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UBS Investment Research
Exide Industries
2-w the next frontier
„ 2-w batteries emerging as a big market for Exide
2-wheelers market in India is witnessing a shift from kick-start to push-start
models. We estimate push-start models are now 50-60% of market versus 10% five
years back and we expect it to be 80-90% of market in next 4-5 years. Push-start
models need a bigger battery and function of battery is more critical, supporting
demand for quality/branded battery. 2-w is 5x car market size in India with shorter
replacement cycle for batteries at 2 years (versus 4 years for cars) and ASP is 1/3rd
„ Exide well placed to benefit with product, capacities and brand
Exide is market leader in car batteries (c70% market share) with a strong brand and
distribution (being expanded further with capacity constraint behind). We expect
the push-start aftermarket (much higher margins vs OEM sales) to be dominated by
branded batteries and Exide has already taken lead in introducing products. Pushstart aftermarket is yet a small market but should grow sharply as shift in 2-w
happens
„ Raise FY12/13 EPS by 1%/16%. Non-cyclical earnings, attractive ROEs
We raise FY12/13 EPS by 1%/16% as we incorporate higher 2-w battery numbers
and now forecast FY11-13 earnings CAGR of 25%. Exide has a net cash balance
sheet and an attractive FY12 core ROCE/ROE of 75%/44%. We believe its
earnings sensitivity to any slowdown in OEM automotive sales in FY12-13 is low.
„ Valuation : Rs200 price target; BUY rating
We derive our higher price target of Rs200 from a SOTP methodology based on
16x FY13E PE for Exide’s battery business, to which we add value (Rs14/share)
for its stakes in subsidiaries and insurance business. Reiterate Buy on Exide.
2-wheelers next big growth driver for Exide
2-wheeler vehicles market in India is witnessing a shift from kick-start to pushstart models. Push-start models are now 50-60% of market versus less than 10%
5 years back. We expect this shift to continue and reach 80-90% of market in
next 4-5 years. Push-start models need a bigger battery (5 amp-hour versus 2.5
amp-hour). The function of the battery is also more critical as it is used for
ignition rather than just for light/horn accessories. This should support demand
for quality/branded battery.
2-w is 5x car market size in India with shorter replacement cycle for batteries at
2 years (vs. 4 years for cars). On an average, 2-w push-start ASP is about 1/3
rd
of cars and push-start batteries are about 50% higher ASP versus kick-start. This
implies that 2-w battery market could be potentially a bigger market than cars
for Exide in future.
Exide is a market leader in car batteries (c70% market share) with a strong brand
and distribution (being expanded further with capacity constraint behind). We
expect the push-start aftermarket to be gradually dominated by branded batteries
and Exide has already taken lead in introducing products. Aftermarket margins
for push-start batteries, like cars, would be significantly higher than OEM sales.
Push-start aftermarket is yet a small market but will grow sharply as shift in 2-w
happens and there is an installed base of push-start models which come up for
replacement of their batteries every 2 years.
Change in estimates
We increase our FY12/13 earnings and EBITDA estimates to reflect higher sales
from 2-w push start aftermarket segment. Our FY12/13 PAT estimates change
by 1%/16%.
This is based on our bottom-up model for forecasting 2-wheeler battery demand
for both push-start and kick-start models, with respective replacement cycles.
Valuation
We raise Exide’s price target from Rs162 to Rs200 (28% above the current
market price).
We base our price target on 16x FY13E PE for Exide’s core storage battery
business, to which we add value for its stakes in subsidiaries and the insurance
business. The stock valuations appear attractive at 17.6x FY12E PE with strong
earnings growth of 25% CAGR over FY11-13E, high core ROE of 44% in
FY12E and a strong net cash balance sheet.
We believe Exide is more akin to a consumer than an auto component company.
We estimate more than 83% of its earnings comes from the auto aftermarket
and home inverter segments, where brand and distribution are critical. Sales to
auto OEMs—though not significant 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 25% assumed in our forecasts would impact its net profit estimate
by only 2.6%). The average volume growth over FY09-11 in the 2-W, PV and
commercial vehicles (CV) markets was 26%, 27% and 33%, respectively; which
reflects our strong outlook for replacement demand from the aftermarket segment.
Also, as Exide increases its capacity (see table 4 below), it should be able to regain
its lost market share
Q 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.
Q 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
2-w the next frontier
„ 2-w batteries emerging as a big market for Exide
2-wheelers market in India is witnessing a shift from kick-start to push-start
models. We estimate push-start models are now 50-60% of market versus 10% five
years back and we expect it to be 80-90% of market in next 4-5 years. Push-start
models need a bigger battery and function of battery is more critical, supporting
demand for quality/branded battery. 2-w is 5x car market size in India with shorter
replacement cycle for batteries at 2 years (versus 4 years for cars) and ASP is 1/3rd
„ Exide well placed to benefit with product, capacities and brand
Exide is market leader in car batteries (c70% market share) with a strong brand and
distribution (being expanded further with capacity constraint behind). We expect
the push-start aftermarket (much higher margins vs OEM sales) to be dominated by
branded batteries and Exide has already taken lead in introducing products. Pushstart aftermarket is yet a small market but should grow sharply as shift in 2-w
happens
„ Raise FY12/13 EPS by 1%/16%. Non-cyclical earnings, attractive ROEs
We raise FY12/13 EPS by 1%/16% as we incorporate higher 2-w battery numbers
and now forecast FY11-13 earnings CAGR of 25%. Exide has a net cash balance
sheet and an attractive FY12 core ROCE/ROE of 75%/44%. We believe its
earnings sensitivity to any slowdown in OEM automotive sales in FY12-13 is low.
„ Valuation : Rs200 price target; BUY rating
We derive our higher price target of Rs200 from a SOTP methodology based on
16x FY13E PE for Exide’s battery business, to which we add value (Rs14/share)
for its stakes in subsidiaries and insurance business. Reiterate Buy on Exide.
2-wheelers next big growth driver for Exide
2-wheeler vehicles market in India is witnessing a shift from kick-start to pushstart models. Push-start models are now 50-60% of market versus less than 10%
5 years back. We expect this shift to continue and reach 80-90% of market in
next 4-5 years. Push-start models need a bigger battery (5 amp-hour versus 2.5
amp-hour). The function of the battery is also more critical as it is used for
ignition rather than just for light/horn accessories. This should support demand
for quality/branded battery.
2-w is 5x car market size in India with shorter replacement cycle for batteries at
2 years (vs. 4 years for cars). On an average, 2-w push-start ASP is about 1/3
rd
of cars and push-start batteries are about 50% higher ASP versus kick-start. This
implies that 2-w battery market could be potentially a bigger market than cars
for Exide in future.
Exide is a market leader in car batteries (c70% market share) with a strong brand
and distribution (being expanded further with capacity constraint behind). We
expect the push-start aftermarket to be gradually dominated by branded batteries
and Exide has already taken lead in introducing products. Aftermarket margins
for push-start batteries, like cars, would be significantly higher than OEM sales.
Push-start aftermarket is yet a small market but will grow sharply as shift in 2-w
happens and there is an installed base of push-start models which come up for
replacement of their batteries every 2 years.
Change in estimates
We increase our FY12/13 earnings and EBITDA estimates to reflect higher sales
from 2-w push start aftermarket segment. Our FY12/13 PAT estimates change
by 1%/16%.
This is based on our bottom-up model for forecasting 2-wheeler battery demand
for both push-start and kick-start models, with respective replacement cycles.
Valuation
We raise Exide’s price target from Rs162 to Rs200 (28% above the current
market price).
We base our price target on 16x FY13E PE for Exide’s core storage battery
business, to which we add value for its stakes in subsidiaries and the insurance
business. The stock valuations appear attractive at 17.6x FY12E PE with strong
earnings growth of 25% CAGR over FY11-13E, high core ROE of 44% in
FY12E and a strong net cash balance sheet.
We believe Exide is more akin to a consumer than an auto component company.
We estimate more than 83% of its earnings comes from the auto aftermarket
and home inverter segments, where brand and distribution are critical. Sales to
auto OEMs—though not significant 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 25% assumed in our forecasts would impact its net profit estimate
by only 2.6%). The average volume growth over FY09-11 in the 2-W, PV and
commercial vehicles (CV) markets was 26%, 27% and 33%, respectively; which
reflects our strong outlook for replacement demand from the aftermarket segment.
Also, as Exide increases its capacity (see table 4 below), it should be able to regain
its lost market share
Q 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.
Q 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
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