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EXIDE INDUSTRIES LIMITED
RECOMMENDATION: BUY
CMP: Rs. 132.5
1st TARGET: Rs. 160
HOLDING PERIOD: 1-1.5 Years
RISK PROFILE: AGGRESSIVE
BUSINESS SUMMARY
Exide Industries Limited (EIL) is the biggest lead acid battery manufacturer in the country. The company manufactures a wide range of storage batteries for industries such as automobiles, railways, telecom, power plants, solar cells and submarines (incidentally EIL is just one amongst 5 companies in the world that can manufacture submarine batteries).
INVESTMENT RATIONALE/RISKS
EIL has pretty much all the characteristics that are becoming of an industry leader right from dominant market share both in the OEM market as well as replacement market, 7 manufacturing plants diversified across the country, a pan-India distribution network of 4000 dealer outlets, 202 area offices and 40 branches spread over 9 regions, pricing power, resplendent brand equity and preferred supplier status.
One of the most attractive features of EIL is that in possesses 2 in-house lead smelters that enable the company to source a considerable (42% in FY10, 55% IN FY11e and 70% in FY12e)portion of its total lead requirements at a 10-15% discount to international prices on the LME. EBITDA margins shot up from 16% to the 23% trajectory largely due to the influence of these smelters.
In the current fiscal, EIL has struggled with capacity constraints forcing it to concede market share in the replacement market but that is set to change with the company investing Rs.600 crore for the FY11-FY12 for capacity additions. Installed capacity is forecasted to grow by 24% CAGR over the next 2 years compared to the historical figure of 9-10%.
RISKS: OEM automobile sales may not quite be as robust as the last fiscal due to hardening interest rates. Lead (lead accounts for 75-80% of raw material cost) prices have been on an upward trajectory since Q2 and are currently trading at Rs.119 per kg, up by 65% from the figure of Rs.72 per kg seen in June 2010. Recently there have been news reports questioning the hazardous nature of lead and its deleterious effect on plant workers and the environment and parsimonious value investors might question the worth of acquiring an auto ancillary stock which is trading at a PE multiple greater than that of some automobile stocks.
OUTLOOK AND SCOPE
Automobile sales are likely to grow by 12% for the next 5 years and many global auto manufacturing companies are making India as a hub for manufacturing. This will also stimulate sales for auto batteries.
The 2 wheeler and the 4 wheeler battery capacity of EIL is expected to increase by 60% and 28% at the end of FY11, with the company spending around Rs.300 crore in this fiscal for that purpose and another Rs.300 crore in the next fiscal.
Due to this capacity constraints will ease and utilization rates are expected to drop from the 90% mark to around 80-84%.
With regard to its distribution network the company is looking to increase the hub and spoke model in the current 206 locations to more than 250 by the end of the current fiscal.
EIL is looking to develop batteries for stop start micro-hybrid batteries and lithium-ion batteries for the emerging electric vehicle segment.
Lead prices are expected to cause some strain to the battery manufacturers’ margins until Q4 atleast. However EIL will be able to negate it to some extent due to the increasing contribution of its in-house smelting units. In FY11E the smelting units contribution to total lead requirements is expected to reach 55% from last year’s figure of 55%. Next year that figure will be 70%.
HISTORICAL FINANCIALS Historically due to its leadership status, strong brand equity and preferred supplier status the company has often been swamped with demand for its batteries. Utilization rates (number of batteries produced/installed capacity) from FY07-FY10 has been 90%, 86% and 89%. While high utilization rates are a result of strong demand, it is also due to tepid capacity additions of 10% cagr from FY07-FY10. Sales volume and price realizations for the same time period have grown by 9% and 14% CAGR respectively. Net sales for FY07-FY10 have grown from Rs.1870 crores to Rs.3794 crores at a CAGR of 26.3%. Lead prices have been volatile moving from Rs.40 per kg in Dec.08 to Rs.120 per kg in Sep 09. Due to the influence of in-house smelters standalone operating margins have jumped from the 16% trajectory to 20%+ levels. The debt equity ratio for the last 3 years has not exceeded 0.5.Last year’s figure was 0.05. Net sales for FY07-FY10 have grown from Rs. 154 crores to Rs.537 crores at a CAGR of 51%. EIL employs a consistent dividend payout policy of around 15%. It’s ROCE is best in the industry at 43.2% for FY10.
FINANCIAL OUTLOOK While installed capacity has grown at 9-10% CAGR historically, the next 2 years will see it grow by 24% CAGR. The company will be spending Rs.120 crore in Q4FY11e and a further Rs.300 crore in FY12 for capacity additions. For the next 2 years net sales are forecasted to grow at 20% CAGR driven by a 17% growth in volumes. Despite contribution of smelters to total lead cost increasing to 55% and 70% for the next two years, raw material costs are forecasted to grow by 19%. Operating profits are forecasted to grow by 18.7% while operating profit margins are expected to drop to 20.4% for FY11E before rising to 22.9% in FY12E. Depreciation is expected to grow at 13% CAGR for the next 2 years. Net profits are expected to grow at 24.5% for the next two years. PAT margins are expected to be 13.5% in FY11E and 15.2% in
RISKS
Volatile and high lead prices are a severe impediment to respectable operating margins. Lead prices have gyrated from Rs.40 per kg to Rs.123 per kg in the last 2 years and at the time of writing it was at Rs.119 per kg.
Recent news articles have highlighted the deleterious effects of lead to plant workers and the environment and have questioned the compliance levels of lead battery manufacturers with health and environment norms.
OEM auto sales are likely to slow down due to hardening of interest rates.
Parsimonious value investors might question the need to buy an auto ancillary stock with a multiple of 18-20 when notable auto companies are trading at lesser multiples.
INVESTMENT RATIONALE
EIL is more of an auto ancillary company than Amara Raja Batteries as it derives a greater proportion of its revenue from automobile battery sales (60%). We believe auto ancillary stocks particularly battery makers are better positioned than auto companies due to the existence of a resplendent secondary market.
EIL is the biggest lead battery manufacturer in the country and also has a very well diversified and extensive presence across the country, both in terms of manufacturing plants as well as distribution units. The company enjoys a strong brand equity and is the preferred source of batteries providing it with solid pricing power.
EIL had previously faced capacity constraints but now armed with a Rs.600 crore investment outlay on capacity additions for the next two years is well poised to eradicate the problem. Capacity expansion is to be funded through minimum or negligible debt as the company has already secured Rs.540 crore through a QIP.
EIL has 2 inhouse lead smelting units that enable it to source a considerable proportion of its lead requirements ata 10-15% discount to international rates.
There is an opportunity to unlock value through EIL’s 50% stake in ING Vysya.
We are assigning a value of Rs.147 to the standalone business based on discounted earnings multiple, a value of Rs.6 for its 50% stake in IVL, Rs.6 for its in-house smelters and a value of Rs.1 for the other smelters leading to a Sum of the Parts Valuation Price of Rs.160 with a time horizon of 1-1.5 years
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
EXIDE INDUSTRIES LIMITED
RECOMMENDATION: BUY
CMP: Rs. 132.5
1st TARGET: Rs. 160
HOLDING PERIOD: 1-1.5 Years
RISK PROFILE: AGGRESSIVE
BUSINESS SUMMARY
Exide Industries Limited (EIL) is the biggest lead acid battery manufacturer in the country. The company manufactures a wide range of storage batteries for industries such as automobiles, railways, telecom, power plants, solar cells and submarines (incidentally EIL is just one amongst 5 companies in the world that can manufacture submarine batteries).
INVESTMENT RATIONALE/RISKS
EIL has pretty much all the characteristics that are becoming of an industry leader right from dominant market share both in the OEM market as well as replacement market, 7 manufacturing plants diversified across the country, a pan-India distribution network of 4000 dealer outlets, 202 area offices and 40 branches spread over 9 regions, pricing power, resplendent brand equity and preferred supplier status.
One of the most attractive features of EIL is that in possesses 2 in-house lead smelters that enable the company to source a considerable (42% in FY10, 55% IN FY11e and 70% in FY12e)portion of its total lead requirements at a 10-15% discount to international prices on the LME. EBITDA margins shot up from 16% to the 23% trajectory largely due to the influence of these smelters.
In the current fiscal, EIL has struggled with capacity constraints forcing it to concede market share in the replacement market but that is set to change with the company investing Rs.600 crore for the FY11-FY12 for capacity additions. Installed capacity is forecasted to grow by 24% CAGR over the next 2 years compared to the historical figure of 9-10%.
RISKS: OEM automobile sales may not quite be as robust as the last fiscal due to hardening interest rates. Lead (lead accounts for 75-80% of raw material cost) prices have been on an upward trajectory since Q2 and are currently trading at Rs.119 per kg, up by 65% from the figure of Rs.72 per kg seen in June 2010. Recently there have been news reports questioning the hazardous nature of lead and its deleterious effect on plant workers and the environment and parsimonious value investors might question the worth of acquiring an auto ancillary stock which is trading at a PE multiple greater than that of some automobile stocks.
OUTLOOK AND SCOPE
Automobile sales are likely to grow by 12% for the next 5 years and many global auto manufacturing companies are making India as a hub for manufacturing. This will also stimulate sales for auto batteries.
The 2 wheeler and the 4 wheeler battery capacity of EIL is expected to increase by 60% and 28% at the end of FY11, with the company spending around Rs.300 crore in this fiscal for that purpose and another Rs.300 crore in the next fiscal.
Due to this capacity constraints will ease and utilization rates are expected to drop from the 90% mark to around 80-84%.
With regard to its distribution network the company is looking to increase the hub and spoke model in the current 206 locations to more than 250 by the end of the current fiscal.
EIL is looking to develop batteries for stop start micro-hybrid batteries and lithium-ion batteries for the emerging electric vehicle segment.
Lead prices are expected to cause some strain to the battery manufacturers’ margins until Q4 atleast. However EIL will be able to negate it to some extent due to the increasing contribution of its in-house smelting units. In FY11E the smelting units contribution to total lead requirements is expected to reach 55% from last year’s figure of 55%. Next year that figure will be 70%.
HISTORICAL FINANCIALS Historically due to its leadership status, strong brand equity and preferred supplier status the company has often been swamped with demand for its batteries. Utilization rates (number of batteries produced/installed capacity) from FY07-FY10 has been 90%, 86% and 89%. While high utilization rates are a result of strong demand, it is also due to tepid capacity additions of 10% cagr from FY07-FY10. Sales volume and price realizations for the same time period have grown by 9% and 14% CAGR respectively. Net sales for FY07-FY10 have grown from Rs.1870 crores to Rs.3794 crores at a CAGR of 26.3%. Lead prices have been volatile moving from Rs.40 per kg in Dec.08 to Rs.120 per kg in Sep 09. Due to the influence of in-house smelters standalone operating margins have jumped from the 16% trajectory to 20%+ levels. The debt equity ratio for the last 3 years has not exceeded 0.5.Last year’s figure was 0.05. Net sales for FY07-FY10 have grown from Rs. 154 crores to Rs.537 crores at a CAGR of 51%. EIL employs a consistent dividend payout policy of around 15%. It’s ROCE is best in the industry at 43.2% for FY10.
FINANCIAL OUTLOOK While installed capacity has grown at 9-10% CAGR historically, the next 2 years will see it grow by 24% CAGR. The company will be spending Rs.120 crore in Q4FY11e and a further Rs.300 crore in FY12 for capacity additions. For the next 2 years net sales are forecasted to grow at 20% CAGR driven by a 17% growth in volumes. Despite contribution of smelters to total lead cost increasing to 55% and 70% for the next two years, raw material costs are forecasted to grow by 19%. Operating profits are forecasted to grow by 18.7% while operating profit margins are expected to drop to 20.4% for FY11E before rising to 22.9% in FY12E. Depreciation is expected to grow at 13% CAGR for the next 2 years. Net profits are expected to grow at 24.5% for the next two years. PAT margins are expected to be 13.5% in FY11E and 15.2% in
RISKS
Volatile and high lead prices are a severe impediment to respectable operating margins. Lead prices have gyrated from Rs.40 per kg to Rs.123 per kg in the last 2 years and at the time of writing it was at Rs.119 per kg.
Recent news articles have highlighted the deleterious effects of lead to plant workers and the environment and have questioned the compliance levels of lead battery manufacturers with health and environment norms.
OEM auto sales are likely to slow down due to hardening of interest rates.
Parsimonious value investors might question the need to buy an auto ancillary stock with a multiple of 18-20 when notable auto companies are trading at lesser multiples.
INVESTMENT RATIONALE
EIL is more of an auto ancillary company than Amara Raja Batteries as it derives a greater proportion of its revenue from automobile battery sales (60%). We believe auto ancillary stocks particularly battery makers are better positioned than auto companies due to the existence of a resplendent secondary market.
EIL is the biggest lead battery manufacturer in the country and also has a very well diversified and extensive presence across the country, both in terms of manufacturing plants as well as distribution units. The company enjoys a strong brand equity and is the preferred source of batteries providing it with solid pricing power.
EIL had previously faced capacity constraints but now armed with a Rs.600 crore investment outlay on capacity additions for the next two years is well poised to eradicate the problem. Capacity expansion is to be funded through minimum or negligible debt as the company has already secured Rs.540 crore through a QIP.
EIL has 2 inhouse lead smelting units that enable it to source a considerable proportion of its lead requirements ata 10-15% discount to international rates.
There is an opportunity to unlock value through EIL’s 50% stake in ING Vysya.
We are assigning a value of Rs.147 to the standalone business based on discounted earnings multiple, a value of Rs.6 for its 50% stake in IVL, Rs.6 for its in-house smelters and a value of Rs.1 for the other smelters leading to a Sum of the Parts Valuation Price of Rs.160 with a time horizon of 1-1.5 years
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