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A charged up proxy for the India auto story…
Market leader in battery business
• Exide (EIL) is the largest battery supplier in the domestic market
with capacity pipeline of ~3.5 crore units (1.7x FY11) by FY13-14E
• The unmatched distribution network(~39,000 retail outlets) and
strong brand loyalties are the pillars of its strong market share
(~72% in the OEM space,~65% in the replacement market)
• EIL is among the safest proxy calls on the India auto story, which
we expect will multiply 1.7x by CY15. We expect battery sales to
grow to ~3x of present by CY15 as stronger replacement demand
would be reflected due to the strong auto growth(2x) since FY06.
We believe this as higher proportion (~60%) will push start twowheeler
sales that would be up for replacement
• EIL has strong backward integration through its in-house lead
smelters, which provides it an edge over its peers in terms of
overcoming unfavourable commodity cycles
• One of the reasons we believe EIL would continue to grow its
market share lies in the fact that it remains the preferred OEM
supplier and first battery replacement constitutes a strong degree
of loyalty towards the installed brand. Thus, we believe as the
market keeps growing EIL would enjoy stronger market
dominance
• EIL is insulated from cyclicality in terms of OEM demand
slowdown as it diverts its extra production to replacement sales
(higher yield). On the other hand, it also keeps costs in check,
which helps in margin and RoE growth
Going ahead
• EIL is expected to continue improving its sales mix with higher
aftermarket to OEM sales ratio targeted at ~1.6 levels by FY14E
• The company plans to increase its backward integration to ~65%
levels in the coming years to further insulate itself from the impact
of volatility in lead prices
• EIL has initiated a strong capacity addition, which would provide it
higher replacement sales possibilities. This would provide twin
benefits by increasing market share and improving profitability
• EIL has strong RoEs at~24-25%, which we expect will grow
further due to healthy income growth
Valuation
The stock has always commanded a valuation premium in comparison to
its competitors due to its dominant market share with higher than
industry margins and return ratios. The backward integration also
insulates EIL to a certain extent from commodity price vagaries. We
recommend the stock be accumulated as the structural growth story of
the automotive industry is expected to continue in the long-term.
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