Stock Views on Infrastructure Development Finance Corp, Exide Industries

MERRILL LYNCH on EXIDE INDUSTRIES

Merrill Lynch maintains `Buy’ rating on Exide Industries, however, it has cut the target price to Rs 62 on a weak Q3. Exide Industries reported 30% below estimated PAT in 3QFY09 largely due to Rs 20 crore FX loss and in small part due to weaker sales. Merrill Lynch has cut EPS on slower demand, however, it maintains `Buy’ as

(1) FY10E EPS to grow 22% on falling cost and

(2) FY10E PE of 9.9x is close to trough valuation.

Exide Industries, the largest lead acid battery manufacturer of India, reported a net profit of Rs 56.1 crore, a growth of only 1.8% y-o-y in 3QFY09. This was the slowest growth in the last 15 quarters and is driven by

(1) volume growth of only 11% and

(2) foreign exchange loss of Rs 20 crore that reduced profit by 23%. Volume growth weakened considerably from the recent trend of over 15% growth due to slowdown in automobile demand. With FX loss accrued due to unhedged payables of over Rs 450 crore, Merrill Lynch still expects strong EPS growth of 220% in FY10E driven by

(1) lower cost of lead along with rupee appreciation could help expand EBITDA margin by 200 bps and

(2) demand growth of over 12% driven by market share gain in the relative secular segment of the automotive after market.

Thus far, FX loss on account of sharp depreciation of the rupee has been negating the impact of decline in lead cost.

GOLDMAN SACHS on IDFC

Goldman Sachs maintains a `Sell’ rating on Infrastructure Development Finance Corp (IDFC), despite a significant fall in price as lack of growth drivers over the medium term. Infrastructure lending should likely remain constrained by the need to maintain high capitalisation ratios; and capital market-driven revenues should likely remain depressed. A subdued contribution from capital market-related revenues will erode ROA from 3.1% in 2007 to 2.8% in 2008E and 2.4% in 2009E and 2010E, in our view. The constraint for IDFC in growing its balance sheet without additional equity capital infusion due to higher capitalisation requirement is well-known to the market. However, expectations, as implied by consensus estimates, remain high and could be driven by many factors including expectations of lower capitalisation requirement or a possible change in the structure of the company (although we note that the company has not stated any intention of a potential change in structure/form) over the medium term, in our view. Expectations of lower capitalisation requirements are unlikely to fructify until macroeconomic conditions improve.