 "Exide: Charged to gain from revival")
Exide Industries dominates the original equipment manufacturer (OEM) segment, with market share of 65-70 per cent. Given the momentum in automobile sales, the company should be able to see a rise in volumes. So far this financial year, passenger vehicle sales have risen 4.5 per cent, while the increase in two-wheeler sales is 15 per cent. For most sectors, sales in FY14 were either flat or lower than in FY13.
Analysts expect double-digit growth in FY15, led by a favourable base, an improvement in sentiment and latent demand. Nitesh Sharma of Reliance Securities believes Exide will post 23 per cent earnings growth through the next two years, given a volume-led revenue pick-up in the OEM segment, double-digit growth in the replacement market, a pick-up in the industrial sector and 200-basis point margin expansion.
The other trigger for the stock will be the passage of the insurance Bill, which will raise the foreign direct investment limit in the insurance segment from 26 per cent to 49 per cent. Exide Industries has 100 per cent stake in insurance arm Exide Life (in 2013, it had bought its erstwhile partner’s stake). While the business is profitable and does not require any investment from Exide, any divestment or sale could be a positive for the stock, as this will free cash for the company. About 11 per cent of Exide’s current valuation is attributed to the insurance business.
Strong recovery hopes
A large part of the run-up in the stock is on expectations there will be a recovery in the OEM segment, while growth in the replacement segment will continue to be steady. Exide is best placed to ride the OEM recovery cycle, with leading passenger vehicle makers Maruti, Honda and Hyundai sourcing 64-100 per cent of their battery requirement from Exide.
What is worrying is the loss in market share to smaller peer in the replacement segment. In the June quarter, while Amara Raja reported 15 per cent volume growth in this segment, Exide’s growth was muted---three per cent. The automobile segment accounts for about 65 per cent of Exide’s sales; two thirds of that is in the replacement segment. However, the company is expected to maintain its 30 per cent share in the replacement market, owing to new product launches, increased promotions in FY15 and a strong brand name. Analysts expect these measures to yield market share gains for Exide, albeit marginal. While growth in the replacement segment was 16 per cent between FY09-14, it is expected to stabilise at 11 per cent.
Also, it is expected the industrial segment, which accounts for 35 per cent of Exide’s revenue, will see a turnaround, as economic activity picks up in the second half of this financial year. Inverter sales have helped the company post growth of about 15 per cent in the industrial segment through the past five years. High inverter sales also helped the company post 18 per cent growth in revenue in the June quarter. During this period, the company also gained market share in the telecom segment.
Margin uptick
Driven by higher demand from automobile makers and increased volumes, the company is expected to benefit from higher capacity utilisation. Utilisation levels, currently at 70 per cent for passenger vehicles, are expected to rise to 85 per cent. Further, the sharpest turnaround is expected in the case of commercial vehicle makers, which bore the brunt of the slowdown. Increased off-take and utilisation should aid margin gains. The recent fall in lead prices should keep raw material prices benign in the short term. From current levels of about 14 per cent, margins are expected to rise to about 16 per cent by FY16.