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4QFY11: margin improvement
signals better outlook for FY12
Results beat indicates a let-up in capacity constraints; Buy
Exide’s revenue and EBITDA were better than our forecasts, likely due to a betterthan-
expected sales mix. While capacity constraints continue to impact highermargin
after-market sales, we believe there was a sequential improvement in its
share in 4Q11. Management indicated: 1) capacity constraints should ease by end-
2QFY12E, 2) unlike previously, FY11 price increases could not offset rising lead
costs, and 3) inverter battery demand (25% of revenue) has yet to improve. We
believe the capacity increase can drive earnings momentum (18% pa); Buy
4QFY11: EBITDA margins improve by 210bps to 17.3%
Revenues were Rs 12.3bn (+17% YoY, 8% above our estimate), EBITDA was Rs
2.1bn (-2% YoY, 13% above our estimate). Raw material costs declined 230bps
QoQ, likely due to better mix. Employee costs increased 90bps QoQ, likely due to
the new motorcycle plant. PAT at Rs 1.6bn (+22% YoY) came in 20% above our
estimate due to higher-than-expected other income at Rs 436m (70% above
estimate).
Huge after-market opportunity remains our key investment argument
Exide’s motorcycle battery capacity is slated to increase to 20m by October 2011
(40% above FY11), which would enable it to better service the after-market
segment. Two-wheeler volumes grew 10% pa over a 15-year period (FY1995-
2010), resulting in an estimated pool of c80m. Moreover, Exide’s strong
distribution (2x nearest competitor) should enable it to increase market share at
the expense of unorganized players (40-45% of market).
2-year EPS CAGR (FY11-13E) of 18%; core business trading at 15x FY12E EPS
We value Exide on a sum-of-the-parts basis (SOTP) at Rs 165/share, consisting of:
1) a DCF-based valuation of Rs 155/share (implied P/E of 18x FY12E & 15x FY13E)
for the core battery business, and 2) Rs 10/share for its 50% stake in the life
insurance joint venture. Risks include a further delay in commissioning the new
capacity and increased competition in the automotive segment
4QFY11 results takeaway
Exide’s 4QFY11 results came in above our estimates, likely on account of a better-thanexpected
improvement in the sales mix. Revenue was Rs 12.3bn (+17% YoY, 8% above our
estimate), and the EBITDA margin improved 210bps QoQ to 17.3% (our estimate: 16.5%).
We had forecast a sequential improvement in margins, as we expected capacity constraints
to ease a bit in 4Q, which would enable the company to sell more automotive batteries in the
after-market. Management commentary suggests that demand for the industrial (inverter)
segment batteries has not deteriorated further.
Key highlights and takeaways:
EBITDA margins improved 210bps to 17.3%, mainly on account of an improvement in
raw material costs (230bps QoQ).
Employee costs increased 35% QoQ to Rs 854m. We infer that the increase is likely on
account of the commissioning of the new motorcycle battery plant.
Capacity – management commentary indicates that it continues to face constraints due
to robust OEM volumes. Management believes it should be able to overcome these by
the end of 2QFY12, which is consonant with our view and the guidance in 3Q.
Pricing – the company has not been able to completely pass on the increase in lead
prices in the form of higher prices.
Capex – management stated that the company was able to spend only Rs 2.75bn out of
the Rs 4.25bn outlay committed for FY11. Capex guidance for FY12E is Rs 3.7bn.
Capacity expansion timeline
Exide’s automotive batteries division was operating at almost 90% capacity utilization in
FY10. Consequently, the company drew up an aggressive plan to spend Rs 4bn in FY11 on
significantly expanding its automotive capacity. The company expects to complete the
current phase of expansion by October 2011. As a result, its motorcycle battery capacity is
expected to increase from 10m (end-FY10) to 20m (October 2011), and its 3/4W battery
capacity is expected to increase from 8.4m to 12m over the same period. We believe this will
enable Exide to increase its revenue share from after-market sales, which would improve
margins.
Financial analysis
Revenue – two-year CAGR (FY11-13E) of 20%
We forecast Exide’s battery volume to grow at a CAGR (FY11-13E) of 15%, driven mainly by
increased capacity in the automotive segment (65% of revenue). The additional capacity
would improve Exide’s sales mix, as it would enable the company to sell more batteries in
the after-market. We expect automotive battery volume to grow at a CAGR (FY11-13E) of
16%. In the industrial segment, we expect volume growth to be lower, as the demand
outlook for power back-up and UPS solutions remains weak in the medium term. We
estimate industrial volumes to grow at a CAGR (FY11-13E) of 10% vs 18% during FY05-10.
We assume overall realizations will improve by 4.5% pa over FY11-13E, leading to a 20% pa
growth in revenue.
EBITDA margins forecast to trend upwards
We forecast Exide’s EBITDA margins to improve by 70bps from 19.3% in FY11 to 20% in
FY13E. EBITDA/battery is also expected to increase, by 6% pa to Rs 384/battery. Exide’s
margins fell 410bps in FY11 due to a combination of: a) adverse sales mix in the automotive
segment, and b) a slowdown in demand for the high-margin power back-up solutions
business. We believe margins should improve going forward as automotive capacity should
increase by 19% pa over FY11-13E, allowing the company to cater to the after-market (higher
margin that OEM sales). However, margins are unlikely to revert to the FY10 peak (23.4%), as
lead prices are expected to remain firm in the medium term and we do not expect any
significant uptick in the industrial segment. Overall, we forecast EBITDA to grow at a CAGR
(FY11-13E) of 22%.
Net profit growth to lag EBITDA growth
We forecast PAT to grow at a CAGR (FY11-13E) of 18%. We expect depreciation to increase
23% pa in FY11-13E due to the accelerated capitalization of the assets being built up in FY11
and FY12E.
Capex and cash flows
We expect the company to incur capital expenditure of Rs 6.2bn in FY12E and 13E to
enhance battery capacity in the automotive segment. The company is also expected to
continue investing in its life insurance joint venture, and we forecast overall investment of Rs
2.5bn over the same period. We expect the company to fund these requirements
comfortably as we forecast it to generate operating cashflow of Rs 16.5bn over the same
period.
Valuation and risks
Target price and valuation methodology
We derive our new target price of Rs165/share for Exide based on a sum-of-the-parts (SOTP)
methodology. We value the core battery business using DCF at Rs 155/share and its 50%
stake in the life insurance joint venture at book value (Rs 10/share). Exide has a significant
investment in ING Vysya Life Insurance Company.
DCF assumptions and sensitivity
We have used a 15-year timeframe for our DCF forecasts, with revenue growth trending
down over our forecast period from 17% in FY13E to 8% by 2027. We expect capex/sales to
stabilize at around 3.5% and EBIT margin to trend down to 16%, from 18% in FY13E. Our
assumptions are: a risk-free rate of 6.7%, a risk premium of 8.1%, beta of 0.85 and a terminal
growth rate of 4%. Our terminal growth rate is in line with the expected long-term growth
rate of households in India. Our resulting WACC is 13.6%.
Premium to historical levels justified due to improved metrics
Our target multiple is also at a premium to Exide’s historical average valuation range. We
believe this is reasonable given the structural improvement in its profitability and ROCE over
the past five years. The average EBITDA margin for Exide over FY05-09 was in the range of
15-16% vs. 20% expected over FY12-14E. Similarly, core ROCE of the business has
improved from 20-50% to 60-70%. Additionally, the company is now a net cash company,
with a minimal funding gap going forward.
Stake in life insurance business valued at Rs10/share
Exide has a 50% stake in ING Vysya Life Insurance Company Limited (IVL), a joint venture
with ING Group, Netherlands. We are reducing the value of this stake from Rs 20/share to Rs
10/share, driven by a change in our valuation methodology. Previously, we had valued this
business using the appraisal value methodology and arrived at a value of Rs 34bn, implying
Rs 20/share for Exide’s 50% stake. We are now valuing Exide’s investment in this business
at book value, reflecting our conservative stance and the minimal likelihood of any divestment
to unlock value. Management commentary has indicated that the company intends to
continue investing in this business and has no plans of selling out in the medium term. We
estimate the cumulative investment by FY12E at Rs 8.9bn, translating into Rs 10/share.
We believe that Exide is unlikely to get any upside from its investment in this business in the
medium term. This company has been operating in India for the past ten years and has
managed to garner only 1% market share.
Risks
Delay in capacity expansion in automotive segment
We have assumed Exide’s margins will improve, as we expect the increased capacity in the
automotive segment to allow the company to sell more batteries in the after-market. If there
is a delay in the commissioning of additional capacity, it would impact our revenue and
earnings estimates. Furthermore, it would allow competitors to increase market share.
Further slowdown in demand for industrial batteries
Exide’s profitability was significantly impacted in FY11 by a slowdown in demand for power
back-up and UPS solutions. We expect demand for these applications to normalize over the
next two years. However, if there is a further slowdown in demand, it would negatively affect
our forecasts.
Significant increase in lead prices
Lead and lead alloy are the primary materials consumed in the manufacture of batteries,
representing c80% of all of the materials consumed by Exide. We have assumed that lead
prices will increase during our forecast period and expect this to be partly mitigated by better
realizations and increased sourcing from Exide’s smelter subsidiaries. If the increase in lead
prices is higher than we anticipate, this would have a negative impact on our earnings
forecasts.
Increased investment in the life insurance business
Exide has invested cRs 7.5bn to date in its life insurance joint venture. We estimate that
Exide will invest another Rs 2.5bn over FY12-13E. If the investment requirement is
significantly higher over the next few years, it would have a negative impact on cash flow and
valuation.
Possibility of investment in unrelated businesses
We note that Exide has net cash of Rs 5.4bn on its balance sheet currently and, given its
strong cash flow, this position should improve over our forecast period. There is a possibility
that the company might invest in unrelated businesses, as in the case of the insurance
venture in the past.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
4QFY11: margin improvement
signals better outlook for FY12
Results beat indicates a let-up in capacity constraints; Buy
Exide’s revenue and EBITDA were better than our forecasts, likely due to a betterthan-
expected sales mix. While capacity constraints continue to impact highermargin
after-market sales, we believe there was a sequential improvement in its
share in 4Q11. Management indicated: 1) capacity constraints should ease by end-
2QFY12E, 2) unlike previously, FY11 price increases could not offset rising lead
costs, and 3) inverter battery demand (25% of revenue) has yet to improve. We
believe the capacity increase can drive earnings momentum (18% pa); Buy
4QFY11: EBITDA margins improve by 210bps to 17.3%
Revenues were Rs 12.3bn (+17% YoY, 8% above our estimate), EBITDA was Rs
2.1bn (-2% YoY, 13% above our estimate). Raw material costs declined 230bps
QoQ, likely due to better mix. Employee costs increased 90bps QoQ, likely due to
the new motorcycle plant. PAT at Rs 1.6bn (+22% YoY) came in 20% above our
estimate due to higher-than-expected other income at Rs 436m (70% above
estimate).
Huge after-market opportunity remains our key investment argument
Exide’s motorcycle battery capacity is slated to increase to 20m by October 2011
(40% above FY11), which would enable it to better service the after-market
segment. Two-wheeler volumes grew 10% pa over a 15-year period (FY1995-
2010), resulting in an estimated pool of c80m. Moreover, Exide’s strong
distribution (2x nearest competitor) should enable it to increase market share at
the expense of unorganized players (40-45% of market).
2-year EPS CAGR (FY11-13E) of 18%; core business trading at 15x FY12E EPS
We value Exide on a sum-of-the-parts basis (SOTP) at Rs 165/share, consisting of:
1) a DCF-based valuation of Rs 155/share (implied P/E of 18x FY12E & 15x FY13E)
for the core battery business, and 2) Rs 10/share for its 50% stake in the life
insurance joint venture. Risks include a further delay in commissioning the new
capacity and increased competition in the automotive segment
4QFY11 results takeaway
Exide’s 4QFY11 results came in above our estimates, likely on account of a better-thanexpected
improvement in the sales mix. Revenue was Rs 12.3bn (+17% YoY, 8% above our
estimate), and the EBITDA margin improved 210bps QoQ to 17.3% (our estimate: 16.5%).
We had forecast a sequential improvement in margins, as we expected capacity constraints
to ease a bit in 4Q, which would enable the company to sell more automotive batteries in the
after-market. Management commentary suggests that demand for the industrial (inverter)
segment batteries has not deteriorated further.
Key highlights and takeaways:
EBITDA margins improved 210bps to 17.3%, mainly on account of an improvement in
raw material costs (230bps QoQ).
Employee costs increased 35% QoQ to Rs 854m. We infer that the increase is likely on
account of the commissioning of the new motorcycle battery plant.
Capacity – management commentary indicates that it continues to face constraints due
to robust OEM volumes. Management believes it should be able to overcome these by
the end of 2QFY12, which is consonant with our view and the guidance in 3Q.
Pricing – the company has not been able to completely pass on the increase in lead
prices in the form of higher prices.
Capex – management stated that the company was able to spend only Rs 2.75bn out of
the Rs 4.25bn outlay committed for FY11. Capex guidance for FY12E is Rs 3.7bn.
Capacity expansion timeline
Exide’s automotive batteries division was operating at almost 90% capacity utilization in
FY10. Consequently, the company drew up an aggressive plan to spend Rs 4bn in FY11 on
significantly expanding its automotive capacity. The company expects to complete the
current phase of expansion by October 2011. As a result, its motorcycle battery capacity is
expected to increase from 10m (end-FY10) to 20m (October 2011), and its 3/4W battery
capacity is expected to increase from 8.4m to 12m over the same period. We believe this will
enable Exide to increase its revenue share from after-market sales, which would improve
margins.
Financial analysis
Revenue – two-year CAGR (FY11-13E) of 20%
We forecast Exide’s battery volume to grow at a CAGR (FY11-13E) of 15%, driven mainly by
increased capacity in the automotive segment (65% of revenue). The additional capacity
would improve Exide’s sales mix, as it would enable the company to sell more batteries in
the after-market. We expect automotive battery volume to grow at a CAGR (FY11-13E) of
16%. In the industrial segment, we expect volume growth to be lower, as the demand
outlook for power back-up and UPS solutions remains weak in the medium term. We
estimate industrial volumes to grow at a CAGR (FY11-13E) of 10% vs 18% during FY05-10.
We assume overall realizations will improve by 4.5% pa over FY11-13E, leading to a 20% pa
growth in revenue.
EBITDA margins forecast to trend upwards
We forecast Exide’s EBITDA margins to improve by 70bps from 19.3% in FY11 to 20% in
FY13E. EBITDA/battery is also expected to increase, by 6% pa to Rs 384/battery. Exide’s
margins fell 410bps in FY11 due to a combination of: a) adverse sales mix in the automotive
segment, and b) a slowdown in demand for the high-margin power back-up solutions
business. We believe margins should improve going forward as automotive capacity should
increase by 19% pa over FY11-13E, allowing the company to cater to the after-market (higher
margin that OEM sales). However, margins are unlikely to revert to the FY10 peak (23.4%), as
lead prices are expected to remain firm in the medium term and we do not expect any
significant uptick in the industrial segment. Overall, we forecast EBITDA to grow at a CAGR
(FY11-13E) of 22%.
Net profit growth to lag EBITDA growth
We forecast PAT to grow at a CAGR (FY11-13E) of 18%. We expect depreciation to increase
23% pa in FY11-13E due to the accelerated capitalization of the assets being built up in FY11
and FY12E.
Capex and cash flows
We expect the company to incur capital expenditure of Rs 6.2bn in FY12E and 13E to
enhance battery capacity in the automotive segment. The company is also expected to
continue investing in its life insurance joint venture, and we forecast overall investment of Rs
2.5bn over the same period. We expect the company to fund these requirements
comfortably as we forecast it to generate operating cashflow of Rs 16.5bn over the same
period.
Valuation and risks
Target price and valuation methodology
We derive our new target price of Rs165/share for Exide based on a sum-of-the-parts (SOTP)
methodology. We value the core battery business using DCF at Rs 155/share and its 50%
stake in the life insurance joint venture at book value (Rs 10/share). Exide has a significant
investment in ING Vysya Life Insurance Company.
DCF assumptions and sensitivity
We have used a 15-year timeframe for our DCF forecasts, with revenue growth trending
down over our forecast period from 17% in FY13E to 8% by 2027. We expect capex/sales to
stabilize at around 3.5% and EBIT margin to trend down to 16%, from 18% in FY13E. Our
assumptions are: a risk-free rate of 6.7%, a risk premium of 8.1%, beta of 0.85 and a terminal
growth rate of 4%. Our terminal growth rate is in line with the expected long-term growth
rate of households in India. Our resulting WACC is 13.6%.
Premium to historical levels justified due to improved metrics
Our target multiple is also at a premium to Exide’s historical average valuation range. We
believe this is reasonable given the structural improvement in its profitability and ROCE over
the past five years. The average EBITDA margin for Exide over FY05-09 was in the range of
15-16% vs. 20% expected over FY12-14E. Similarly, core ROCE of the business has
improved from 20-50% to 60-70%. Additionally, the company is now a net cash company,
with a minimal funding gap going forward.
Stake in life insurance business valued at Rs10/share
Exide has a 50% stake in ING Vysya Life Insurance Company Limited (IVL), a joint venture
with ING Group, Netherlands. We are reducing the value of this stake from Rs 20/share to Rs
10/share, driven by a change in our valuation methodology. Previously, we had valued this
business using the appraisal value methodology and arrived at a value of Rs 34bn, implying
Rs 20/share for Exide’s 50% stake. We are now valuing Exide’s investment in this business
at book value, reflecting our conservative stance and the minimal likelihood of any divestment
to unlock value. Management commentary has indicated that the company intends to
continue investing in this business and has no plans of selling out in the medium term. We
estimate the cumulative investment by FY12E at Rs 8.9bn, translating into Rs 10/share.
We believe that Exide is unlikely to get any upside from its investment in this business in the
medium term. This company has been operating in India for the past ten years and has
managed to garner only 1% market share.
Risks
Delay in capacity expansion in automotive segment
We have assumed Exide’s margins will improve, as we expect the increased capacity in the
automotive segment to allow the company to sell more batteries in the after-market. If there
is a delay in the commissioning of additional capacity, it would impact our revenue and
earnings estimates. Furthermore, it would allow competitors to increase market share.
Further slowdown in demand for industrial batteries
Exide’s profitability was significantly impacted in FY11 by a slowdown in demand for power
back-up and UPS solutions. We expect demand for these applications to normalize over the
next two years. However, if there is a further slowdown in demand, it would negatively affect
our forecasts.
Significant increase in lead prices
Lead and lead alloy are the primary materials consumed in the manufacture of batteries,
representing c80% of all of the materials consumed by Exide. We have assumed that lead
prices will increase during our forecast period and expect this to be partly mitigated by better
realizations and increased sourcing from Exide’s smelter subsidiaries. If the increase in lead
prices is higher than we anticipate, this would have a negative impact on our earnings
forecasts.
Increased investment in the life insurance business
Exide has invested cRs 7.5bn to date in its life insurance joint venture. We estimate that
Exide will invest another Rs 2.5bn over FY12-13E. If the investment requirement is
significantly higher over the next few years, it would have a negative impact on cash flow and
valuation.
Possibility of investment in unrelated businesses
We note that Exide has net cash of Rs 5.4bn on its balance sheet currently and, given its
strong cash flow, this position should improve over our forecast period. There is a possibility
that the company might invest in unrelated businesses, as in the case of the insurance
venture in the past.
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