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Exide Industries Ltd.

April 29, 2013


BSE Code: 500086 NSE Code: EXIDEIND Reuters Code: EXID.BO Market Data Rating CMP (`) Target (`) Potential Upside Duration Face Value (`) 52 week H/L (`) Adj. all time High (`) Decline from 52WH (%) Rise from 52WL (%) Beta Mkt. Cap (` bn) Enterprise Value (` bn) Fiscal Year Ended
Y/E FY11A FY12A FY13E FY14E

Bloomberg Code:

EXID:IN

Exide Industries Ltd (Exide) is a leading manufacturer of lead acid batteries for automotive, telecommunications, UPS, naval and power applications. Exide manufacture the widest range of storage batteries in the world like lead acid batteries that ranged from 2.5 Ah to 20,400 Ah capacity. Exide enjoys a dominant position in the automotive battery segment with 72% market share in automotive batteries and 71% for Motorcycle Batteries and ~30% market share in the auto replacement. It also has ~30% market share of the power back-up segment.

BUY
139.0

160
~15.0%
Long Term 1 166/113 188 19.4 23.0 0.8 118.1 117.6

Investors Rationale

We expect Exide to post a CAGR revenue growth of ~19% over FY12FY14 driven by strong replacement demand for batteries to commence for automobiles sold between FY10-FY12. Exide reported a strong sales growth of 26% YoY in 9MFY13 that reflects the replacement demand remains buoyed.

Exide

continues to witness strong growth in the auto and industrial

battery segments, led by robust demand-pull on account of higher auto and industrial production and increased consumer spending. The company is also on an expansion spree and is expanding capacities across segments. Exide has expanded the two-wheeler, four wheeler and industrial battery capacity to 22.8 mn, ~10mn and 2,500mnAH respectively in FY13. We believe the capacity addition help Exide to meet the rising auto battery demand going forward.

Net Sales (`bn) EBIDTA (`bn) PAT (`bn) EPS (`) P/E (x) P/BV (x) EV/EBIDTA(x) ROA (%) ROE (%) One year Price Chart

45.5 8.8 6.6 7.8 16.6 4.3 13.4 24.9 26.0

51.1 6.8 4.6 5.4 25.6 3.9 17.2 15.9 15.1

61.7 8.0 5.1 6.1 22.8 3.4 14.7 15.6 15.1

72.5 10.1 6.7 7.8 17.7 3.0 11.6 18.5 16.9

Exide

has displayed a considerable amount of pricing power and has

increased prices in the recent times to offset the impact of higher lead prices and also plans to take further hikes in the range of 5-6%. The full benefit of the price hikes should help margin performance going forward.

Exide has agreed to acquire the remaining 50% stake in ING Vysya Life
Insurance for `5.5 bn. Going ahead the company intends to find another strategic partner for the life insurance business to cap its further investment in the insurance business.

Improvement in sales of diesel cars has helped to boost the realisation of


Exide as the diesel vehicle batteries are sold at premium to the petrol variant batteries. Enhancement in dieselisation of domestic passenger vehicle would help to maintain the realisation growth. Further, most of two wheelers are now coming with electric start and use VRL batteries which have short replacement cycle and thus the volume from the two-wheeler segment is expected to grow at a better pace.
Shareholding Pattern
Promoters FII DII Others

Dec12
45.99 16.69 13.29 24.03

Sep12
45.99 17.57 13.84 22.6

Diff.
(0.88) (0.55) 1.43

EIL has expanded its 2-W capacity to 22mn units in 9MFY13 from ~14 mn

Exide Industries: a leading battery maker of India


Exide Industries Ltd., manufacture the widest range of storage batteries in the world like lead acid batteries that ranged from 2.5 Ah to 20,400 Ah capacity, covering the broadest spectrum of application. Exide supplies batteries to automotive, industrial, infrastructure development, information technology and defense sectors. Exide has 7 battery manufacturing facilities in India, which excludes two Home UPS manufacturing facilities. During FY12, the company acquired home UPS system business of M/S Kevin Power Solutions Limited. Exide enjoys a dominant position in the automotive battery segment with 72% market share in automotive batteries and 71% for Motorcycle Batteries and ~30% market share in the auto replacement. It also has ~30% market share of the power back-up segment. The company also exports its products to Europe, South and South East Asia and other overseas markets either directly or through its subsidiaries. Exide sells its products under Exide, SF, Sonic and Standard Furukawa brands. In the international market, the products are sold under Dynex, Index and Sonic brands. Exide currently owns 50% stake in ING Vysya Life Insurance Company (IVL) and has decided to acquire the remaining 50% stake in IVL for `5.5 bn.

Exide is a leading battery maker of India with the widest range of storage batteries in the world like lead acid batteries that ranged from 2.5 Ah to 20,400 Ah capacity.

Exides product mix

Auto and industrial batteries demand scenario to remain robust


EIL is concentrating to increase 2wheeler VRLA batteries to meet the rising auto battery demand going forward and improve the forgoing realisation. EIL continues to witness strong growth in the auto and industrial battery segments post the economic downturn, led by robust demand-pull on account of higher auto and industrial production and increased consumer spending. This has been proved from the fact that EILs realizations has improved across the auto and industrial battery segments, that has helped offset the movements in input prices. Besides, EIL has planned to raise prices for replacement auto batteries by ~5-6% due to rising input costs (continuous hike in lead prices which is the main raw material). This reflects the companys strong pricing power and should help the company to improve margins.

EIL has been operating at ~90% utilization levels over the past five years. In order to meet the robust battery demand from both the automotive and industrial segment, the company has increased the two-wheeler and industrial battery capacity by ~6% (to 22.8 mn) and 4% (to 2,500mnAH) respectively in FY13. The expected four-wheeler battery capacity is to be ~10 mn in FY13 from 7.8 mn units in FY12. As a result of increased capacity, we believe EIL is well placed to meet the rising auto battery demand going forward.

EILs automotive batteries volume trend

Replacement demand is expected to remain robust


Exide to benefit from the strong replacement demand for batteries from two wheelers sold in FY10-11 that may come in the next two quarters and would inturn boost the margins of the company in FY14-FY15. Strong replacement demand from automobiles (likely from cars, trucks and two-wheelers) is set to benefit the battery manufacturers. Post the global economic turmoil, the demand for automobiles was strong, with the automobile sector sales posting a CAGR of ~19% over FY10FY12. So we expect the replacement demand from the vehicles sold during this period to remain sturdy over the next two years, as the life of battery continues over a period of around three years. During FY11, two wheeler sales grew ~24% YoY while, the passenger vehicle sales grew by ~29% YoY. So the strong replacement demand for batteries is round the corner to be spread over FY13-FY15 from automobiles sold in FY10-FY12. Thus, we expect replacement demand to remain strong in FY13-FY15. EIL, being the market leader, is likely to reap maximum benefits out of the replacement demand. EIL has high exposure to the OEM segment, which has a very thin margin, and continuously focuses towards improving the exposure in the replacement market which enjoys high margin. With the reputation of having richer product mix, EIL is better placed among its peers to exploit the expected replacement demand for batteries from two wheelers sold in FY10-11 that may come in the next two quarters and would inturn boost the margins of the company in FY14-FY15. Thus, we expect the companys EBITDA margin and PAT margin to improve to 13.9% and 9.2% YoY in FY14 against 13.4% and 9.0% in FY12.

Estimated automotive battery demand

Emphasis on batteries intended for diesel cars and two-wheelers to help improved realisation
Exide is continuously focusing towards technology upgradation and also acquiring new technology to meet the increasing demands of the customers and to maintain its dominancy. Structural shift in demand from petrol cars to diesel cars following the de-regulation of petrol prices has increased the demand of batteries meant for diesel cars. Significant increase in the petrol prices has severely impacted the sales of petrol based vehicle models. While the recent marginal increase in the diesel price is a step to narrow down the gap between price per litre of diesel and petrol, still the difference is huge, ~`22/lt. We expect higher sales of diesel cars will proved to be a major catalyst towards growth for the companies indulge in battery manufacturing, as diesel car batteries require higher cranking power compared to petrol car batteries. The average price of diesel car batteries are also sold at a ~70-100% premium compared to petrol car batteries, which will further boost the realisation. Consequently, the twowheeler segment witnessed a demand shift to automatic-start vehicles from kick-start vehicles. The two wheeler vehicles with kick-start facility are now having VRLA (valve regulated lead acid) batteries. The batteries have a shorter replacement cycle and the average price of VRLA batteries are priced at a ~50-60% premium compared to petrol car batteries, which will further aid the revenues of batteries manufacturers. In order to cash-in the burgeoning opportunities in the two-wheeler battery space, EIL has increased its capacity in two-wheeler batteries to 22 mn from 14 mn in FY13.

Sales trend of Passenger and Commercial vehicle

Hike in lead price and Rupee depreciation impacted the business


Exide has been able to take price increases to offset the impact of higher lead prices that reflects the companys strong pricing power. Lead is the main raw material for the battery manufacturers and constitutes ~75% of the total raw material cost. Overall 50-60% of the price is passed on to the customers. The hardening of prices of lead coupled with the high depreciation in the value of the Rupee against US Dollar is always a major concern and has a serious impact on the cost of the products and on the margins. However, considering the robust volume growth in replacement segment has partially offset the margin pressure. With the companys ability to pass on the increase in material costs to the customers has helped offset sharp volatility in lead prices.

Lead price and Indian Rupee trend

Robust Q3FY13 performance on healthy replacement demand


EIL recorded decent revenue growth 17.4% YoY for Q3FY13 mainly on back of healthy replacement demand, although OEM demand declined YoY. Exides overall sales growth during Q3FY13 was ~17% YoY to `14.6 bn, led by 25% YoY volume growth in the replacement market for automotive batteries. In two-wheeler replacement market, the company witnessed a 53% volume growth, however the OE segment remain subdued, though in line with the two wheeler vehicle Industry. Business for solar batteries recorded healthy growth of almost ~100 % while, demand for UPS batteries remained low due to the adverse weather condition during the period. Further, the volumes were hampered by slowdown in the economic growth and lower investment from the bulk customers like banks and other major players in the service sector. Operating profits however remain muted as it grew 1.3% YoY at `1.6 bn, while, OPM declined to 11.3% against 13.0% YoY, impacted by higher raw material cost as well as adverse currency movement. Flat operating profit growth coupled with rise in depreciation resulted to a marginal decline in PAT by 0.2% YoY to `1.04 bn. The sharp rise in the other income by 22.1% YoY to `121 mn has restricted the further decline in the bottomline.

` in mn Total Revenue EBITDA EBITDA Margin (%) Other Income Depreciation Interest PBT Tax PAT PAT Margin %

Q3FY13 14,632 1,647 11.3 121 289 11 1,469 428 1,041 7.1

Q3FY12 12,467 1,625 13.0 99 250 14 1,460 417 1,043 8.4

YoY (%) 17.4 1.3 22.1 15.5 (25.5) 0.6 2.5 (0.2) -

9MFY13 45,345 5,857 12.9 394 847 34 5,370 1,607 3,763 8.3

9MFY12 36,638 4,751 13.0 486 734 43 4,460 1,274 3,187 8.7

YoY (%) 23.8 23.3 (18.9) 15.4 (21.2) 20.4 26.2 18.1 -

Performance analysis:
Exides capacity addition programme and the price hike initiative will help to boost realisation further. Exide over the past two years has gone through a rough phase viz; loss of market share in the replacement segment, high cost inventory, contracting margins and the slowdown in the overall demand, affecting the companys performance. As a result, the financial performance of the company impacted significantly as the lower sales volume and realisation dragged the EBITDA margin consequently impacting the net profitability. However, EILs balance sheet remains strong as the company does not have debt on its books. Thus, despite operating margin contraction, the net margins are at reasonable 8-9%. Return ratios continues to be above 15%. The company has done capacity expansion in FY13 to capitalise on the strong replacement demand. We expect EILs performance to improve as the company has regained market share in the replacement segment in 9MFY13. EIL has increased prices in last Nov12 and in Feb13 and plans to take further hikes in the range of 5-6%. The price hike impact has yet to translate fully into the financials. Hence we expect realisations to improve in next 3-4 months.

Performance ratios trend

Balance Sheet (Standalone)


Y/E (`mn) Share Capital Reserve and surplus Net Worth Long term debt Long Term Provisions Current liabilities Deferred Liabilities Total liabilities Fixed Assets Non-Current Investment Loans & Advances(LT) Other Assets Non-current Tax FY11A 850 26,575 27,425 33 465 7,472 675 36,070 8,833 8,748 312 3 18,174 36,070 FY12A 850 29,724 30,574 41 542 8,962 825 40,944 9,932 9,066 175 9 21,762 40,944 FY13E 850 33,442 34,292 42 676 11,158 953 47,120 11,605 9,066 494 10 25,946 47,120 FY14E 850 38,645

Profit & Loss Account (Standalone)


Y/E (`mn) Net Revenue Expenses 39,495 43 795 10,496 910 51,738 12,582 Interest 9,066 580 11 29,500 51,738 Profit Tax Tax Net Profit NPM (%) Before 60 8,932 2,738 6,664 15.7 53 6,452 1,840 4,612 9.0 45 7,314 2,142 5,172 8.4 45 9,509 2,853 6,657 9.2 EBITDA EBITDA margin (%) Other Income Depreciation EBIT 8,786 19.3 1,041 835 8,993 6,839 13.4 673 1,007 6,505 7,960 12.9 526 1,127 7,359 10,078 13.9 700 1,224 9,554 FY11A 45,473 36,688 FY12A 51,070 44,232 FY13E 61,705 53,745 FY14E 72,503 62,425

Current Assets Total assets

Key Ratios (Standalone)


Y/E EBITDA Margin (%) EBIT Margin (%) NPM (%) ROCE (%) ROE (%) EPS (`) P/E (x) BVPS (`) P/BVPS (x) EV/Operating Income (x) EV/EBITDA (x) FY11A 19.3 19.8 15.7 31.4 26.0 9.4 16.6 32.3 4.3 12.0 13.4 FY12A 13.4 12.7 9.0 20.3 15.1 6.6 25.6 36.0 3.9 15.7 17.2 FY13E 12.9 11.9 8.4 20.5 15.1 7.4 22.8 40.3 3.4 13.8 14.7 FY14E 13.9 13.2 9.2 23.2 16.9 9.3 17.7 46.5 3.0 10.8 11.6 We believe the company is in a transitory phase to regain its market share and improve profitability and is a good long term bet considering the leadership position. Considering the above aspects, we rate the stock as BUY at the current market price of `139, which implies a P/E of ~22.8x FY13E EPS of `7.4 and 17.7x on FY14E EPS of `9.3 respectively.

Valuation and view


Strong replacement demand will be the key trigger towards the companys volume growth and realization. We expect EIL revenues to grow at a CAGR of ~19% over FY12-14. The focus on two-wheeler VRLA batteries and diesel vehicle batteries is likely to improve overall product mix and will further aid the revenues. During 9MFY13, the companys flagship products like Automotive Batteries, Motor-Cycle Batteries and ion ( applic12V-7/9Ah SMF VRLA Batteries) continues robust performance and are expected to maintain the momentum going forward.

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