Buy Exide Industries, target price Rs 205: Edelweiss

Edelweiss has given a buy rating to Exide Industries Ltd with a target price of Rs 205. The share price moved up by 0.28 per cent from its previous close of Rs 158.30. The last traded stock price is Rs 158.75.

Exide Industries missed the brokerag's Q4FY20 sales estimates by 12 per cent. sales dipped 20 per cent year on year as automotive OEM and home UPS sales suffered from demand uncertainty and a late summer, not to mention the lockdown. Gross margin, though, expanded 310bps year on year due to softer lead prices. EBITDA contracted 28 per cent year on year (10 per cent below estimate) owing to higher staff expenses. The Covid-19 fallout prompted the brokerage to cut FY21/22E EPS by 29/13 per cent. The replacement nature of the business may, however, drive a surge in FY22 battery volumes beyond the FY20 peak. In FY21, gross margin would hold up as lead prices are likely to remain soft.

Investment Rationale

According to the brokerage, gross margin rose ~310bps year on year to 38.2 per cent due to softer lead cost. EBITDA weakened by 28 per cent year on year on account of a 7 per cent year on year increase in employee expense. The brokerage believes gross margins would sustain ahead as lead prices have softened further with no corresponding pass-through. Also, with cost control via cut in salary cost of 15-30 per cent and technology upgradation, the brokerage anticipates margins to improve from the current lows. Exide Life posted a profit in 4Q (seasonal) of Rs 1.14 billion but a PBT loss of Rs 153 million for full year FY20.

The replacement nature of business may cause FY22 volumes to surge beyond the FY20 peak. In the near term, given the Covid-19 shock, the brokerage is cutting FY21/22E EPS by 29/13 per cent. It is raising the target PE from 15 times to 18 times FY22E EPS, in line with peer Amar Raja, and Exide’s ten-year average. The brokerage maintains a buy rating with a revised target price of Rs 205. It values Exide Life at 1 time September 2019 EV.

Financials

For the quarter ended March 31, 2020, the company reported consolidated sales of Rs 3474.68 crore, down -2.22 per cent from last quarter sales of Rs 3553.64 crore and down -18.46 per cent from last year same quarter sales of Rs 4261.53 crore. The company reported net profit after tax of Rs 235.76 crore in the latest quarter.

Promoter/FII Holdings

Promoters held 45.99 per cent stake in the company as of March 31, 2020, while FIIs held 9.41 per cent, DIIs 23.48 per cent and public and other 21.12 per cent.