Exide Industries: Upgrade to Buy; TP increased to INR170 ::Nomura research

Upgrade to Buy; TP increased to INR170
Margin improvement and replacement demand likely to drive the stock

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Action: Upgrade to Buy as catalysts appear on the horizon
We estimate Exide (EXID) will report an 18% revenue CAGR over the next
two years. Its auto segment should be driven by the replacement of
batteries for cars sold during FY09-11, when volumes increased at a 27%
CAGR. We also expect the industrial segment to pick up as the power
shortage situation has worsened vs that of last year, due to policy inaction.
EXID stock has corrected by 18% over the last year due to: 1) lower
replacement demand in the auto sector from the 2008 crisis period and
some market share losses, and 2) weak power inverter demand as the
power supply situation had improved in FY12. With both segments likely to
improve, we expect an earnings CAGR of 31% over FY12-FY14F. EXID
stock trades at 13x FY14F EPS of INR9.2 (ex investments in insurance of
INR8.8/share), below its past-three-year average of 16x.
Catalysts: Improvement in replacement volumes and margins
 EXID has launched company-branded home inverters to capture the
growth opportunity. If successful, this should further drive revenues.
 With recent declines in lead prices and a 2.5% price increase in June-
12, margins should improve in FY13F. Further upside potential could
come as EXID reduces the brand-building expenses that it is now
incurring to regain lost market share.
Valuation: TP of INR170 based on 16x one-year forward EPS
We value EXID at 16x avg EPS of FY14-15F (INR10.1); we value EXID’s
investments in the insurance business at a book value of INR8.8/share.



Upgrade to Buy
In our view, Exide Industries has been impacted by a number of factors over the last
year. Home inverter demand was hit by an improved power situation in 2011. Its market
share in the four-wheeler replacement car batteries market was impacted as it was
constrained for capacity during the strong demand period and chose to supply to OEMs.
Subsequently, the company has had to spend more on branding to regain lost market
share. However, in our view, the fundamental strength of the Exide brand remains and
consequently, it should be successful in recapturing lost market share. The earnings
downgrade cycle appears to be over, in our view. In addition, there is high visibility on
catalysts in the form of improved demand for replacement batteries and home inverters.
Thus, we upgrade the shares of Exide to Buy.
Auto segment: Strong growth expected in the replacement
segment
In our view, the outlook for growth in the auto segment should improve over the next two
years, driven by robust demand in the replacement battery segment as Exide benefits
from strong growth in domestic car sales (27% CAGR) seen during FY09-11. Further, we
expect Exide to regain some of the market share it lost during CY11 when it faced
capacity constraints. Overall, we expect volume growth of 20% in FY13F and 17% in
FY14F in the four-wheeler replacement battery segment of Exide. Volumes in the OEM
segment are likely to remain weak as the economic slowdown and higher petrol prices
have impacted customer demand.
We expect the replacement:OEM ratio in four-wheelers to improve to 1.34 in FY13F from
1.16 in FY12. We believe that a better replacement:OEM mix would augur well for
margins as PBIDT margins in the replacement segment are 20%-plus compared to
single-digit margins in the OEM segment, as per our estimates.


Upgrade to Buy with a TP of INR170, offering 32% potential
upside from current levels
We increase our target price by ~15% to INR170, driven largely by: 1) a 5% increase in
our FY14F EPS estimates and 2) roll forward of our target price to Sep-13 from Feb-13
earlier.
We value Exide Industries’ core business at INR161 based on 16x 1-yr forward EPS
(average of FY14F and FY15F) of INR10.1. This is in line with company’s past-threeyear
average one-year forward P/E multiple. We value the investment in the insurance
business at a book value of INR8.8/share.


Investment risks
Unable to gain market share in the replacement segment: According to Exide, it lost
~8-9% market share in the replacement segment in CY11 primarily due to capacity
constraints. We have assumed that Exide will gradually regain its lost market share over
the next 12-18 months. If Exide is unsuccessful in winning back part of its lost market
share, there would be potential downside risks to our estimates.
Increase in raw-material prices: If raw-material prices increase sharply from current
levels and Exide is unable to pass on the cost to customers due to high competition,
there could be downside risks to our estimates.