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Exide Industries (EXID)
Automobiles
Powered to perform. Exide Industries is a leading manufacturer of automotive and
industrial batteries in India. We believe its long-term growth potential is firmly in place,
driven by strong automotive demand and an unparalleled distribution network. Strong
pricing power in the battery industry and low cost advantage (due to sourcing from inhouse lead smelters) will help Exide maintain high EBITDA margins. We initiate coverage
with an ADD rating and a target price of Rs160.
Key beneficiary of strong growth in automobile demand
We expect the automotive battery market size to more than double to Rs201 bn by FY2015 from
Rs84 bn in FY2010. We estimate the organized battery segment to grow at a CAGR of 20% over
the next five years. We believe Exide Industries would be a key beneficiary of this strong demand
given its strong OEM relationships, unmatched distribution network and strong brand loyalty.
Industrial battery segment revenue growth expected to moderate
The industrial battery segment contributes 38% to Exide’s revenues. The company manufactures
batteries for power back-up systems (including UPS and inverters), telecom batteries which are
used in base stations of telecom towers, traction batteries to be used in fork lifts and exports (used
in infrastructure). We forecast a 14% CAGR in Industrial battery segment revenues over FY2011-
2013E, slightly higher than 11% CAGR witnessed in the FY2009-2011 period due to our
expectations of strong growth in the UPS segment.
Margins to remain stable as rising smelter proportion offsets material cost pressure
We expect EBITDA margins to improve by 80 bps over the next two years despite a sharp spike in
lead prices driven by (1) strong pricing power due to the duopoly structure of the battery industry,
which we believe is unlikely to be challenged in the near term, (2) increase in sourcing from
captive smelters from 45% in FY2011E to 70% in FY2013E which could lead to cost savings, and
(3) improvement in mix with the replacement battery segment growing at a faster pace than the
OEM battery segment.
Initiate with an ADD rating
We initiate coverage with an ADD rating and a target price of Rs160 based on a sum-of-parts
valuation methodology. We value our standalone business at Rs134/share (based on 16x PE on our
FY2012E EPS) at a 10% premium to historical average due to sustenance of high EBITDA margins
due to strong pricing power and improvement in product mix. We value Exide’s captive lead
smelters at Rs12/share and its 50% stake in ING Vysya Life Insurance at Rs12/share.
VALUATIONS BACK TO HISTORICAL AVERAGE
We value Exide Industries at 16X PE on our standalone FY2012E EPS estimate—a 10% premium to historical
averages. We believe the stock is likely to trade at a slight premium to its historical average given sustained
high margins due to strong pricing power in a duopoly structure of the automotive battery industry. We
expect cost benefits from increasing in-sourcing from in-house lead smelters and strong distribution networks,
which are a key entry barrier for new players. The stock currently trades at 14.9X PE on our FY2012E EPS
(excluding Rs12/share in ING Vysya Life Insurance), in line with its historical average. We initiate coverage on
the stock with an ADD rating. Our target price of Rs160 is based on a sum-of-parts valuation.
We value the stock according to the sum-of-parts methodology. We value the standalone
business at Rs134/share (based on 16x PE on our FY2012E EPS), smelters at Rs10/share and
50% stake in ING Vyasa Life Insurance at Rs12/share. Our standalone P/E multiple of 16 is
based on a 10% premium to its historical average.
We believe the stock could trade at a premium valuation to historical averages due to:
` We expect robust growth in the high margin replacement automotive battery market
(20% CAGR over FY2011-2013E), which is likely to aid improvement in margins.
` The increase in sourcing from smelters to 70% of the total lead requirement by FY2013E
from 40% in FY2010, which is likely to offset pressure due to increase in lead prices.
` Strong brand loyalty and wide distribution network are the key entry barriers in this
business which is unlikely to be replicated in a short timeframe. We believe the
automotive battery industry will continue to be dominated by two players over the next
five years and hence margins are unlikely to be impacted by the strong pricing power of
organized battery players.
A case for premium valuations
Exide has consistently generated very high returns (average ROEs of 26%) with its leadership
of the fast-growing duopoly market (Top 2 players dominate >90% of the organized battery
market) leading to superior earnings growth (52% CAGR over FY2006-2010). EBITDA
margins of Exide have increased from mid teens (15-16%) to high teens (~18-20%) driven
by (1) backward integration (acquired lead smelters) which brought down average raw
material price for Exide, (2) strong and stable growth in the high-margin, replacement
automotive battery segment as consumers shifted to branded batteries from unbranded
batteries and (3) very strong growth in the power back up and telecom battery segment
which also has a relatively stable competitive intensity with three major players dominating
~95% of the market.
Exide has traded at an average PE of 17X since FY2010 after EBITDA margins improved from
~16% in FY2009 to 23% in FY2010, which led to a re-rating of the stock. We expect
margins to remain at ~20% levels and thus expect the stock to trade at close to 15-17X PE
band despite earnings growth moderating to 18% CAGR over FY2011-2013E versus 52%
during the period FY2006-FY2010. Exide’s PE multiple re-rated from 12X to 17X over
FY2006-2010.
We value Exide’s 50% stake in ING Vysya Life Insurance at Rs12/share
Nischint Chawathe, KIE’s insurance analyst, values ING Vysya Life Insurance at Rs20,496 mn
(1.4X Rs14,640 mn capital invested in the business). Exide has a 50% stake in ING Vyasa Life
Insurance and we value this at Rs12/share based on our insurance analyst’s valuation.
We value Exide’s 100% stake in lead smelters at Rs12/share
We value the lead smelter based on a price-to-earnings valuation methodology. The
company owns a 100% stake in two lead smelters, Chloride Metals and Leadage Alloys.
Exide has been increasing its sourcing from these smelters from 23% of their total lead
requirement in FY2009 to 45% by end of FY2011. Exide plans to increase the sourcing of
lead from these smelters to 60% by FY2012 and 70% by the end of FY2013E. Lead smelters
covert scrap lead into usable lead which leads to 7-8% cost savings versus procuring
imported lead primarily due to two main factors (1) decline in the inventory holding period
versus imported lead and (2) cheaper price of lead due to a discount between scrap lead
prices and lead prices. Smelter profits are expected to increase significantly as Exide invests
in increasing capacities at these smelters. Capacity at the end of FY2010 was 96,000 tonnes
and is expected to increase to 140,000 tonnes by end of FY2012E. We value these lead
smelters at 10X PE FY2012E EPS and ascribe Rs12/share value to the smelters.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Exide Industries (EXID)
Automobiles
Powered to perform. Exide Industries is a leading manufacturer of automotive and
industrial batteries in India. We believe its long-term growth potential is firmly in place,
driven by strong automotive demand and an unparalleled distribution network. Strong
pricing power in the battery industry and low cost advantage (due to sourcing from inhouse lead smelters) will help Exide maintain high EBITDA margins. We initiate coverage
with an ADD rating and a target price of Rs160.
Key beneficiary of strong growth in automobile demand
We expect the automotive battery market size to more than double to Rs201 bn by FY2015 from
Rs84 bn in FY2010. We estimate the organized battery segment to grow at a CAGR of 20% over
the next five years. We believe Exide Industries would be a key beneficiary of this strong demand
given its strong OEM relationships, unmatched distribution network and strong brand loyalty.
Industrial battery segment revenue growth expected to moderate
The industrial battery segment contributes 38% to Exide’s revenues. The company manufactures
batteries for power back-up systems (including UPS and inverters), telecom batteries which are
used in base stations of telecom towers, traction batteries to be used in fork lifts and exports (used
in infrastructure). We forecast a 14% CAGR in Industrial battery segment revenues over FY2011-
2013E, slightly higher than 11% CAGR witnessed in the FY2009-2011 period due to our
expectations of strong growth in the UPS segment.
Margins to remain stable as rising smelter proportion offsets material cost pressure
We expect EBITDA margins to improve by 80 bps over the next two years despite a sharp spike in
lead prices driven by (1) strong pricing power due to the duopoly structure of the battery industry,
which we believe is unlikely to be challenged in the near term, (2) increase in sourcing from
captive smelters from 45% in FY2011E to 70% in FY2013E which could lead to cost savings, and
(3) improvement in mix with the replacement battery segment growing at a faster pace than the
OEM battery segment.
Initiate with an ADD rating
We initiate coverage with an ADD rating and a target price of Rs160 based on a sum-of-parts
valuation methodology. We value our standalone business at Rs134/share (based on 16x PE on our
FY2012E EPS) at a 10% premium to historical average due to sustenance of high EBITDA margins
due to strong pricing power and improvement in product mix. We value Exide’s captive lead
smelters at Rs12/share and its 50% stake in ING Vysya Life Insurance at Rs12/share.
VALUATIONS BACK TO HISTORICAL AVERAGE
We value Exide Industries at 16X PE on our standalone FY2012E EPS estimate—a 10% premium to historical
averages. We believe the stock is likely to trade at a slight premium to its historical average given sustained
high margins due to strong pricing power in a duopoly structure of the automotive battery industry. We
expect cost benefits from increasing in-sourcing from in-house lead smelters and strong distribution networks,
which are a key entry barrier for new players. The stock currently trades at 14.9X PE on our FY2012E EPS
(excluding Rs12/share in ING Vysya Life Insurance), in line with its historical average. We initiate coverage on
the stock with an ADD rating. Our target price of Rs160 is based on a sum-of-parts valuation.
We value the stock according to the sum-of-parts methodology. We value the standalone
business at Rs134/share (based on 16x PE on our FY2012E EPS), smelters at Rs10/share and
50% stake in ING Vyasa Life Insurance at Rs12/share. Our standalone P/E multiple of 16 is
based on a 10% premium to its historical average.
We believe the stock could trade at a premium valuation to historical averages due to:
` We expect robust growth in the high margin replacement automotive battery market
(20% CAGR over FY2011-2013E), which is likely to aid improvement in margins.
` The increase in sourcing from smelters to 70% of the total lead requirement by FY2013E
from 40% in FY2010, which is likely to offset pressure due to increase in lead prices.
` Strong brand loyalty and wide distribution network are the key entry barriers in this
business which is unlikely to be replicated in a short timeframe. We believe the
automotive battery industry will continue to be dominated by two players over the next
five years and hence margins are unlikely to be impacted by the strong pricing power of
organized battery players.
A case for premium valuations
Exide has consistently generated very high returns (average ROEs of 26%) with its leadership
of the fast-growing duopoly market (Top 2 players dominate >90% of the organized battery
market) leading to superior earnings growth (52% CAGR over FY2006-2010). EBITDA
margins of Exide have increased from mid teens (15-16%) to high teens (~18-20%) driven
by (1) backward integration (acquired lead smelters) which brought down average raw
material price for Exide, (2) strong and stable growth in the high-margin, replacement
automotive battery segment as consumers shifted to branded batteries from unbranded
batteries and (3) very strong growth in the power back up and telecom battery segment
which also has a relatively stable competitive intensity with three major players dominating
~95% of the market.
Exide has traded at an average PE of 17X since FY2010 after EBITDA margins improved from
~16% in FY2009 to 23% in FY2010, which led to a re-rating of the stock. We expect
margins to remain at ~20% levels and thus expect the stock to trade at close to 15-17X PE
band despite earnings growth moderating to 18% CAGR over FY2011-2013E versus 52%
during the period FY2006-FY2010. Exide’s PE multiple re-rated from 12X to 17X over
FY2006-2010.
We value Exide’s 50% stake in ING Vysya Life Insurance at Rs12/share
Nischint Chawathe, KIE’s insurance analyst, values ING Vysya Life Insurance at Rs20,496 mn
(1.4X Rs14,640 mn capital invested in the business). Exide has a 50% stake in ING Vyasa Life
Insurance and we value this at Rs12/share based on our insurance analyst’s valuation.
We value Exide’s 100% stake in lead smelters at Rs12/share
We value the lead smelter based on a price-to-earnings valuation methodology. The
company owns a 100% stake in two lead smelters, Chloride Metals and Leadage Alloys.
Exide has been increasing its sourcing from these smelters from 23% of their total lead
requirement in FY2009 to 45% by end of FY2011. Exide plans to increase the sourcing of
lead from these smelters to 60% by FY2012 and 70% by the end of FY2013E. Lead smelters
covert scrap lead into usable lead which leads to 7-8% cost savings versus procuring
imported lead primarily due to two main factors (1) decline in the inventory holding period
versus imported lead and (2) cheaper price of lead due to a discount between scrap lead
prices and lead prices. Smelter profits are expected to increase significantly as Exide invests
in increasing capacities at these smelters. Capacity at the end of FY2010 was 96,000 tonnes
and is expected to increase to 140,000 tonnes by end of FY2012E. We value these lead
smelters at 10X PE FY2012E EPS and ascribe Rs12/share value to the smelters.
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