Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Exide Industries
Leading the growth charge
Market leader in lead acid storage batteries; oligopoly market
We initiate coverage of Exide Industries (Exide) with a Buy rating. Exide
manufactures automotive and industrial batteries catering to the auto and
infrastructure sectors. The auto storage battery market is a growing one and a near
oligopoly in India—Exide dominates with a 72% market share.
Has consumer business characteristics and a strong growth outlook
We believe Exide is more akin to a consumer than an auto component company.
We estimate more than 80% of Exide’s earnings come from the auto aftermarket
and home inverter segments—where branding and distribution are critical. We
forecast FY09-11 volume CAGRs in the two-wheeler (2-W) and passenger vehicle
(PV) markets at 26% and 27%, respectively. This reflects our strong outlook for
replacement demand. We think Exide is well-placed to benefit from growth in the
auto aftermarket and power backup segments, given its strong brands and
distribution.
Non-cyclical and high earnings growth, attractive ROEs
We forecast an FY11-13 earnings CAGR of 23%, driven by a 19% CAGR in
revenue and a 270bp improvement in the company’s EBITDA margin. Exide has a
net cash balance sheet and we estimate an attractive FY11 core return on capital
employed (ROCE)/ROE of 63%/45%. We believe its earnings sensitivity to any
slowdown in OEM automotive sales in FY12-13 is negligible.
Valuation: initiate coverage with Rs162.00 price target
We derive our price target from a sum-of-the-parts methodology—16x FY12E PE
for Exide’s core storage battery business, to which we add value for its stakes in
subsidiaries and the insurance business.
Investment Thesis
We initiate coverage of Exide with a Buy rating and a Rs162.00 price target—
23% above its share price. We think its share price is attractive at 14.3x FY12E
PE (12.5x for the core underlying business) given our assumptions of: 1) a 23%
FY11-13 earnings CAGR; 2) high core FY11/13 ROE of 45%/35% (reported
ROE of 20%/21%); and 3) a net cash balance sheet, driven by a back-to-trend
aftermarket:OEM mix (1.6x) in the 4-W PV segment and secular growth in
the industrial segment. Exide is a leading lead acid storage battery
manufacturer with a 72% domestic automotive battery market share and a
45% industrial battery market share. The company’s auto batteries cater to
the automotive industry, while its industrial batteries cater to the power,
telecom and railway industry. Its submarine batteries cater to the defence
industry.
We believe Exide is more akin to a consumer company than an auto
component one. We estimate more than 80% of its earnings come from the
auto aftermarket and home inverter segments, where brand and distribution
are critical. Sales to auto OEMs—though insignificant in terms of their
contribution to earnings—remain the basis for capturing the aftermarket as
consumers are loyal to OEM brands when it comes to batteries. The growing
auto storage battery market is almost a duopoly. We think Exide remains
well-placed to benefit from auto sales and industrial growth as well as rising
demand for power backup equipment.
Exide has a stronger and more stable (less cyclical) growth outlook than the
2-W and four-wheeler (4-W) OEM companies given its earnings dependency on
the aftermarket segment. We estimate FY12-13 earnings sensitivity to any
slowdown in OEM automotive sales is negligible (0% OEM sales growth in
FY12E compared to the 16% assumed in our forecasts would impact its net
profit estimate by only -1%). We forecast FY09-11 average volume growth in
the 2-W, PV and commercial vehicles (CV) markets at 26%, 27% and 33%,
respectively; which reflects our strong outlook for replacement demand from
the aftermarket segment.
We base our price target 16x FY12E PE for Exide’s core storage battery
business, to which we add value for its stakes in subsidiaries and the insurance
business. We believe this target multiple is justified given Exide’s high core
ROE as well as its non-cyclical and rising earnings.
Key catalysts
Aftermarket—OEM mix back-to-trend. Exide’s margins in Q3 FY11 were
adversely affected by capacity constraints impacting supplies to the more
profitable aftermarket segment. We estimate this segment’s margins at 3-4x
that of the OEM segment. Exide’s EBITDA margins dropped from 23%/24%
in Q1 FY11/Q3 FY10 to 15% in Q3 FY11 as its aftermarket:OEM mix
dropped from 1.6x historically to 1.2x in Q3 FY11. With capacity expansion
coming on-stream from March-April 2011 onwards, we expect Exide to
gradually move back to its historical mix. This should lead to strong earnings
growth and act as a key catalyst for its share price performance.
Backward integration. Captive smelters (owned by subsidiaries) for lead
recycling accounts for 55% of Exide’s lead requirements (costs for lead was
46% of its FY10 revenue). We believe this is a key competitive advantage
for the company, raising its overall margin by almost 500bp currently
(recycled lead is 10%-12% cheaper). Exide is aiming to increase this to 70%
in the next two to three years. We think any move towards this aim will be a
key catalyst for its share price.
Slowdown in OEM market can be a perverse positive catalyst in the
short term. We estimate Exide generates 46% of its revenue from
automotive OEMs and 54% from aftermarket OEMs. However, the
aftermarket segment is more profitable (aftermarket OEM margins are 3-4x
that of OEMs). We think any slowdown in OEM sales due to
macroeconomic factors can be a short-term positive for its earnings as this
would free up capacity to increase sales to the aftermarket segment. However,
we caution investors that this may not be a long-term positive as it would
impact long-term demand from the aftermarket segment in the next two to
three years.
Risks
Raw materials. Exide’s earnings are sensitive to volatility in the prices of its
key input—lead (46%/79% of FY10 revenue/costs). A significant increase in
London Metal Exchange (LME) lead prices could impact margins. However,
in the past, the company had been in a position to pass on most of the price
increases through price hikes in the automotive replacement battery segment.
Competition. Exide’s business is exposed to competitive pressures in the
domestic market from Amara Raja Batteries, HBL Power Systems, Amco
Batteries and other small, local companies. The entry of many foreign brands
through JVs with Indian companies might be a source of risk for Exide. We
believe Exide remains well-positioned due to its market dominance, costcompetitiveness
and the support of its strong brands and distribution.
Macroeconomic slowdown. Exide’s business is exposed to overall GDP
growth, a slowdown in which would impact its growth and earnings.
Cyclical risk. Exide’s products cater primarily to the automotive and
infrastructure industries. A slowdown in volume growth in these industries
can adversely impact Exide’s earnings over the long term. However, the
impact on its immediate earnings might be limited given that the bulk of
Exide’s earnings come from the less cyclical aftermarket segment.
Threat of cheaper imports. Exide’s market share in the automotive
replacement battery segment is exposed to the risk of rising imports of
cheaper batteries from China.
Forex. Exide imports 25% of its lead requirements from other countries. Any
volatility in FX movements can impact its earnings.
Valuation and basis for our price target
We use a sum-of-the-parts methodology to value Exide. We forecast an FY11-
13 earnings CAGR of 23% and FY11/13 ROE of 20%/21%. We value the
company’s core battery business at 16x FY12E PE, based on its past trading
band of 13-19x and supported by strong earnings growth as well as high ROEs.
To this we add the value of its subsidiaries. We value its lead smelting
subsidiaries at 6x trailing PE and its insurance business at a 50% premium to
book value. We believe this is a conservative approach and thus do not ascribe
any holding company discount (also because lead smelting is part of the core
business and the combined value of investments in subsidiaries and its insurance
business are small at 9% of our sum-of-the-parts valuation).
We believe Exide’s valuations should be compared to 2-W auto OEM
companies such as Hero Honda and Bajaj Auto rather than 4-W OEM
companies. This is due to their similar dominant market positions, return ratios
and balance sheets. Exide has a stronger and more stable (less cyclical) growth
outlook than the 2-W and 4-W OEM companies given its earnings dependency
on the aftermarket segment. We forecast FY09-11 average volume growth in the
2-W, PV and CV market at 26%, 27% and 33%, respectively; which reflects our
strong outlook for replacement demand from the aftermarket segment.
Exide’s financial metrics are comparable to those of fast-moving consumer goods
(FMCG) companies. This is primarily due to its market-dominant position, which
is supported by its strong brands and distribution. Exide’s end-demand (from the
main profit contributor of the aftermarket automotive segment) also displays noncyclical
characteristics. We have a target FY12E PE multiple of 16x for Exide
compared with 15-28x for our FMCG/consumer coverage universe.
UBS versus consensus
Our FY12 EBITDA and PAT estimates are 4% and 1% above consensus,
respectively, which we attribute to our different volume growth and price
assumptions for the company’s automotive and industrial battery segments.
Sensitivity analysis
Our earnings forecasts are sensitive to our battery volume growth and margin
assumptions. Its FY12-13 earnings sensitivity to any slowdown in OEM
automotive sales is negligible (0% OEM sales growth compared to the 16%
assumed in our FY12 forecast would impact our net profit estimate by -1%).
We conduct a sensitivity analysis of volume growth in the company’s
automotive (OEM and replacement) and industrial battery segments to our FY12
PAT estimates. We assume FY12 sales volume growth rates of 16%, 28% and
20% for the automotive OEM, auto replacement and industrial batteries
segments, respectively.
We assume operating margins of 5%, 25.5% and 14.5% for the auto OEM, auto
replacement and industrial battery segments, respectively. We estimate every
1% decrease in the margins for each segment would impact our FY12 PAT
estimates by -7%, and vice versa.
We also conduct a sensitivity analysis of volatility in lead prices to our FY12
PAT estimates. We estimate every 1% increase in lead prices for FY12 (without
any commensurate increase in product prices) would impact our FY12 PAT
estimates by -2.7%, and vice versa.
Exide Industries
Exide Industries is India's largest lead acid battery manufacturer and it
dominates the storage battery market in the automotive OEM and replacement
segments. The company is involved in the manufacture of automotive, industrial
and submarine batteries for automotive and industrial (power, telecom and
railways infrastructure) applications. The company sells its products under wellestablished
brands including EXIDE, SONIC, SF, INDEX and Standard
Furukawa.
Statement of Risk
We believe the key risks facing the company include volatility in the prices of
lead, competitive pressure in domestic market, slowdown in auto and
infrastructure sector; and forex volatility.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Exide Industries
Leading the growth charge
Market leader in lead acid storage batteries; oligopoly market
We initiate coverage of Exide Industries (Exide) with a Buy rating. Exide
manufactures automotive and industrial batteries catering to the auto and
infrastructure sectors. The auto storage battery market is a growing one and a near
oligopoly in India—Exide dominates with a 72% market share.
Has consumer business characteristics and a strong growth outlook
We believe Exide is more akin to a consumer than an auto component company.
We estimate more than 80% of Exide’s earnings come from the auto aftermarket
and home inverter segments—where branding and distribution are critical. We
forecast FY09-11 volume CAGRs in the two-wheeler (2-W) and passenger vehicle
(PV) markets at 26% and 27%, respectively. This reflects our strong outlook for
replacement demand. We think Exide is well-placed to benefit from growth in the
auto aftermarket and power backup segments, given its strong brands and
distribution.
Non-cyclical and high earnings growth, attractive ROEs
We forecast an FY11-13 earnings CAGR of 23%, driven by a 19% CAGR in
revenue and a 270bp improvement in the company’s EBITDA margin. Exide has a
net cash balance sheet and we estimate an attractive FY11 core return on capital
employed (ROCE)/ROE of 63%/45%. We believe its earnings sensitivity to any
slowdown in OEM automotive sales in FY12-13 is negligible.
Valuation: initiate coverage with Rs162.00 price target
We derive our price target from a sum-of-the-parts methodology—16x FY12E PE
for Exide’s core storage battery business, to which we add value for its stakes in
subsidiaries and the insurance business.
Investment Thesis
We initiate coverage of Exide with a Buy rating and a Rs162.00 price target—
23% above its share price. We think its share price is attractive at 14.3x FY12E
PE (12.5x for the core underlying business) given our assumptions of: 1) a 23%
FY11-13 earnings CAGR; 2) high core FY11/13 ROE of 45%/35% (reported
ROE of 20%/21%); and 3) a net cash balance sheet, driven by a back-to-trend
aftermarket:OEM mix (1.6x) in the 4-W PV segment and secular growth in
the industrial segment. Exide is a leading lead acid storage battery
manufacturer with a 72% domestic automotive battery market share and a
45% industrial battery market share. The company’s auto batteries cater to
the automotive industry, while its industrial batteries cater to the power,
telecom and railway industry. Its submarine batteries cater to the defence
industry.
We believe Exide is more akin to a consumer company than an auto
component one. We estimate more than 80% of its earnings come from the
auto aftermarket and home inverter segments, where brand and distribution
are critical. Sales to auto OEMs—though insignificant in terms of their
contribution to earnings—remain the basis for capturing the aftermarket as
consumers are loyal to OEM brands when it comes to batteries. The growing
auto storage battery market is almost a duopoly. We think Exide remains
well-placed to benefit from auto sales and industrial growth as well as rising
demand for power backup equipment.
Exide has a stronger and more stable (less cyclical) growth outlook than the
2-W and four-wheeler (4-W) OEM companies given its earnings dependency on
the aftermarket segment. We estimate FY12-13 earnings sensitivity to any
slowdown in OEM automotive sales is negligible (0% OEM sales growth in
FY12E compared to the 16% assumed in our forecasts would impact its net
profit estimate by only -1%). We forecast FY09-11 average volume growth in
the 2-W, PV and commercial vehicles (CV) markets at 26%, 27% and 33%,
respectively; which reflects our strong outlook for replacement demand from
the aftermarket segment.
We base our price target 16x FY12E PE for Exide’s core storage battery
business, to which we add value for its stakes in subsidiaries and the insurance
business. We believe this target multiple is justified given Exide’s high core
ROE as well as its non-cyclical and rising earnings.
Key catalysts
Aftermarket—OEM mix back-to-trend. Exide’s margins in Q3 FY11 were
adversely affected by capacity constraints impacting supplies to the more
profitable aftermarket segment. We estimate this segment’s margins at 3-4x
that of the OEM segment. Exide’s EBITDA margins dropped from 23%/24%
in Q1 FY11/Q3 FY10 to 15% in Q3 FY11 as its aftermarket:OEM mix
dropped from 1.6x historically to 1.2x in Q3 FY11. With capacity expansion
coming on-stream from March-April 2011 onwards, we expect Exide to
gradually move back to its historical mix. This should lead to strong earnings
growth and act as a key catalyst for its share price performance.
Backward integration. Captive smelters (owned by subsidiaries) for lead
recycling accounts for 55% of Exide’s lead requirements (costs for lead was
46% of its FY10 revenue). We believe this is a key competitive advantage
for the company, raising its overall margin by almost 500bp currently
(recycled lead is 10%-12% cheaper). Exide is aiming to increase this to 70%
in the next two to three years. We think any move towards this aim will be a
key catalyst for its share price.
Slowdown in OEM market can be a perverse positive catalyst in the
short term. We estimate Exide generates 46% of its revenue from
automotive OEMs and 54% from aftermarket OEMs. However, the
aftermarket segment is more profitable (aftermarket OEM margins are 3-4x
that of OEMs). We think any slowdown in OEM sales due to
macroeconomic factors can be a short-term positive for its earnings as this
would free up capacity to increase sales to the aftermarket segment. However,
we caution investors that this may not be a long-term positive as it would
impact long-term demand from the aftermarket segment in the next two to
three years.
Risks
Raw materials. Exide’s earnings are sensitive to volatility in the prices of its
key input—lead (46%/79% of FY10 revenue/costs). A significant increase in
London Metal Exchange (LME) lead prices could impact margins. However,
in the past, the company had been in a position to pass on most of the price
increases through price hikes in the automotive replacement battery segment.
Competition. Exide’s business is exposed to competitive pressures in the
domestic market from Amara Raja Batteries, HBL Power Systems, Amco
Batteries and other small, local companies. The entry of many foreign brands
through JVs with Indian companies might be a source of risk for Exide. We
believe Exide remains well-positioned due to its market dominance, costcompetitiveness
and the support of its strong brands and distribution.
Macroeconomic slowdown. Exide’s business is exposed to overall GDP
growth, a slowdown in which would impact its growth and earnings.
Cyclical risk. Exide’s products cater primarily to the automotive and
infrastructure industries. A slowdown in volume growth in these industries
can adversely impact Exide’s earnings over the long term. However, the
impact on its immediate earnings might be limited given that the bulk of
Exide’s earnings come from the less cyclical aftermarket segment.
Threat of cheaper imports. Exide’s market share in the automotive
replacement battery segment is exposed to the risk of rising imports of
cheaper batteries from China.
Forex. Exide imports 25% of its lead requirements from other countries. Any
volatility in FX movements can impact its earnings.
Valuation and basis for our price target
We use a sum-of-the-parts methodology to value Exide. We forecast an FY11-
13 earnings CAGR of 23% and FY11/13 ROE of 20%/21%. We value the
company’s core battery business at 16x FY12E PE, based on its past trading
band of 13-19x and supported by strong earnings growth as well as high ROEs.
To this we add the value of its subsidiaries. We value its lead smelting
subsidiaries at 6x trailing PE and its insurance business at a 50% premium to
book value. We believe this is a conservative approach and thus do not ascribe
any holding company discount (also because lead smelting is part of the core
business and the combined value of investments in subsidiaries and its insurance
business are small at 9% of our sum-of-the-parts valuation).
We believe Exide’s valuations should be compared to 2-W auto OEM
companies such as Hero Honda and Bajaj Auto rather than 4-W OEM
companies. This is due to their similar dominant market positions, return ratios
and balance sheets. Exide has a stronger and more stable (less cyclical) growth
outlook than the 2-W and 4-W OEM companies given its earnings dependency
on the aftermarket segment. We forecast FY09-11 average volume growth in the
2-W, PV and CV market at 26%, 27% and 33%, respectively; which reflects our
strong outlook for replacement demand from the aftermarket segment.
Exide’s financial metrics are comparable to those of fast-moving consumer goods
(FMCG) companies. This is primarily due to its market-dominant position, which
is supported by its strong brands and distribution. Exide’s end-demand (from the
main profit contributor of the aftermarket automotive segment) also displays noncyclical
characteristics. We have a target FY12E PE multiple of 16x for Exide
compared with 15-28x for our FMCG/consumer coverage universe.
UBS versus consensus
Our FY12 EBITDA and PAT estimates are 4% and 1% above consensus,
respectively, which we attribute to our different volume growth and price
assumptions for the company’s automotive and industrial battery segments.
Sensitivity analysis
Our earnings forecasts are sensitive to our battery volume growth and margin
assumptions. Its FY12-13 earnings sensitivity to any slowdown in OEM
automotive sales is negligible (0% OEM sales growth compared to the 16%
assumed in our FY12 forecast would impact our net profit estimate by -1%).
We conduct a sensitivity analysis of volume growth in the company’s
automotive (OEM and replacement) and industrial battery segments to our FY12
PAT estimates. We assume FY12 sales volume growth rates of 16%, 28% and
20% for the automotive OEM, auto replacement and industrial batteries
segments, respectively.
We assume operating margins of 5%, 25.5% and 14.5% for the auto OEM, auto
replacement and industrial battery segments, respectively. We estimate every
1% decrease in the margins for each segment would impact our FY12 PAT
estimates by -7%, and vice versa.
We also conduct a sensitivity analysis of volatility in lead prices to our FY12
PAT estimates. We estimate every 1% increase in lead prices for FY12 (without
any commensurate increase in product prices) would impact our FY12 PAT
estimates by -2.7%, and vice versa.
Exide Industries
Exide Industries is India's largest lead acid battery manufacturer and it
dominates the storage battery market in the automotive OEM and replacement
segments. The company is involved in the manufacture of automotive, industrial
and submarine batteries for automotive and industrial (power, telecom and
railways infrastructure) applications. The company sells its products under wellestablished
brands including EXIDE, SONIC, SF, INDEX and Standard
Furukawa.
Statement of Risk
We believe the key risks facing the company include volatility in the prices of
lead, competitive pressure in domestic market, slowdown in auto and
infrastructure sector; and forex volatility.
No comments:
Post a Comment