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Low capex will power Exide scrip

BofAML expects Exide to benefit from expansion of market share in FY12.

Written by Fe Bureau |
July 7, 2011 3:14:13 am

The financial year’s annual report illustrates adverse impact of a rise in lead cost on smelting and adverse impact of capacity constraint on profit margin. These concerns are likely to ease owing to stable lead prices and the addition of capacity along with an OEM slowdown. We expect Exide to re-rate owing to expansion of the Ebitda margin by 130 bps q-o-q to 20% in Q1FY12e. We also expect the stock to re-rate on stronger cash flow in the second half of FY12,owing to a decline in capex.

Ebitda margin of Exide’s lead smelters declined to 5% in FY11 from 10% in FY10 owing to a sharp jump in the cost of scraps. We expect the profit margin of smelters to bounce back in FY12,largely driven by a decline in cost of scrap relative to lead,owing to the reduced volatility of lead price and higher in-house collection. Cost savings from proposed smelter modernisation is also a positive.

Exide is seeing stronger replacement battery growth as the current slowdown in OEM demand on account of higher interest rates has freed up capacity. We expect the ratio of replacement-to-OEM batteries to rise from 1.11 in Q4FY11 to 1.56x in Q1FY12e.

This situation is temporary,but additional capacity will become available in H2FY12 that will lead to a sustained rise in replacement battery mix.

While we expect Exide to benefit from expansion of market share in FY12,owing to an easing of capacity constraints,the company should benefit from a stronger replacement cycle in FY13 and FY14,which is linked to 25% car sales growth in FY10 and FY11.

Our price objective of R196 for Exide is based on a sum-of-the-parts value including R184 for its lead acid battery business and R12 for its 50% stake in ING Vysya Life Insurance.


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