its stake in ING Vysya Life Insurance Company (IVL) to 100%.