Exide - all charged up!; initiating coverage; Buy :: Edelweiss

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Exide (EXID IN, INR 155, Buy)

n  Brand centric businesses to the fore

Exide has steadily transformed itself from an OEM-focused ancillary to a strong consumer brand. The company’s branded businesses—automobile battery replacement and inverter segment (>65% of revenue; ~80% of EBITDA)—with strong brand recall, robust distribution, high FCF generation, and low demand volatility have more similarities with FMCG companies than an auto ancillary/ OEM player. This, in our view, justifies valuation premium over the auto sector.

n  Key beneficiary of robust replacement demand

With strong growth in car volumes in the past few years (CAGR of 16% in FY06-11E) and a gradual shift towards organized sector, we expect the automotive replacement battery market to grow at a CAGR of 17% in FY10-12E. Exide, with its strong brand equity and critical mass, has created strong entry barriers for new entrants. With the company continuing to invest in its distribution network, we expect Exide to be a key beneficiary of the growth.

n  Industrial segment: Maintaining momentum

Exide’s industrial segment (~37% of sales) has grown at a fast clip (27% CAGR over three years) with the inverter segment driving performance. With the power demand supply gap expected to persist in the medium term, demand for inverters is expected to remain strong.

n  Backward integration gives further competitive edge

Exide’s acquisition of two smelter companies gives it access to a stable supply of low cost raw material - a clear competitive advantage. Further, the proportion of in-house smelters in lead supplies is likely to increase to 70% by FY13E (45% currently); the cost benefits provide a buffer to our estimates.

n  Outlook and valuations: Positive; initiate coverage with ‘BUY’

We expect Exide’s bottom-line to post 22% CAGR between FY10 and FY12E, driven by strong top-line growth and sustained high margins. In addition, with strong cash flows (comparable with FMCG companies), we believe the company deserves premium valuations to the OEM/ auto ancillary space. We initiate coverage on the stock with a‘BUY’ recommendation and a SOTP based target price of INR 190 implying an upside of 23% from current levels.