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Competitive pressures to increase for Exide

Competitive pressures to increase for Exide

  Exide Industries' stock hit its 52-week high last week as September quarter results were better than expected and analysts gave a higher valuation to its insurance business. Led by strong traction in automotive replacement segment as well as improving demand from auto makers, overall revenue growth was higher over the year ago period by 10.5 per cent. Demand from two-wheeler and four-wheeler manufacturers was up 20 per cent year on year. Though it is a lean season, the inverter battery segment too witnessed good demand. The company posted healthy Ebidta margins of 15.2 per cent, up 60 basis points year on year aided by a fall in raw material prices as well as tight control on costs. While raw material costs to sales was down 110 basis points to 61.1 per cent, there could be headwinds to margins as lead prices are up 10 per cent from September quarter levels and the company may take a price hike to offset the same. How the competition reacts will be critical for the increase to sustain.

Analysts at Geojit BNP Paribas Research say that automotive industry is witnessing a structural recovery and given the 60 per cent market share for Exide it will be a direct beneficiary of auto recovery led by higher income growth in rural and urban India due to Pay Commission pay outs as well as higher crop productivity. The passing of the GST bill would also help battery makers such as Exide as the organised segment, which accounts for 40 per cent of the market and sells at a 25 per cent discount due to tax evasion. GST will reduce tax rate from 28 per cent to 18 per cent.

While there are positives, analysts believe medium term outlook due to higher competition is a worry. Elara Capital analysts say that the company's dependence on inverter battery for growth is a concern given that the segment contributes 25 per cent to revenues. This will come under threat once Amara Raja ramps up capacities. Further on the auto side, higher margin auto replacement segment too could face some pressures with analysts believing that Exide's premium on pricing is likely to narrow and converge with that of Amara Raja. This is expected to impact both realisations and margins. Spark Capital analysts believe there is minuscule near-term margin benefit while return ratios will be impacted due to ongoing technology upgrades and cost cutting initiatives.

At the current price, the stock is trading at 21.2 times its FY18 earnings estimates. This is at a significant discount to peer Amara Raja due to lower Ebidta growth, capital allocation issues (in non-core areas such as insurance) and a strong parent and thus technological edge for Amara. Given the run up in prices, investors should await rebound in auto and industrial revenues before taking exposure to the stock.