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Exide Industries Ltd.
Leveraging strong car demand
Raising PO as strong car sales supports 16-18% 5 year growth
Exide management has expressed concern about near term prospects owing to
capacity constraints and consequent change in product mix in favour of less
profitable OEM battery. However, it is temporary and strong OEM growth seen
now should help sustain 16-18% growth in FY13-15e. We have cut FY11e EPS by
4%, but we have tweaked our FY12/13e EPS marginally. We have also raised PO
to Rs196 driven by rising visibility of 16-18% growth sustaining till FY15e. Our PO
is based on sum of (1) battery business of Rs184 at PE of 15.5x FY13e and (2)
Rs12 for insurance JV equivalent to 1.1x investment.
Capacity constraint hurts now but to ease off from FY12e
Exide is facing capacity constraint owing to (1) higher than expected increase in
OEM sales and (2) three month delay in pace of capacity expansion led by vendor
issues. Exide used to sell 150 replacement batteries for every 100 OEM battery.
However, this has changed to 110 replacement battery for every 100 OEM
batteries. Key positive is the relatively resilient margin despite mix change.
Three year replacement cycle benefit to kick-in from FY13
On an average, an automobile battery needs to be changed every three to four years.
In this cycle the demand for replacement batteries is estimated to grow by 4% in
FY11e and 6% in FY12e. However given expected new car sales growth of 25% in
FY10 and FY11, Exide should be assured of strong replacement demand from FY13.
Key risk is weaker telecom & power backup demand
Industrial battery contributing to 38% of FY10 revenue is struggling to achieve
15% growth and is the key concern. Key reasons being (1) slowdown in telecom
network expansion is reducing demand for tower battery back-ups; and (2)
improvement in electric supply is reducing demand for residential power backup.
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