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MOSL: EXIDE INDS - Earnings growth back post five-year flat run - Expect re-rating to historical levels - upgrade to Buy




Motilal Oswal Securities Ltd.


24 Jul 2014





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EXIDE INDUSTRIES: Earnings growth back post five-year flat run; Expect re-rating to historical levels; upgrade to Buy with 25% upside (EXID IN, Mkt Cap USD2.3b, CMP INR160, TP INR200, 25% upside, Upgrade to Buy) Management indicated improved outlook on both auto and industrial fronts, thus corroborating with our view based on industry interactions. We upgraded Exide Industries’ (EXID) FY15E/16E EPS by 11.7%/27% during 1QFY15 preview on improved demand outlook, initial signs of market share gains in replacement segment and consequent margin expansion on operating leverage. Expect the stock to re-rate to 18.5x (~10% premium to 10-year average PE of 16.6x) on 25.6% EPS CAGR over FY14-17E (v/s -2% CAGR over FY10-14). Stock trades at 18.4x/14.2x FY15E/16E EPS (adjusted for INR20 insurance valuation). Upgrade to Buy with a potential upside of 25%. Improvement signs in autos, PV bounces back in 1Q, MHCV decline moderates Initial signs of demand recovery are visible in autos. PV demand turned positive in 1QFY15 with 3% growth (13.3% in June 2014), post weak performance for the last three years. Decline in MHCV has also moderated (closer to flattish) as economic activity improves and drives a 10-12% increase in freight rates in CY14 YTD. Expect sharp 16% revenue CAGR in autos driven by OEM demand recovery and share gains in replacement segment (~40% of market is still unorganized). Channel checks suggest market share rise in replacement segment Our channel checks with dealers indicate that EXID has undertaken major initiatives, primarily in sales and service process, to gain share in the replacement segment. Major initiatives are faster service turnaround and improved focus on smaller but fast growing dealers. Economic recovery to drive improvement in industrial revenue Demand for industrial segment, comprising primarily of inverters, telecom, UPS, railways and infrastructure (power, traction), is highly linked with the economic activity. With an expected pick-up in macro recovery, we estimate industrial revenue to post a CAGR of 16.4% over FY14-17E. Improved demand outlook to drive 15.9% revenue growth Initial signs of demand recovery are visible in autos, with a sharp pick-up in PV demand and moderation in MHCV decline in 1QFY15. Demand in industrial segment is strengthening as the economic activity picks up. Expect revenue to clock 15.9% CAGR over FY14-17E, driven by 15.8%/16.4% growth in autos/industrial. Margins to rise from 13.8% in FY14 to 16.4% in FY17E Led by healthy revenue growth and benign outlook for lead prices, we expect EBITDA margin to expand by 260bp over FY14-17E. EXID is working aggressively on cost reduction measures, which provide upside risk to margins. Expect stock to re-rate to 18.5x on robust 25.6% EPS CAGR over FY14-17E Compared to -2% EPS CAGR over FY10-14, we expect EXID to deliver 25.6% EPS CAGR over FY14-17E. Our FY15E/16E EPS are 12%/23%, ahead of consensus. Expect the stock to re-rate to 18.5x (~10% premium to 10-year average PE of 16.6x) as earnings growth momentum returns. Upgrade to Buy with a target price of INR200, with potential upside of 25% Adjusted for INR20 for valuation of the insurance business, the stock trades at 18.4x/14.2x FY15E/16E EPS of INR7.6/9.7. We upgrade EXID to a Buy with a target price of INR200 (18.5x FY16E EPS), potential upside of 25%.

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