Exide Industries: Growth and Visibility Deserve Premium: Overweight
Best way to play expanding India Auto space – 17%
upside potential: We expect Exide shares to continue
benefiting from strong battery demand in India. Our
Rs193 price target implies 17% upside from current
levels. Having increased its earnings at a 47%
compound annual rate in the past five years, Exide will
achieve a 25% earnings CAGR in FY10-13, we forecast.
We favor Exide for three reasons:
1. Best way to play auto consumption theme:
Given India’s 15 million car base, 80mn twowheeler
base and 15/20% projected growth, the
automotive battery segment should see strong
demand. We prefer to play the auto growth
story with Exide rather than OEMs, as it has
less competition and a better earnings profile
with higher margins and ROEs. Exide’s pan
India presence, relationships across OEMs,
and dominant market share should make it a
major beneficiary of such industry growth.
2. Backward integration to boost margins:
Exide currently sources 45% of its lead – the
key raw material for batteries – from captive
smelters and aims to raise this proportion to
70% by FY13. As captive lead is 10-12%
cheaper than externally procured lead is,
Exide’s margins should benefit accordingly.
3. High earnings visibility: Exide generates 36%
of its revenues from the auto battery
replacement market, where demand remains
steady; for instance, in FY09, replacement
demand rose 18% even as OEM sales fell 3%.
Valuation: Our sum-of-the-parts (SOTP) analysis yields
a price target of Rs193 for Exide. We value the core
business at 17x our FY12 EPS estimate, which we think
is justified by the rapid growth in the battery industry and
Exide’s strong brand and market share.
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