Replacement demand, spurt in UPS sales to support Exide's revenue

Margins, however, could be under pressure on higher raw material costs

Pick-up in replacement demand and higher uninterruptible power supply (UPS) sales helped Exide Industries report better-than-expected June quarter performance. Though revenues declined by 44 per cent as compared to the year ago quarter due to 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 auto makers which account for about 20 per cent of revenues is expected to have dipped by 70 per cent. The company’s operations were closed till mid-May and has scaled up gradually since then. The weak revenue performance dented profitability on the gross and operating profit 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 what brokerages had estimated due to lower other expenses. 

Margins could however come under pressure given the rising trend of lead prices which have increased by 9 per cent since the June quarter. Part of this could be offset by passing on the higher cost in the replacement segment which accounts for over half of revenues. 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.

While the Q1 show was better than estimates, analysts at Kotak Institutional Equities highlight key concerns such as growth in the UPS segment (fifth of revenues) given the improving power availability in the country. Further, they add that the company’s limited expertise in lithium-ion technology and muted R&D investments, could hit the growth potential leading to a derating.

While the stock gained about 5 per cent in early trade, it lost the gains ending flat on Tuesday. Though brokerages have cut earnings estimates for FY21 and FY22, the stock is expected to get support from undemanding valuations and a pick up in the replacement segment going ahead. The stock is trading at 9 times its FY22 earnings estimates.