India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Exide Industries Limited
All charged up!
Investment rationale
Undisputed leader in the OEM segment
Exide Industries Limited (EIL) is the undisputed leader for automobile batteries
in India with a market share of 75% in the OEM segment. EIL's almost
monopolistic position in auto batteries clearly makes it the biggest beneficiary
from the uptrend in the Indian auto industry. Its ability to maintain high margins
in a rising commodity scenario (whilst gaining market share) is testimony of
the strength of brand "Exide".
Replacement demand - The key driver!
Over the last eight years, the Indian domestic automobile industry has grown
at a CAGR of 14%. On an average, every vehicle battery is replaced after
three years. This augurs well for EIL since it has a 68% market share in the
organized battery replacement market (which is approximately 50% of total
replacement market). An inherent advantage that EIL enjoys is that
approximately 3/4th of the vehicles on road already have EIL batteries and
when they come up for replacement clients usually prefer the same brand.
Captive lead - Helps sustain high margins!
The company currently meets 45% of its lead requirement from its two captive
smelters and plans to increase the contribution to 70% within the next two
years. This would not only reduce its exposure on foreign exchange volatility
(20% of lead is still imported) but also entail significant cost benefits as
captive lead is estimated to be almost 10% cheaper.
Valuation and outlook
After adjusting for the value of company's major subsidiaries and stake in
ING (valued at INR9 and INR10 per share, respectively), the CMP of INR164
discounts our FY11e and FY12e earnings of the core battery business by
17.5x and 14.6x respectively. We believe that the company is the best proxy
for the underlying buoyancy in the Indian automobile industry and hence
justifies the premium valuations. This also provides strong earnings visibility -
we estimate FY10-13e earnings CAGR of 23%. We recommend a BUY with
an SOTP-based target price of INR198, which provides a 21% upside.
Investment rationale
Undisputed leader in the OEM segment
Over the years, Exide Industries Ltd (EIL) has emerged as the most preferred brand for
batteries in the Indian Auto industry. The Automotive segment accounts for around
68% of EIL's total revenues. The company supplies batteries to all segments in the
automobile industry i.e., cars, CVs, UVs, tractors and two-wheelers. Within the OEM
segment passenger vehicles accounts for 50%, two wheelers for 30% and CVs for the
balance 20%. The list of clientele includes all the leading players such as Maruti
Suzuki, Tata Motors, M&M, Hyundai Motors, General Motors, Toyota, Honda, Ashok
Leyland, Hero Honda, Bajaj Auto, John Deere etc. The company is also the sole
supplier to the Nano and thereby supplies batteries to most leading OEM.
EIL is the market leader in the OEM segment with a market share of over 75%, driven
by its strong brand image and product range. It has a range of well established
brands like EXIDE, SF, SONIC and Standard Furukawa that caters to the domestic
clients. In the overseas markets, the products are sold under brand names like DYNEX,
INDEX and SONIC brands. Besides its strong R&D base, EIL has a technical
collaboration with Shin Kobe Denki, Japan and Furukawa Battery Company for
automotive technology. This has enabled EIL to constantly upgrade its product mix
and launch new products which find usage across diverse segments.
Given EIL's dominant market share in the OEM segment and its superior distribution
network in the replacement market, EIL is poised to be the biggest beneficiary of the
uptrend in auto industry volumes. This will also help to sustain its overall revenue
growth as automobile industry accounts for 68% of its total sales.
Replacement demand - The key driver!
Over the last seven years, Indian domestic automobile industry has grown at a CAGR of
11% and in the last two years (FY10 and YTDFY11) it has been over 20%. This trend
augurs well for EIL which benefits from the replacement demand for batteries given that
on an average, every vehicle battery is replaced after three years. Hence, in addition to
the growth accruing from new models through OEMs, demand from the fast growing
higher margin replacement market will provide an impetus to the company's profitability.
Within the replacement segment passenger vehicles accounts for 65%, two wheelers
for 20% and CVs for the balance 15%. Penetration of the commercial vehicles and
tractors segments are much smaller in the replacement segment since they are largely
dominated by the unorganised market. However, with the organised players
strengthening their presence in rural markets, the contribution from the unorganised
sector (currently 50% of the battery replacement industry) is gradually reducing.
EIL has a 68% market share in the organized battery replacement market (which is
approximately 50% of total replacement market). An inherent advantage that EIL
enjoys is that approximately 75% of the cars already have EIL batteries and when they
come up for replacement clients usually prefer the same brand. We estimate the
revenue contribution from the same to increase from 36% in FY10 to 39% in FY12e as
the company targets the untapped CV and tractor replacement markets currently
dominated by the unorganised players.
In addition to the strong brand image that the company enjoys, EIL's success in the
replacement segment is further strengthened by its extensive distribution network
christened "Exide Care". There is scope for further penetration into the tractor and CV
battery market as it still remains largely unorganised.
Besides enabling growth in volumes for EIL, the replacement market also augurs well
for the profitability of the company as the segment enjoys higher margins as compared
to the OEM segment.
With a view to further increase its penetration across India, EIL has further expanded
its marketing and distribution set up by increasing the number of marketing offices to
around 200 as compared to 30 earlier. It has undertaken "Project Kissan", which
largely targets the rural customers by increasing the awareness about brand Exide. It
has also entered into arrangements with IOC, HPCL and other OMCs for distribution
of its products through their retail outlets. This will significantly help EIL to extend its
presence across Tier II and Tier III cities, given that the three major OMCs (i.e., IOC,
HPCL & BPCL) combined have over 38,000 petrol pumps across the country.
Captive lead - Helps sustain high margins!
Lead is the primary raw material for EIL and it meets a significant proportion of its
lead requirements through imports. Lead accounts for 70-75% of the total cost of a
battery. Of the total lead requirements, 60-65% is pure lead and the balance is lead
alloys. Lead is imported from Australia, China, Europe, etc. and 100% of the lead
procurement is on a spot basis. Domestically, the company procures lead from Hindustan
Zinc Ltd., which too is primarily on a spot basis.
The volatility in lead prices in the global markets coupled with the volatility in foreign
currency has a direct bearing on EIL's operating costs. To reduce its exposure on
foreign exchange volatility, EIL has increased its lead off-take through captive sources
which also provides cost benefits in lead sourcing. EIL has two smelting units with a
total capacity of 36,000 tonnes per annum. It acquired 100% in Tandon Metals
(erstwhile Chloride Metals Ltd), Pune in October 2007. It also acquired 51% stake in
Leadage Alloys, Karnataka in June 2008 and recently hiked it to 100%.
The company currently meets 45% of its lead requirement from its captive smelters and
plans to increase the contribution to 70% within the next 2 years. This would not only
reduce its exposure on foreign exchange volatility (20% of lead is still imported) but
also entail significant cost benefits as captive lead is estimated to be almost 10%
cheaper.
Valuation and outlook
After adjusting for the value of the company's major subsidiaries and stake in ING
(valued at INR9 and INR10 per share, respectively), the CMP of INR160 discounts
our FY11e and FY12e earnings of the core battery business by x and x respectively.
We believe that the company is the best proxy for the underlying buoyancy in the
Indian automobile industry and hence justifies the premium valuations. This also provides
strong earnings visibility - we estimate FY10-13e earnings CAGR of 23%.
We recommend a BUY with an SOTP-based target price of INR198, which provides a
21% upside from the current levels.
No comments:
Post a Comment