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India: Automobiles: Parts
Equity Research
Initiate on Indian auto parts leaders: Exide Ind. (Buy, CL), Bharat Forge, MRF
Initiate on auto parts market leaders in India; Exide is our top pick
We initiate coverage on Exide Industries, India’s largest battery manufacturer,
with a Buy rating (on Conviction Buy List) and a 12-m FY13E P/E-based TP of
Rs184. We believe: (1) Trailing auto demand growth (over the previous 24-48
months) is a key swing factor for Indian battery industry revenues (57% rsquared). (2) Indian auto industry experienced its strongest demand growth over
10 years across segments during FY10-FY11. Thus, we expect trailing auto
demand to approach peak in FY13-FY14. (3) As a result of (1) and (2), India’s
battery industry could witness its strongest revenue growth during FY13-FY14,
as vehicles sold in FY10-FY11 require replacement batteries. We believe the
replacement market is likely to witness a strong recovery over the next 2
quarters. (4) Exide Industries represents ideal exposure to this investment
theme, given its strong operating and financial profile. We also initiate coverage
on Bharat Forge, India’s largest forging company, with a Neutral rating and a 12-
m FY13E P/E-based TP of Rs250 and MRF Tyres, India’s largest tyre maker, with a
Neutral rating and a 12-m FY12E (year-end Sept. 2012) P/E-based TP of Rs7,029.
Exide Ind. and Bosch India also attractive on quality, value, growth
We evaluate our Indian auto parts coverage group of 5 companies, which
includes Bosch India and Apollo Tyres, on 3 parameters: (1) Quality: Industry
position and company strategy, cash returns, and financial profile. (2) Value:
Valuation on relative returns (P/B vs. ROE, Director’s Cut), vs. peers and trading
history (earnings as well as balance sheet multiples). (3) Growth: Company’s
ability to grow faster than industry and sustainability of returns. Our evaluation
suggests that both our Buy-rated stocks, Exide Industries and Bosch India, look
attractive relative to our coverage on all three parameters. We believe Bharat
Forge is likely to achieve higher growth over the next 3 years, even though it
currently looks unattractive due to an aggressive historical investment strategy,
as well as from the perspective of a relative returns-based valuation.
Exploring key investment themes on Exide Ind. and Bharat Forge
We explore key themes in this report, which include: (1) Lead-acid battery
recycling – regulatory environment and its impact on industry structure. (2)
Battery industry consolidation – the result of scale benefits and a threat to
smaller operators. (3) The future of lead-acid battery technology. (4) Bharat
Forge – the turnaround in earnings appears to be driven by cyclical factors.
Key risks: Commodity costs and macroeconomic headwinds
Initiate coverage on segment leaders in Indian auto parts market
We initiate coverage on Exide Industries, India’s largest battery manufacturer, with a Buy
rating (on Conviction Buy List) and a 12-month FY13E P/E-based target price of Rs184. We
believe:
(1) Trailing auto demand growth (over the previous 24-48 months) is a key swing factor for
battery industry revenues (57% r-squared) (Exhibit 11).
(2) Indian auto industry experienced its strongest demand growth over 10 years across
segments during FY10-FY11. Thus, we believe trailing auto demand will approach its peak
in FY13-FY14.
(3) As a result the strong trailing autos demand, India’s battery industry could witness its
strongest revenue growth during FY13-FY14 as vehicles sold in FY10-FY11 require
replacement batteries. Our analysis shows that the replacement market could begin a
strong recovery over next 2 quarters.
(4) Market leader, Exide Industries, represents ideal exposure to this investment theme,
given its strong operating and financial profile (Exhibits 15-22).
We initiate coverage on Bharat Forge, India’s largest forging company, with a Neutral
rating and a 12-month FY13E P/E-based target price of Rs250. We believe that this company
has one of the strongest growth profiles vs. our Indian auto and capital goods coverage
universe (Exhibits 59 and 60). However, the company’s cash returns performance steadily
declined from the 1st quartile in 2004 to the 3rd quartile in 2009, and it now trades at a
premium to its peers on relative returns-based metrics (Exhibits 61-75).
We also initiate coverage on MRF Tyres, India’s largest tyre maker, with a Neutral rating
and a 12-month FY12E (year-end September 2012) P/E-based target price of Rs7,029. MRF
Tyres is the market leader in the Indian tyre market, and currently trades close to its
historical average in terms of earnings and balance sheet-based multiples
Evaluating Indian auto parts coverage on quality, value, growth
We evaluate our Indian auto parts coverage universe of 5 companies, which includes Bosch
India and Apollo Tyres, on 3 parameters:
(1) Quality: Industry position and company strategy, cash returns across the cycle and
financial profile.
(2) Value: Valuation on relative returns (P/B vs. ROE, Director’s cut) vs. peers and trading
history (earnings as well as balance sheet multiples).
(3) Growth: Company’s ability to grow faster than industry and sustainability of returns
Key conclusions: Our evaluation suggests that both our Buy-rated stocks, Exide Industries
(on Conviction Buy List) and Bosch India, look attractive relative to our coverage universe
on all three parameters (Exhibits 2-5). We believe Bharat Forge scores highly in terms of
growth relative to auto and capital goods peers, but does not compare favorably on quality
(particularly given the company’s aggressive investment strategy, and its historical impact
on cash returns) and value-based parameters (valuation relative to auto parts and capital
goods peers)
Valuation methodology: Director’s Cut to identify mispricing
The Director’s Cut framework aims to capture intra-sector value by identifying undervalued
and overvalued stocks on the basis of their sector relative EV/GCI (market value of gross
cash invested) to CROCI/WACC (excess returns) (please refer to our report titled “Asia:
Introducing Director’s Cut – Returns matter more than growth”, published on August 7,
2009 by our Asia Tactical Research team). We apply this framework, along with P/B vs. ROE
and previous valuation and returns history to identify mispriced opportunities in our Indian
auto parts coverage universe.
The basic Director’s Cut framework selects valuation outliers based on EV/GCI over
CROCI/WACC – the underlying assumption of the methodology is that a company’s EV/GCI
vs. CROCI/WACC ratio will converge with the sector average over time as
under/overvaluations are arbitraged away. Therefore:
(1) Stocks lying above the sector average line appear overvalued (i.e. the excess value
attributed by the market for a company’s excess returns are well above the sector average)
and therefore may represent good sell opportunities.
(2) Stocks lying below the sector average line appear undervalued (i.e. the excess value
attributed by the market for a company’s excess returns are well below the sector average)
and therefore may represent good buy opportunities.
(3) The basic Director’s Cut methodology ignores those companies that appear
appropriately valued at any point in time. These appropriately valued companies lie on the
sector average line, i.e. the multiple on which the market values the assets (EV/GCI) over
excess returns (CROCI/WACC) equates to the sector average multiple.
Indian auto parts coverage universe in the context of advanced
Director’s Cut
We find a strong relationship between sector-relative EV/GCI and sector relative
CROCI/WACC, with r-squared exceeding 50% as detailed later in this report. There are two
groups of companies with apparently anomalous valuations:
(1) Consistently high CROCI companies – There are companies with unusually high levels
of dispersion in the top end of the CROCI range, particularly those with returns in the top
quartile of their sector (e.g. Exide Industries and Bosch India). We found that companies in
this area of the chart can continually trade at a premium to the sector average line,
although they look overvalued. This dispersion is in effect due to differing expectations
about the sustainability of returns for these different companies.
To deal with this apparent anomaly in valuation, we refer to the company’s historical
trading pattern on earnings as well as balance sheet-based multiples, and also regress
changes in returns to arrive at our target price for the stock.
(2) Consistently low CROCI companies – Another smaller group, at the low end of the
CROCI range, also behaves differently from its peers in our analysis. These companies tend
to trade at a premium to their sector despite being among the worst performers and
destroy value when CROCI/WACC falls below 1X (e.g. Bharat Forge, and Indian tyre
companies).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India: Automobiles: Parts
Equity Research
Initiate on Indian auto parts leaders: Exide Ind. (Buy, CL), Bharat Forge, MRF
Initiate on auto parts market leaders in India; Exide is our top pick
We initiate coverage on Exide Industries, India’s largest battery manufacturer,
with a Buy rating (on Conviction Buy List) and a 12-m FY13E P/E-based TP of
Rs184. We believe: (1) Trailing auto demand growth (over the previous 24-48
months) is a key swing factor for Indian battery industry revenues (57% rsquared). (2) Indian auto industry experienced its strongest demand growth over
10 years across segments during FY10-FY11. Thus, we expect trailing auto
demand to approach peak in FY13-FY14. (3) As a result of (1) and (2), India’s
battery industry could witness its strongest revenue growth during FY13-FY14,
as vehicles sold in FY10-FY11 require replacement batteries. We believe the
replacement market is likely to witness a strong recovery over the next 2
quarters. (4) Exide Industries represents ideal exposure to this investment
theme, given its strong operating and financial profile. We also initiate coverage
on Bharat Forge, India’s largest forging company, with a Neutral rating and a 12-
m FY13E P/E-based TP of Rs250 and MRF Tyres, India’s largest tyre maker, with a
Neutral rating and a 12-m FY12E (year-end Sept. 2012) P/E-based TP of Rs7,029.
Exide Ind. and Bosch India also attractive on quality, value, growth
We evaluate our Indian auto parts coverage group of 5 companies, which
includes Bosch India and Apollo Tyres, on 3 parameters: (1) Quality: Industry
position and company strategy, cash returns, and financial profile. (2) Value:
Valuation on relative returns (P/B vs. ROE, Director’s Cut), vs. peers and trading
history (earnings as well as balance sheet multiples). (3) Growth: Company’s
ability to grow faster than industry and sustainability of returns. Our evaluation
suggests that both our Buy-rated stocks, Exide Industries and Bosch India, look
attractive relative to our coverage on all three parameters. We believe Bharat
Forge is likely to achieve higher growth over the next 3 years, even though it
currently looks unattractive due to an aggressive historical investment strategy,
as well as from the perspective of a relative returns-based valuation.
Exploring key investment themes on Exide Ind. and Bharat Forge
We explore key themes in this report, which include: (1) Lead-acid battery
recycling – regulatory environment and its impact on industry structure. (2)
Battery industry consolidation – the result of scale benefits and a threat to
smaller operators. (3) The future of lead-acid battery technology. (4) Bharat
Forge – the turnaround in earnings appears to be driven by cyclical factors.
Key risks: Commodity costs and macroeconomic headwinds
Initiate coverage on segment leaders in Indian auto parts market
We initiate coverage on Exide Industries, India’s largest battery manufacturer, with a Buy
rating (on Conviction Buy List) and a 12-month FY13E P/E-based target price of Rs184. We
believe:
(1) Trailing auto demand growth (over the previous 24-48 months) is a key swing factor for
battery industry revenues (57% r-squared) (Exhibit 11).
(2) Indian auto industry experienced its strongest demand growth over 10 years across
segments during FY10-FY11. Thus, we believe trailing auto demand will approach its peak
in FY13-FY14.
(3) As a result the strong trailing autos demand, India’s battery industry could witness its
strongest revenue growth during FY13-FY14 as vehicles sold in FY10-FY11 require
replacement batteries. Our analysis shows that the replacement market could begin a
strong recovery over next 2 quarters.
(4) Market leader, Exide Industries, represents ideal exposure to this investment theme,
given its strong operating and financial profile (Exhibits 15-22).
We initiate coverage on Bharat Forge, India’s largest forging company, with a Neutral
rating and a 12-month FY13E P/E-based target price of Rs250. We believe that this company
has one of the strongest growth profiles vs. our Indian auto and capital goods coverage
universe (Exhibits 59 and 60). However, the company’s cash returns performance steadily
declined from the 1st quartile in 2004 to the 3rd quartile in 2009, and it now trades at a
premium to its peers on relative returns-based metrics (Exhibits 61-75).
We also initiate coverage on MRF Tyres, India’s largest tyre maker, with a Neutral rating
and a 12-month FY12E (year-end September 2012) P/E-based target price of Rs7,029. MRF
Tyres is the market leader in the Indian tyre market, and currently trades close to its
historical average in terms of earnings and balance sheet-based multiples
Evaluating Indian auto parts coverage on quality, value, growth
We evaluate our Indian auto parts coverage universe of 5 companies, which includes Bosch
India and Apollo Tyres, on 3 parameters:
(1) Quality: Industry position and company strategy, cash returns across the cycle and
financial profile.
(2) Value: Valuation on relative returns (P/B vs. ROE, Director’s cut) vs. peers and trading
history (earnings as well as balance sheet multiples).
(3) Growth: Company’s ability to grow faster than industry and sustainability of returns
Key conclusions: Our evaluation suggests that both our Buy-rated stocks, Exide Industries
(on Conviction Buy List) and Bosch India, look attractive relative to our coverage universe
on all three parameters (Exhibits 2-5). We believe Bharat Forge scores highly in terms of
growth relative to auto and capital goods peers, but does not compare favorably on quality
(particularly given the company’s aggressive investment strategy, and its historical impact
on cash returns) and value-based parameters (valuation relative to auto parts and capital
goods peers)
Valuation methodology: Director’s Cut to identify mispricing
The Director’s Cut framework aims to capture intra-sector value by identifying undervalued
and overvalued stocks on the basis of their sector relative EV/GCI (market value of gross
cash invested) to CROCI/WACC (excess returns) (please refer to our report titled “Asia:
Introducing Director’s Cut – Returns matter more than growth”, published on August 7,
2009 by our Asia Tactical Research team). We apply this framework, along with P/B vs. ROE
and previous valuation and returns history to identify mispriced opportunities in our Indian
auto parts coverage universe.
The basic Director’s Cut framework selects valuation outliers based on EV/GCI over
CROCI/WACC – the underlying assumption of the methodology is that a company’s EV/GCI
vs. CROCI/WACC ratio will converge with the sector average over time as
under/overvaluations are arbitraged away. Therefore:
(1) Stocks lying above the sector average line appear overvalued (i.e. the excess value
attributed by the market for a company’s excess returns are well above the sector average)
and therefore may represent good sell opportunities.
(2) Stocks lying below the sector average line appear undervalued (i.e. the excess value
attributed by the market for a company’s excess returns are well below the sector average)
and therefore may represent good buy opportunities.
(3) The basic Director’s Cut methodology ignores those companies that appear
appropriately valued at any point in time. These appropriately valued companies lie on the
sector average line, i.e. the multiple on which the market values the assets (EV/GCI) over
excess returns (CROCI/WACC) equates to the sector average multiple.
Indian auto parts coverage universe in the context of advanced
Director’s Cut
We find a strong relationship between sector-relative EV/GCI and sector relative
CROCI/WACC, with r-squared exceeding 50% as detailed later in this report. There are two
groups of companies with apparently anomalous valuations:
(1) Consistently high CROCI companies – There are companies with unusually high levels
of dispersion in the top end of the CROCI range, particularly those with returns in the top
quartile of their sector (e.g. Exide Industries and Bosch India). We found that companies in
this area of the chart can continually trade at a premium to the sector average line,
although they look overvalued. This dispersion is in effect due to differing expectations
about the sustainability of returns for these different companies.
To deal with this apparent anomaly in valuation, we refer to the company’s historical
trading pattern on earnings as well as balance sheet-based multiples, and also regress
changes in returns to arrive at our target price for the stock.
(2) Consistently low CROCI companies – Another smaller group, at the low end of the
CROCI range, also behaves differently from its peers in our analysis. These companies tend
to trade at a premium to their sector despite being among the worst performers and
destroy value when CROCI/WACC falls below 1X (e.g. Bharat Forge, and Indian tyre
companies).
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