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Exide Industries (EXIIND)
Market dominance, strong brand equity and multi-sector exposure
make Exide Industries (EIL) an attractive play in the domestic auto
ancillary sector. Due to EIL’s high market share in the auto (~70%) and
industrial (~45%) battery segments, we believe it will be a key
beneficiary of sustained growth of auto sales in FY11E, burgeoning auto
replacement market and higher infrastructure investment. Margins
would remain firm on the back of its backward integration initiatives
and higher proportion of recycled lead usage. We project revenues and
PAT to grow at 20.4% and 20.2% CAGR over FY10-12E to | 5498 and |
776 crore, respectively. We initiate coverage on EIL with BUY rating.
Robust demand from the auto OEM and replacement battery segments
With the strong growth of the domestic auto sector and large replacement
battery market, we estimate EIL’s revenues will grow at a 20.4% CAGR in
FY10-12E to | 5,498 crore. The company will benefit from its strong brand
equity, wide sales and service network and capacity expansion plans. In
the high margin auto replacement battery segment, EIL is expected to
garner major share of the total battery replacement, which is expected to
be an opportunity of ~40 million registered vehicles
(www.rtoaifmvd.com) for FY11-12E. Lastly, the company’s strong position
in the industrial battery segment provides a multi-sector exposure (power,
telecom and railways), helping diversify its clientele.
Backward integration bearing fruit
With EIL’s backward integration initiatives starting to bear fruit (in-house
smelters constituted ~42% raw materials requirements in FY10), we
expect the company’s margins to sustain at high levels (22.5% in FY12E).
Over the next few years, the company plans to further raise proportion of
recycled lead, thus reducing the margin volatility from changing lead
prices and improving its competitive position with higher pricing power.
Valuation
At the CMP of | 161, Exide is trading at 19.6x FY11E EPS of | 8.2 and
17.6x FY12E of | 9.1. We have adopted an SOTP-based methodology to
value the standalone business at 18x FY12E (| 164/share) and the rest of
the subsidiaries at | 20/share to arrive at a target price of | 184 with an
upside potential of 14%. We are initiating coverage on the stock with a
BUY rating
Company Background
Exide Industries Limited (EIL), established in 1947 as Associated Battery
Maker, is India’s largest manufacturer of lead acid batteries. The company
enjoys a dominant position in the domestic storage battery market with a
share of ~71% in each of the automotive original equipment
manufacturer (OEM) and the organised automotive replacement
segments. Batteries are sold by the company under the Exide, SF, Sonic
and Standard Furukawa brands.
In addition, EIL manufactures industrial batteries (capacity ranging from
2.5 Ah to 20,600 Ah) catering to the power, telecom and railways
segments, with an overall market share of 45%. Its dominant market
position in both the automotive and industrial battery segments is
supported by EIL’s wide distribution network of 13,850 dealer, four
regional offices and 28 branch offices. Further, the company operates six
factories in India in Maharashtra (two), West Bengal (two), Tamil Nadu
(one) and Haryana (one).
Although EIL is domestic focused with nearly 98% of revenues (FY10)
derived from India, the company has subsidiaries in Singapore, Sri Lanka,
United Kingdom and Australia. In recent years, EIL has acquired the lead
recycler Tandon Metals renamed as Chloride Metals Ltd and Lead Age
Alloys India to cope with the volatile international lead prices.
Headquartered in Kolkata, EIL has staff strength of nearly 3,000 personnel
Investment Rationale
We expect the auto battery segment to be the key driver for EIL’s
revenues over the next few years driven by the positive outlook for
domestic auto demand and the huge replacement demand from the
large base of registered vehicles in India. Topline growth will be further
supported by the robust demand for industrial batteries driven by the
significant power shortfall in the country and increased investment in
the telecom and railway sector. Consequently, we expect EIL’s revenues
to post a 20.4% CAGR over FY10-12E to | 5,498 crore. Volume sales are
estimated to increase at a 13.3% CAGR in FY10-12E to 2.8 crore units in
FY12 with a realisation improvement to the tune of 6.2% CAGR in FY10-
12E at | 1,956 per unit.
Dominant position in automotive segment
Strong replacement demand
The size of the domestic auto replacement battery market is nearly 2.5x
that of the auto OEM market. With the estimated registered vehicles in
India nearly doubling to 12.3 crore during FY03-FY10 (up 83%), we
believe robust growth opportunities exist for EIL due to its dominant
position in the organised replacement market (market share of ~71% vs.
~25% of the second-largest player Amara Raja Batteries). As batteries
have an average life of three years, we estimate ~40 million vehicles
(www.rtoaifmvd.com) will require battery replacement in FY11E-12E. Of
this addressable market, EIL is expected to capture a share of around 52%
due to the high market share in the organised sector. On the other hand,
the unorganised sector dominates the lower end of the market
(commercial vehicles and tractors), which is more pricing sensitive.
We believe EIL will benefit from the robust growth prospects of the
replacement market due to:
ƒ Its strong brand name, wide distribution network and sales and
services network
ƒ Growth of share of organised players in the passenger vehicle
segment in recent years due to higher disposable income, quality
consciousness among consumers and higher technology levels of
automobiles
ƒ Higher profitability of the replacement segment vis-à-vis auto OEM
segment (where the buyers enjoy significant pricing power)
Robust auto sales and strong OEM relationships to aid growth
The ever increasing volume play in the auto OEM segment presents
attractive growth opportunities for EIL given its dominant market position
(market share of ~71% in OEMs vs. 25% for the second-largest player
Amara Raja Batteries) and diversified client base across various segments
(battery supplier for passenger vehicles, two-wheelers and commercial
vehicles). EIL is the preferred brand for a majority of vehicle
manufacturers in India.
Domestic vehicle sales significantly slowed down in FY09 (up 0.7% vs.
CAGR of 10% during FY03-08) as a result of the economic slowdown and
the consequent reduction of bank lending. With the economy coming out
of the slowdown and the low sales base in FY09, domestic vehicle sales
have grown strongly in FY10 (up 26% YoY). As a result, vehicle
production growth was robust in FY10, driving growth of battery demand
by auto OEMs. We expect the automotive sector to continue growing in
FY11E-12E (CAGR of 15-16% in FY10-12E) fuelled by the improved
economic environment and increased disposable income (lowering of tax
slabs). The auto sector has exhibited sustained growth despite the
government’s move to remove the excise duty cut of 2% across product
categories from March 2010 onwards
As a consequence, we estimate EIL’s auto OEM segment sales volume
will grow at 14-15% CAGR in FY10-12E. We believe upside potential
exists in our forecasts due to the expected launch of new models by
almost all automotive companies during the next one or two years, which
would further propel the latent demand.
Strong brand recall
EIL’s strong brand equity makes it a preferred choice for auto OEMs and
retail customers. It enjoys excellent brand recall due to its large
distribution network (and strong sales and services network) and
aggressive advertisement and sales promotion activities, contributing to
its dominant position in the organised market, thus providing it pricing
power. Due to the pricing power, EIL was successful in maintaining
commendable margins even in FY08 despite high lead prices.
Wide distribution channels across India
EIL’s focus on expanding its distribution channels to Tier II and Tier III
cities is likely to provide the necessary push for market share expansion
in the replacement battery segment (especially from the large
unorganised sector). The company has 41,500 retail outlets to cater to the
demand. Currently, EIL is present in over 206 locations in India (vs. 30
locations in early 2008) through company-owned distribution centres that
feed in to its dealer network (13,850 dealers at present). The company
plans to expand to 250 locations by Q3FY11 and further to around 500 till
FY13. The company has also entered into distribution agreements with
Indian Oil Corporation, Hindustan Petroleum and Toyota Kirloskar to
expand its presence in the Tier II and Tier III cities.
The company has also started the innovative ‘Project Kissan’ initiative,
through which it plans to grow its share in the rural market by converting
the low cost unbranded batteries buyer into its own potential customer.
As of date, it has around 3,200 kissan dealers. The company has also
continued its unique ‘Humsafar’ module, which comprises a tertiary
distribution channel of garages and EIL’s dealers who sell batteries to
them directly, thereby improving after market reach. Currently, it has
around 23,000 humsafar partners.
Demand of industrial batteries to continue growing, led by power and
telecom sectors
The industrial battery segment accounted for 37% of EIL’s net sales in
FY10. With the substantial power deficit and growth of telecom
infrastructure in India, sales volumes of this segment have grown strongly
over the last four or five years. EIL’s revenue growth in this segment was
moderate in FY10 with a significant slowdown in the telecom subsegment.
We expect volume sales to grow at 12-13% CAGR in FY10-12E.
Substantial power deficit driving battery demand
India faces a huge power deficit with several cities facing daily power cuts
of as long as 12-14 hours. The government has laid down ambitious plans
to add 162 GW in the XIth and XII Five Year Plans. With a strong client
base, including Bhel, NTPC, ABB, etc. and market share of ~50% in the
power segment, EIL is well poised to capitalise on this opportunity. The
power segment constitutes nearly 45% of EIL’s industrial battery
segment’s revenues.
Despite the aggressive capacity addition plans, the power deficit is likely
to continue in India as actual capacity addition lags planned targets. The
peak power deficit in India was 13.3% in FY10 from 11.9% in FY09 (as per
the Central Electricity Authority). Power shortage along with rising
standard of living would lead to higher demand for UPS/inverters, thus
benefiting the company. We expect the UPS/inverter market to grow by
12-15% annually driven by sustained economic growth, led by the BFSI,
IT/ITeS, telecom and retail sectors.
Battery demand from telecom towers addition
The telecom sector accounts for ~25% of revenues of EIL’s industrial
batteries segment. We believe strong growth opportunities exist in this
space driven by addition of telecom tower infrastructure in India (370,000
by the end of FY12E, 7.5% CAGR in FY10E-12E) and replacement demand
from existing towers (average VRLA battery life of three to four years).
The total telecom subscriber base in India expected to touch 83 crore in
FY12E at 11.3% CAGR in FY10-12E (from ~67.0 crore at present) fuelled
by robust demand growth in rural and semi-urban areas. Hence, telecom
companies are likely to increasingly expand telecom infrastructure in
these areas, necessitating the requirement for storage batteries.
Attractive growth opportunities in railways sector
Indian Railways provides a stable income flow to EIL, constituting 15% of
the company’s industrial battery segment’s revenues. The government
had announced its plans to acquire ~18,000 wagons during FY11-12E to
operate new trains (and modernise existing network) and expansion of
the metro network in several Indian cities. According to the Economic
Survey of India, more than | 20,000 crore will be spent on building and
expanding the metro network in select Indian cities over FY10-12E. This
presents significant growth opportunities for Exide industries in this
space.
Favourable change in lead sourcing strategy
EIL’s EBITDA margins substantially expanded in FY10 (23.4% vs. 16.1% in
FY09) despite lead prices rising ~73% YoY to US$2,163 per tonne in
March 2010. Margin expansions were driven by the two lead smelters
acquired by the company in FY08-09 (42% of raw materials in FY10 were
met through these smelters), usage of recycled lead and the automatic
pass through agreements with auto OEMs. The management plans to
increase the share of in-house lead sourcing to 70% over the next two or
three years through the expansion of these facilities or acquisition of
additional smelting capacity. EIL has also completed the acquisition of the
remaining 49% shares in its smelting arm Leadage Alloys India to make it
a wholly-owned subsidiary.
Plans to raise manufacturing capacity
Exide plans to double the industrial battery capacity and increase its
overall battery capacity by ~29% in FY10-12E to 3.1 crore units in FY12E.
The company has been operating at high utilisation levels of ~90% for
the last five years. According to the management, capital expenditure
(capex) of | 400 crore will be incurred in FY11E, which is more than
double its average normal capex during FY09-10. Around | 80 crore
would be for setting up the new motorcycle battery plant in Ahmednagar,
Maharashtra. The Ahmednagar plant (expected to be commissioned by
March 2011) will have an annual production capacity of 0.7 crore
batteries, nearly increasing two-wheelers batteries production capacity by
0.58 crore and by 0.12 crore for four wheelers.
In March 2010, EIL raised around | 530 crore through the issue of five
crore shares to qualified institutional buyers (QIB), contributing to
earnings dilution (increase in number of shares by 6.3%). The proceeds
from the issue will be deployed for financing capex plans, long-term
working capital requirements, debt repayment, investment in subsidiaries
and latest backward integration acquisitions, etc.
Stake in ING Vysya Life Insurance adds to EIL’s valuation
During FY05, EIL invested | 257 crore for a 50% stake in ING Vysya Life
Insurance. The company has continued to infuse capital to maintain its
majority stake with a total investment of | 625.7 crore. The investment is
purely financial in nature with operational decisions of the business with
the ING Vysya group.
ING Vysya Life Insurance is already the 12
th
largest private player in India
and is expected to infuse further capital of around | 1,100 crore by FY12-
13E. It is targeting assets under management of | 20,000 crore (| 4,500
crore at present) and 5 million customers (1 million at present). In our
view, the insurance industry would greatly benefit from any move by the
government to implement the long awaited liberalisation of the sector
(raising FDI limit to 49% from the current 26%). With low penetration of
life insurance in India we believe this business has substantial growth
potential.
Recently, Gujarat Ambuja sold its stake of 12% in the company at around
|190-200 crore, valuing the company at ~| 1625 crore (per share value of
| 9.8).
We have assumed 19.5% CAGR FY10-12E for the new business premium;
the premiums are expected to gain visible traction in FY12 in line with the
strong expansion plans of the management. The new business achieved
profit (NBAP) margin (14%) and NBAP multiple (14x) has been taken on a
lower spectrum to the industry to reflect its present underperformance.
We have estimated annualised premium earnings of | 898.5 crore in
FY12E and value of business at | 1,761.1 crore. Hence, we have arrived at
| 10.4 per share value for EIL’s stake.
Risks and Concerns
Loss of market share due to increased competition
EIL’s dominant market position is challenged by the increased
competition in the domestic market. International majors have entered
India through JVs (Johnson Controls with Amara Raja Batteries, Exide
Technologies with Tudor and Tata Autocomp with GS Yuasa). EIL faces
considerable competition in the domestic market from Amara Raja
Batteries, Tudor and HBL Power in addition to the large number of players
in the unorganised sector. In the two-wheeler segment, AMCO holds the
highest market share (40% in OEM segment), followed by EIL.
Although EIL’s installed production in FY10 was 2.6x larger than the
second-largest player (Amara Raja Batteries), we believe the latter’s
aggressive capacity expansion in recent years (39% CAGR in FY05-10 vs.
10% for EIL) and sales promotion activities may translate to higher market
share in the future
Loss of market share in replacement segment from imports
Increased import of low cost batteries from China may result in EIL losing
market share in the highly competitive and price conscious replacement
segment.
Demand slowdown
The domestic automotive industry has witnessed robust demand in
H1FY11 and is anticipated to remain strong at around 14% CAGR in FY10-
12E. However, with the rising domestic inflation and risks of a global
slowdown on account of a possible double dip recession, the industry
could see a slowdown in the volume growth. This would have an adverse
impact on the company’s performance.
Margin contraction due to higher lead prices
EIL has acquired two smelters in recent years to de-risk itself from volatile
international lead prices; however the contribution of original lead in total
raw materials costs is still high at 50-60%. A significant rise in lead prices
would lead to margin contraction and earnings reduction, going forward.
As per our sensitivity analysis on changes in RM/sales ratio on EIL’s
EBITDA and EPS, we estimate that a 1% movement on RM/sales ratio on
either side will result in EPS volatility of 4.9% and 4.4% in FY11E and
FY12E, respectively, vis-à-vis our base case.
Rupee depreciation can result in lower profitability
A significant depreciation of the rupee can result in margin contraction as
EIL imported nearly 25% of its raw materials in FY10. In FY10, the average
|/$ rate was 47.8, a 3% depreciation from the average rate in FY09. In this
fiscal FY11 till date the |/$ has been on an average at 45.63 in comparison
to 47.83 in FY10 YTD, a depreciation of 4.6% on a YoY basis.
Financials
Revenues to grow at a 20.4% CAGR in FY10-12E
We project EIL’s revenues will grow at 20.4% CAGR during FY10-12E to |
5,498 crore driven by sustained battery demand from the auto OEM and
replacement segments (due to large base of registered vehicles and EIL’s
leading position in the organised market). Growth will be supported by
the strong demand for industrial batteries. EIL enjoys significant pricing
power in the auto replacement and industrial battery segments due to its
strong brand name and distribution network.
In FY10, EIL’s revenue growth was moderate at 11.8% YoY to | 3,794
crore. Automotive battery sales grew by 13% YoY while industrial battery
sales grew by ~10%. In the industrial battery segment, infrastructure
sales declined by 10% primarily due to the 35% de-growth of telecom
sector sales. On the other hand, sales growth was robust for power (up
36% YoY) and railway (up 17% YoY) sectors in FY10.
EBITDA margins expected to sustain at high levels
Driven by the successful backward integration (42% of lead requirements
were met through its two smelters in FY10), higher production volume
and strong pricing power enjoyed by EIL, EBITDA margins expanded by
740 bps in FY10 to 23.4%.
With the anticipated increased usage of recycled lead by the company
(70% of total lead requirements over the next two or three years), we
believe that margins sustaining at the current high level is a reasonable
assumption. We expect the company to report EBITDA margin of 22.0%
and 22.5% in FY11E and FY12E, respectively. Consequently, we expect
EIL’s EBITDA to grow at 18.1% CAGR in FY10-12E to | 1,240 crore from |
889 crore in FY10.
Return ratios to marginally decline
Return ratios have seen a steady improvement as a result of the higher
profitability though the company has expanded its equity base (~| 530
crore raised through the QIB route in March 2010). However, we expect
return ratios to marginally decline in FY11E-12E primarily due to the
significant investment to boost the manufacturing capacity along with
increased backward integration activities
Valuations
We have valued the company on an SOTP basis, evaluating the
standalone business, the value of its subsidiaries and investment in ING
Vysya separately.
We have valued the standalone business at 18x FY12E EPS of | 9.1 to
arrive at a per share value of |164 for the core business. Its nearest
competitor Amara Raja is trading at 9.3 FY12E. We believe the premium is
justified given over exposure of Amara Raja to telecom infrastructure
sector which is currently facing overcapacity, Exide’s dominant market
share, higher margins and wider distribution network. At the CMP of |
161, the stock is trading at 19.6x FY11E standalone EPS of | 8.2 and 17.6x
FY12E of | 9.1.
We have valued the subsidiaries at | 10/share (assuming 80% discount to
Hindustan Zinc Market Cap/sales multiple for smelting businesses) along
with a P/BV valuation of 1.0 for rest of the subsidiaries. We have valued
the 50% stake in ING Vysya at | 10/share using a NBAP multiple of 14x.
Our SOTP target price of |184 discounts FY11E and FY12E standalone
EPS by 22.4 and 20.2, respectively. We initiate coverage on Exide
Industries with a BUY rating.
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