Kotak slashed its price target for Amara Raja to Rs 650 (from Rs 780 earlier) and Exide Industries to Rs 165 (from Rs 180) due to cut in EPS estimates amid COVID-19-led impact.
The brokerage believes steep correction in the stock prices does not factor in the steady nature of automotive replacement demand.
Amara Raja shares rallied 8.5 percent and Exide Industries gained 4.3 percent on March 31, after falling 44 percent and 38 percent respectively in last more than two months due to coronavirus-led sell-off.
Also, the COVID-19 forced the government to announced 21-day lockdown last week, which will have a major impact on earnings of these companies.
“We expect near-term demand scenario to remain challenging for Amara Raja Batteries and Exide Industries given the 21-day nationwide lockdown the country is under. However, we believe Amara Raja and Exide Industries are well-placed to recover some part of lost revenues as replacement demand will likely come back post the lockdown,” said Kotak.
Automotive replacement segment forms 38-49 percent of total revenues and 55-70 percent of EBITDA for Exide and Amara Raja respectively. Even during the 2008 global crisis, both Amara Raja and Exide Industries gross revenues grew by 17 percent YoY in FY2009 and 7 percent YoY in FY2010 mainly led by strong auto replacement segment demand.
“Also, organized players like Amara Raja and Exide Industries with strong balance sheets are benefitting from gaining market share from the unorganized segment,” said the brokerage.
Hence, Kotak expects Amara Raja revenues to grow by 5 percent CAGR over FY2019-22 led by (1) 7-10 percent revenue CAGR in 2-wheeler and 4-wheeler replacement segment, (2) 13 percent revenue CAGR in e-rickshaw segment and (3) 5 percent revenue CAGR in railways segments.
In case of Exide Industries, the brokerage expects revenues to grow by 1 percent CAGR over FY2019-22 led by (1) 3-8 percent revenue CAGR in 2W and 4W replacement segment, (2) 12 percent revenue CAGR in the submarine and e-rickshaw segment and (3) 3 percent revenue CAGR in UPS segment.
However, Kotak slashed its price target for Amara Raja to Rs 650 (from Rs 780 earlier) and Exide Industries to Rs 165 (from Rs 180) due to cut in EPS estimates amid COVID-19-led impact.
The brokerage has cut Amara Raja’s FY2021-22 EPS estimates by 13-16 percent led by (1) 10-12 percent cut in revenue growth assumptions mainly in the OEM and industrial segments and (2) 20-30 bps cut in EBITDA margin assumptions.
It has cut Exide Industries’ FY2021-22 EPS estimates by 7-20 percent led by (1) 10-12 percent cut in revenue growth assumptions mainly in OEM and industrial segments and (2) 100 bps cut in EBITDA margin assumptions.
Kotak has reduced its EBITDA margin assumptions for Amara Raja by 20-30 bps and Exide Industries by 50-100 bps only over FY2020-22E due to (1) duopoly nature of the industry with high pricing power in the replacement segment (B2C business), which has a fragmented customer base and (2) steep decline in lead prices over the past three months given global growth concerns on account of coronavirus pandemic offset by negative operating leverage.
Lead prices have corrected by 10 percent YoY (in USD terms) and 7 percent YoY (in INR terms) in Q4FY20.
Kotak believes the company will be able to retain most of the lower lead prices in the replacement segment, which will aid gross margins in the near-term.
Amara Raja Batteries was up Rs 33.35 or 7.40 percent at Rs 483.90 and Exide Industries gained Rs 3.95 or 3.11 percent at Rs 130.80 on the BSE at 1306 hours IST.