Weak OEM, Telecom impacts revenue growth; Mix, decline in RM drives margins
* First revenue decline since 1QFY10:
Revenues declined by 1% YoY to INR15.7b (our est. INR16.9b), impacted by lead price pass-through (in 40-50% of the business). The healthy volume growth in aftermarket (4W – 11-12% YoY, 2W – 18-20% YoY) and exports (15-20% YoY) was offset by ~10% YoY decline in automotive OEM and flat volumes in the industrial segment, even as telecom volumes declined 10-15%.
* Product mix and decline in lead prices help EBITDA margins:
Gross margins improved 200bp QoQ (+350bp YoY) to 34.8% (our est. 32.4%) led by favorable product mix and decline in lead prices (~13% YoY, flat QoQ). It has not taken any price increase in the aftermarket segment in 4QFY19. EBITDA margin expanded 60bp QoQ (+220bp YoY) to 15.5%, while Adj. PAT grew 8.7% YoY to INR1.19b (INR1.24b). FY19 revenue/EBITDA/adj. PAT grew 12%/7.8%/2.6%.
* Takeaways from management interaction:
(a) Market share in telecom segment was stable at ~55% in 4QFY19; it gained 0.5-1% share in auto OEM and replacement segment in FY19, (b) realized lead priced at INR154k/t in 4QFY19 (v/s INR150-152k/t in 3QFY19), (c) capex guidance of INR4-5b for increasing 4W capacity by ~4m units to 14.5m, 2W capacity by 3m units to 17m and ~30% increase in tubular battery to 1.3m units, (d) It plans to launch tubular batteries for E-rickshaw applications in the next few months.
* Valuation and view:
We cut FY20/21 EPS by 8%/12% as we trim revenue estimates by 7%/10% due to weaker auto OEM outlook and weak lead prices. We expect the replacement market growth to remain strong for organized players; some stability in telecom segment volumes and soft lead prices should support margins. With exit of Johnson Control, promoters are expected to play a pivotal role in the long-term strategy as well as in technology sourcing. We estimate revenue/ EBITDA/PAT to grow 10%/15%/16% CAGR (FY19-21E). The stock trades at 18.8x/16.4x FY20E/21E EPS. Maintain Buy with a TP of INR761 (20x Mar’21 EPS).
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