Our chat with Exide’s management confirmed our belief that 3QFY09 numbers (flat EPS despite a 12% volume growth in a crashing input cost scenario) do not reflect the operating performance of the company.
The plummeting lead price resulted in a temporary mismatch between actual lead cost and the contract pass-through with OEMs, resulting in realizations from OEMs being lower than costs.
But for this impact, the operational earnings for the quarter would have been up 30% y-o-y. The final leg of this phenomenon is likely to partly impact 4QFY09 earnings as well.
The true earnings potential will be visible in a relatively stable lead price environment; in fact, if the lead price was to rise again from current lows, it would improve realizations from OEMs (i.e. a reversal of the current phenomenon).
The 12% total volume growth was driven by auto replacement segment (up 20% y-o-y) and industrial batteries (up 17% y-o-y). The company continues to remain upbeat on the auto replacement segment.
The replacement purchase of batteries is viewed as a necessity rather than as discretionary spending and shouldn’t be negatively impacted, despite the current economic slowdown.
Demand from auto OEMs continues to remain soft. However, since sales to auto OEMs are low-margin, the slowdown is unlikely to have a significant impact on the bottom line.
We have trimmed our estimates to account for the lower than expected 3QFY09 results. Our target price of Rs70 is based on Rs60 for the core business based on 12x FY10 EPS (earlier 14x) and INR10 for the Exide’s 50% stake in ING Vysya life insurance.
Even if we assign a zero value to the stake in the insurance business, Exide is currently trading at 8.9x FY10 EPS. Any weakness in the stock due to lack of clarity on the 3QFY09 results should be viewed as excellent entry-points.