Exide: Replacement demand, undemanding valuations to support revenues

Margins may be under pressure on higher raw material costs

A pick-up in replacement demand and higher uninterruptible power supply (UPS) sales helped Exide Industries report better-than-expected June quarter (Q1) results. Though revenues declined 44 per cent, compared with the year-ago quarter, because of lower demand from automakers and industrial segments, it was offset by higher sales in the aftermarket and UPS segments in the second half of the quarter.

Revenues from automakers, which account for about 20 per cent of revenues, are expected to have dipped by 70 per cent. The company’s operations were closed till mid-May, though it has scaled up gradually since then. The weak revenue performance dented profitability on the gross and operating levels, despite lower raw material costs. Operating profit fell 64 per cent, while margins were lower by 510 basis points over the year-ago quarter to 9.6 per cent. This was better than estimates because of lower other expenses. 

 

Margins could, however, come under pressure given the rise in lead prices, which have increased by 9 per cent since the June quarter. A part of this could be offset by passing on the higher cost in the replacement segment, which accounts for over half the revenue. While pick-up in volumes and operational benefits is the key trigger, lower costs, led by technology upgrades and other measures, could help soften the impact on margins.

Analysts at Kotak Institutional Equities highlight key concerns such as growth in the UPS segment (fifth of revenue), given the improving power availability in the country. Further, they add that the company’s limited expertise in lithium-ion technology and muted research and development investments, could hit growth potential, leading to a derating.

The stock gained about 5 per cent in early trade, but lost the gains, ending flat on Tuesday. Though brokerages have cut earnings estimates for 2020-21 and 2021-22 (FY22), the stock is expected to get support from undemanding valuations and a pick up in the replacement segment. The stock is trading at 9x its FY22 earnings estimates.