Near-term upsides capped

The Exide Industries’ stock had underperformed its closest peer Amara Raja Batteries’ and the Sensex over the last one year, thanks to a dismal performance in FY12. However, its stock is doing a catch-up lately and is up 13.2 per cent in the last one month, outperforming Amara Raja as well as the Sensex.

Analysts expect Exide to report better financials than Amara over the next two years, which has led to this recent run up, due to which they believe the valuation gap between the two for FY13 estimated earnings — Exide’s 17 times and Amara’s 10.6 times is likely to continue. However, the company’s current stock price at Rs 135 is not far from analysts’ average target price of Rs 153, and there are near-term headwinds which could cap further gains.

Exide’s revenues grew just 11.6 per cent in FY12, as price cuts in industrial and certain automotive batteries in September 2011 led to an unfavourable product mix, while demand in the auto replacement market was weak and pricing pressure continued in the auto OEM (original equipment manufacturer) segment. As a result, its operating profit margin reached a five-year low of 13.5 per cent.

Exide resorted to a further price cut (five-eight per cent) in April for passenger car, jeep and tractors. While it has raised prices across categories by 2.5 per cent (average) from June 1 due to rupee depreciation, analysts believe it is difficult to sustain.

WELL CHARGED
in Rs crore	FY12	FY13E
Net sales	5,111.0	5,981.0
% change y-o-y	11.7	17.0
Operating profit	687.7	935.9
% change y-o-y	-23.8	36.1
Net profit	461.0	651.8
% change y-o-y	-25.5	41.4
EPS (Rs)	5.4	7.7
P/E (x)	24.7	17.5
Source: Company, Analyst reports

Demand is not so much an issue for the company. While demand for the auto OEM industry is expected to remain soft in the near term, it may improve in the second half on account of the festive season, new launches and possible interest rate cuts. Demand in the replacement market, however, is expected to pick up in FY13 due to robust sales growth clocked by the auto OEM market three years ago.

The demand for industrial batteries is also expected to remain healthy, thanks to the power deficit scenario. Exide’s market leadership and pricing power are expected to help it achieve a higher sales growth (14.5 per cent CAGR in FY12-14, compared with 13.9 per cent estimated for Amara Raja) estimate analysts. The management has guided for a revenue growth of 15 per cent in FY13, led by 15-18 per cent demand from the replacement market.

But Jamshed Dadabhoy, analyst, Citigroup Global Markets, who initiated a ‘Buy’ on May 23 on Exide, with a target price of Rs 149, feels pricing action by competition could impact demand. Competition, he adds, is tough, especially from organised players (58.5 per cent of total domestic battery market).

Going ahead, Exide has guided for an operating profit margin of 16-18 per cent. Analysts expect better a profit growth of 20 per cent for Exide over the next two financial years, compared to their estimates of 16 per cent for Amara Raja. But that will depend on the rupee movement and lead prices going forward. Though lead prices are stable at around $2,000 per tonne levels (after correcting from the peak of $2,994), there are expectations of a 12-13 per cent increase by December due to slowing supplies. Also, the rupee movement is unpredictable.

Says Divyah Ahooja, analyst, Karvy Stock Broking: “The depreciating rupee will keep the raw material cost firm and impact margins.” Lead accounts for 83 per cent of the total raw material costs and 55 per cent of the total revenues. If Exide can increase the share of captive sourcing from over 50 per cent at present to more than 60 per cent in the next two years, margins will improve. Imports have come down from an average 27 per cent of total raw material costs between FY08 and FY10 to 19 per cent in FY12. Navin Matta, analyst, Daiwa Capital Market, expects higher volume growth but lower margins.

So, while the long-term story looks positive, there are some headwinds in the near term.