 "Exide Industries: Lower costs, demand recovery to improve margins")
Lower lead prices, stable pricing and value unlocking in its insurance subsidiary could lead to more upsides in Exide Industries. Lead prices, the key raw material in the manufacture of batteries, are down about 7% from September quarter levels. Raw material costs constitute 65.5% of sales and is expected to boost operating profit margins of the company.
Analysts at Citi Research believe that a 1% fall in lead prices should boost Ebidta margins of the company by 50 basis points. However, this is dependent on the company maintaining prices at the current levels. While prices are currently stable, any move to reduce prices in a bid to increase market share however will dent margins.
The company is looking to improve its market position by launching new models at the lower end and taking share from unorganised and organised players. Analysts at Bank of America Merrill Lynch say that the company is trying to protect its flank by launching a cheaper brand in the same category. Among new products launched over the year are Exide Boss aimed at taking share from unorganised players and Exide Red to counter companies in the organised space. Most analysts expect the company to benefit from demand recovery in the auto space where Exide is the largest player (70% share in the OEM market) as well as in the industrial segment.
The other trigger is the unlocking in the 100% insurance subsidiary Exide Life. What will offer more flexibility to the company is the raising of the FDI limit in insurance companies to 49% from the current 26%. While the company is well capitalised (solvency margin ratio at 277% versus required 150%) and does not need fresh funds, bringing in a partner is expected to give the business better valuations. Citi Researh values the insurance business at 1 time book value or Rs 19 in a target price of Rs 200.
The core business is valued at 18 times its FY16 earnings per share.
Though peer Amara Raja is trading at 22 times its FY16 estimates while the consolidated Exide is trading at 16.88 times, analysts believe that the premium is justified given superior margin profile and market share gains of the smaller company. Amara Raja has been able increase its Ebidta margins on the back of higher productivity which has led to lower manufacturing costs and lower distribution costs.
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The company has opened up a 300 basis points gap between it and Exide (current margins at 14% vs Amara's 17%) due to its competitive advantages and reversed the situation from FY11 when Exide's Ebidta margins were higher. Bank of America Merill Lynch analysts expect Amara Raja to gain significant market share in automobile and power back up batteries by FY17 on the back of new capacity additions.
Most analysts have a buy on both companies.