The stock of Exide Industries is down 9% in three trading sessions on earnings downgrades brought on by weak March quarter results and the jump in capital expenditure for FY16. Analysts have cut their earnings estimates upwards of 4-8% for the next couple of years. The number of buys for the stock has also come down from 51% a week ago to 47% given the slew of recent downgrades. At the current price of Rs 164, the stock is trading at about 17 times its FY17 estimates, which is in line with Amara Raja's multiples.
The key disappointment for the Street has been the reported earnings in the March quarter which came in about 20% lower than estimates. This was due to slowing growth and lack of operating leverage. Revenue growth of just two% year-on-year as against an average growth of 20% over the last three quarters was due to poor inverter as well as sales to original equipment manufacturers (OEMs) or auto makers. OEM sales for Exide were lower both in four wheelers and two wheelers on the back of a weak quarter for auto makers resulting in a fall in market share of the company.
The positive takeaway, however, has been that replacement market for four wheelers and two wheelers continue to be strong with growth of 22% and 7%, respectively. Replacement segment fetches higher margins than auto OEM sales. The drag in the quarter have been weaker sales of inverters (20% of sales) due to less harsh summer, better power supply thus delaying demand. Going ahead, higher competition from Amara Raja which is planning to enter the home inverter segment in FY17 would have an impact on the company's profitability as Exide would have to spend more on marketing expenses and price its products lower, say analysts at Spark Capital.
While Exide had incurred a capex of Rs 300 crore in FY15, this is expected to jump two and a half times to Rs 800 crore in FY16. A large part of the capex is for technology upgradation as well as capacity additions which will increase its four wheeler capacity to 13.8 million units (from 12.2 million) and two wheeler capacity to 26 million (from 22 million). Analysts at Spark Capital say that capacity expansion plans are steep given that utilization is still 75%.
Apart from healthy sales in replacement segment, another positive in the quarter has been the improvement in the operating profit margins on the back of falling prices of lead, a key raw material and cost reduction measures. While average lead prices declined 8.5% in the December quarter, they declined a further 9.2% in the March quarter. This helped the company improve its operating profit margins by 300 basis points year-on-year to 14.4%. If the trend in lead prices continues, analysts expect another 20-30 basis points improvement in margins.
Analysts at IIFL Institutional Equities however say that margins are unlikely to sustain beyond the June quarter given that lead prices have bounced back 15% from the March quarter average. The company's inability to pass on the increase in excise duty in January also indicates a lack of pricing power, believe the analysts. So, it remains to be seen how Exide manages the current pricing situation.
Analysts at Emkay say a number of structural issues remain which will limit earnings growth and multiple re-rating for the stock. Higher OEM sales on demand revival is likely to impact margins while the company is likely to cede market share to Amara Raja in the replacement as well as OEM segments. Further, lower inverter sales as power supply improves in the country and technology up gradation costs over the next three years which would be a drain on the free cash flows would impact trading multiples of the battery business.
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