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Exide
Management Q&A:
We recently interacted with Mr T V Ramanathan, MD & CEO of Exide Industries.
Following is an excerpt of our discussion.
Q1) Is the slowdown in inverter demand on a y-o-y basis in Sep 2010 quarter
structural? I am keen to understand if the demand is declining because of rising
power supply situation in the country. This is important for us to know as inverter
battery demand is about 25% of your sales.
A) Inverter sales is seasonal and demand will recover from Feb2010. Key
demand driver includes (1) BPO expanding in Tier2/3 cities (2) Rising rural
income (3) Rising aspiration level.
situation in India.
If power situation improves then warranty cost will decline for Exide. The inverter
battery life is shortened from excess use and hence the places in which power
situation is very bad, the battery becomes dead before the warranty period
leading to higher warranty cost for Exide. In places like UP, Bihar and TN
warranty is 8-10% while in paces like Mumbai it is 0.1-0.2%.
Exide believes that there will be growth in inverter, but not as high as before. The
demand in Tier I cities will taper off as the power situation in these cities will
improve ahead of other cities. However, demand loss in tierI cities will be
compensated by demand pick up in tier2/3 cities.
In 5 years time, however contribution of inverter to sales mix will decline.
This is the reason why Exide will not be assuming too high growth for inverter in
its business plan for setting up capacity.
Q2) I understand that industrial battery sales continues to be sluggish for Exide.
However, given that infrastructure segment is less than 7% of total sales, the
impact is not as high for Exide as it is for Amara Raja. Please let us know if the
industrial battery demand is likely to improve in next six months.
A) Telecom battery demand is unlikely to recover in 2 years time. Overall
industrial battery including inverter will struggle to achieve 15% growth.
Q3) Exide has stepped up capex to address capacity constraint in automotive battery
segment. Please let us know when the benefit of additional capacity will accrue.
A) Benefit of capacity expansion is getting neutralized by stronger than estimated
growth in OEM sales. Also the pace of capacity expansion is slower than plan.
In Oct 2010, Exide added 55,000 per month battery capacity hoping that most of
the incremental volume will cater to replacement demand. However, OEM
demand increased by 40,000 m-o-m and squeezed out replacement.
Exide is also seeing 3-4month delay in capacity expansion owing to delay by
Capital goods supplier. Suppliers in Europe of key equipment have cut down
capacity and manpower owing weak demand and are not ramping up overall
capacity owing to subdued overall demand for capital goods.
Q4) Please let us know the extent of marketshare Exide has lost owing to
capacity constraint. Also please let us know the amount of capacity expansion
happening in various segments.
A) Exide used to sell 150 replacement batteries for every 100 OEM batteries in
4wh space. However, this has changed to 110 replacement batteries for every
100 OEM batteries. Demand is strong in replacement, but Exide is not being able
to meet it.
Even though Exide is losing marketshare in replacement owing to stronger
demand from OEM, the company is confident of regaining replacement
marketshare once new capacity comes up. The first replacement battery of a car
is invariably the one fitted along with the OEM battery. Exide believes it is easier
to have replacement marketshare than OEM marketshare.
A) Overall growth of automobile will be in excess of 16% and will be faster than
industrial unit growth.
Q5) Also sir, please let us know what is the current capacity of lead smelters and
how much additional expansion is being planned for the smelters.
A) Lead smelter will contribute 50% of lead consumption by Mar2011 from 47%
now and 70% in 2 years time.
Q6) Lastly sir, please let us know the status of proposed expansion of battery
range for truck/tractor market, which will help expand Exide's marketshare.
A) This will happen as per plan and will be launched in FY12.
Q7) What is the likelihood of Exide sustaining 23%+ EBITDA margin and 20%+
net profit growth for coming two years.
A) Exide standalone will have 21% EBITDA margin. Smelters may not see margin
expansion compared to FY10 level as FY10 profit was boosted by inventory gains.
Price objective basis & risk
Exide Indus Ltd (XEDRF)
Our price objective of Rs196 for Exide is based on sum-of-the-parts value
including Rs184 for its lead acid battery business and Rs12 for its 50% stake in
ING Vysya Life Insurance. We have valued its battery business at Rs184 per
share assuming that it will trade at a PE of 15.5xFY13E, similar to one year
forward PE auto OEM as the company's retail sales now forms bulk of profit. We
believe that rising visibility of 16-18% growth sustaining in FY13-15 owing to
strong new car growth being seen now will translate to strong replacement battery
growth in three years time. We have valued the life insurance business at Rs12
per share, based on 13x FY11E NBAP. Value of life insurance business arrived
above is also at an implied valuation of 1.1x the amount to be invested by Exide
by end FY12e. Risks to our price objective are a sharp increase in cost of lead
and increase in competition.
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