We cut Exide Industries' rating to under perform following a 20% slippage in Q2FY13 profit driven by weaker ebitda margin. We also lower our price objective to Rs 139 (Rs 172 earlier) based on a sum-of-the-parts value including Rs 124 for its lead acid battery business and Rs 15 for its 50% stake in ING Vysya Life Insurance to factor 12% and 15% cut in FY13e and FY14e EPS, and lower P/E of 14x FY14e, which is in-line with trough P/E seen for last three years.
Exide, India's largest automotive and industrial battery company, is facing intense competition to sustain market share. Despite better product mix and foreign exchange gain of Rs 139.6 million, Exide reported 12.4% ebitda margin in Q2FY13, which was below our expectation of 15.3% margin and was also lower than Q1FY13 ebitda margin of 15% the company had reported. This was the fifth such quarter in row having margin disappointment. Key factor, which led to decline in margins, was high sales expenses to regain market share. Other factors that led to fall in margins include more than 20% increase in electricity cost, higher advertisement cost of Rs 120 million, a 2%-increase in lead cost, and higher freight cost following diesel price hike.
Exide continues to target ebitda margin of 18% once it recovers and sustains its market share. The company managed to gain back its lost market share in auto replacement battery to around 29% in September 2012. However, it needs to sustain it at least for six months after which it should be able to cut back on its advertising and dealer commissions. Recent price hike of 5% could boost margin to 15%. However, key competitor Amara Raja having advantage of 50% cheaper power tariff may not match Exide’s price hike causing Exide to roll back.
We expect Exide to incur higher sales expense to regain and sustain market share, which should lead to subdued margin recovery despite a low base. We expect the stock to derate down to its trough P/E owing to subdued margin recovery than past cycles. Value of life insurance business arrived is at an implied valuation of 1.1x the amount to be invested by Exide by end FY14e.