Batteries Sector Report-250912

7/27/2019 Batteries Sector Report-250912

1/15

Your success is our success

Emka

Sec

torReport

Emkay Global Financial Services Ltd. 1

Batteries

Strong fundamentals; Initiate with BUY

September 25, 2012

Amara Raja (BUY, TP: Rs250)

Price Performance

(%) 1M 3M 6M 12M

Absolute 11 41 48 103

Rel. to Nifty 6 28 37 76

Source:Bloomberg

Relative price chart

90

117

144

171

198

225

Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12

Rs

-10

8

26

44

62

80%

Amara Raja Batteries (LHS) Rel to Nifty (RHS)

Source: Bloomberg

Exide Industries (BUY, TP: Rs175)

Price Performance

(%) 1M 3M 6M 12M

Absolute 6 6 -2 9

Rel. to Nifty 1 -4 -9 -6

Source:Bloomberg


100

110

120

130

140

150


Rs

-30

-22

-14

-6

2

10%

Exide Industri es (LHS) Rel to Ni fty ( RHS ) Source: Bloomberg

Kaushal Maroo

[email protected]

+91-22-66121252

Siddhartha Bera

[email protected]

+91-22-66242494

n Quasi consumption play with >15% revenue CAGR potential

and better growth visibility than OEMs

n Exide and Amara Raja between them own ~90% of organized

market; to benefit from revival in replacement demand

n High revenue visibility from battery replacement cycle, strong

20%+ ROEs and low capital intensity makes both stocks re-

rating candidates

n BUY EXID with a TP of Rs 175; BUY AMRJ with a TP of Rs 250

Batteries: Defensive plays; strong fundamentals

In the current scenario of bleak domestic automobile sales, the battery sector provides a

good investment alternative. We expect the battery sector to benefit from the strong 22%

auto sales CAGR between FY09-FY12. The typical three year battery life means that

replacement demand is likely to pick up after a weak phase. We believe that Exide andAmara Raja are well placed to capitalize on this 20%+ growth opportunity, now that the

capacity expansion is on-stream. UPS/inverter sales continue to post double-digit growth

and we expect the weak demand from the low-margin OEMs to be more than offset by

replacement/industrial sales.

We like the sector because of 1) its low capital intensity (asset turnovers > 3x) and

resultant strong return ratios (20%+ ROEs), 2) barriers to entry in the form of strong OEM

tie-ups and a vast retail distribution network for both Exide and Amara Raja - 90% OEM

market share and >40k/18k retail touch-points respectively 3) high revenue visibility (OEM

tie ups & three year replacement cycle) and 4) quasi-duopoly (virtually a two-player

market) / quasi-consumption (given large portion of sales is retail sales) nature. We initiate

coverage on the sector with a structural positive stance and expect the companies to

report healthy 18-20% revenue growth and sustainable margins in the next 3 years.

Exide Industries: Turning around

Exides capacity commissioning which got delayed is now on-stream adding capacity of

2.0 mn for 2 wheelers and 1.4 mn for 4wheelers. Resolution of capacity constraints, in our

view, favorably places Exide to capitalize on the uptick in replacement demand in

FY13/14. We expect the company to report margin improvement of 200 bps over the next

two years driven by higher replacement sales and higher capacity at its in-house smelters,

which are a source of cheaper lead. We expect EBITDA margins to stabilize at ~17%.

We initiate coverage on Exide with a one-year target price of Rs 175 and a BUY

recommendation. We have valued its battery business at 16xFY14E earnings and have

added Rs 9/share for its stake in the ING Vysya Life Insurance business. We expect the

company to report earnings CAGR of 31% in FY12-FY15 and act as a counter cyclical

stock when OEMs are facing pressure of demand slowdown.

Amara Raja Batteries: Consistent performer

Amara Raja is, in our view, amongst the most exciting small cap companies with a superb

track record of revenue growth, market share gain and profitability. The company has

grown its revenues/profits at a CAGR of 31%/36% respectively in the last five years. We

believe that the AMARON brand has gained significant brand equity/presence and would

continue to see strong revenue growth and sustainable profits within the battery space.

Amara Raja has increasingly been focusing on automotive capacity addition a structural

positive in our view, and has set up an enviable network of 18,000 retail touch points.

We initiate coverage on Amara Raja with a BUY recommendation and a target price of Rs250. We expect the company to clock 18%/19% revenue/earnings growth CAGR over

FY12-FY15 with strong ROE of >25%. We believe that the stock is a re-rating candidate

given its consistent track record, quasi consumption nature of business, enviable return

profile and strong earnings growth trajectory.


2/15

Batteries Sector Report

Emkay Research September 25, 2012 2

Why batteries sector?

n Quasi duopoly 90% of market between Exide and Amara Raja ; Strong OEM tie-ups and vast distribution

network difficult to replicate

Exhibit 1: EXID/AMRJ have size and relationship advantage with OEMs

72% 71%

26%

0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

4W 2WExide AMRJ

OEM

Source: Company, Emkay Research

Exhibit 2: Organized replacement too, is a quasi duopoly between them

55%

34%

0%

10%

20%

30%

40%

50%

60%

Exide* AMRJ4 Wheeler

Replacement

Source: Annual Report, Emkay Research

Note: * -Estimates

Exhibit 3: Amara Raja has done an incredible job of raising distribution

18,000

274

-

5,000

10,000

15,000

20,000

Amaron Dealer Amaron Franchise


Exhibit 4: Exide already boasts of an FMCG-like retail reach

Other touch

points, 10,000

"Humsafar"

touchpoint,

14,000

EXID Dealers,

16,000

Retail Touchpoints


n Share of unorganized market on the decline

Exhibit 5: While 2w/PVs are largely catered by organized market, the price sensitivecommercial vehicles users still greatly use the unorganized market batteries

65%

40%

0%

10%

20%

30%

40%

50%

60%

70%

FY00 FY12Unorganised


Apart from advantage of better

quality products, organized market

is set to grow as manufacturersbuy back used batteries from the

market (thereby cutting supply of

lead to unorganized market) and

introduce cheaper batteries with

lower (life) warranties


3/15



n Pricing power: Pass-through clauses with OEMs and pricing power in retail assures margin sustainability

Exhibit 6: Margins resilient despite volatility in lead prices

5

10

1520

25

30

Q1FY07

Q3FY07

Q1FY08

Q3FY08

Q1FY09

Q3FY09

Q1FY10

Q3FY10

Q1FY11

Q3FY11

Q1FY12

Q3FY12

Q1FY13

1,000

1,500

2,0002,500

3,000

3,500

Lead (USD/Ton) Exide AMRJ

USD/Ton%

Source: Bloomberg, Company, Emkay Research

n Strong profitability, low capital intensity assures sustainable high return ratios

Exhibit 7: High gross fixed asset turnover levels

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E

AMRJ EXID

GFA Turnover (x)

Source: Emkay Research

Exhibit 8: EBITDA margins to improve over FY12 levels

14

.515

.1 16

.5

15

.7

19

.6

14

.6

15

.0

15

.5

16

.0

16

.5

16

.6

16

.7

16

.2

23

.4

19

.4

13

.41

6.0

17

.0

10

12

14

16

18

20

22

24

26


AMRJ EXID


Exhibit 9: 20%+ ROEs are sustainable in our view

10

15

20

25

30

35


AMRJ EXID

ROE


Exhibit 10: ROIC trend

20

30

40

50

60

70

80

90


AMRJ EXID

ROIC


Both companies sustained

margins even at lead prices of

>3k/ton; disappointments in the

past have been either due to

high cost inventory (EXID) or

shift in product mix (AMRJ)


4/15



Exhibit 11: Strong free cash flow generation: Should further improve once capex programs in FY13 are through

Rs mn FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E

Exide

Operating CF 2,234 1,877 1,783 5,047 5,238 3,978 5,102 5,078 7,643

Capex -358 -1,084 -1,627 -1,739 -1,076 -2,752 -1,996 -2,700 -2,000

FCF 1,876 793 155 3,309 4,163 1,226 3,106 2,378 5,643

% of EBITDA 82 25 3 60 47 14 45 25 46Amara Raja

Operating CF 266 -376 -296 2,239 2,143 861 2,963 3,199 3,476

Capex -244 -700 -570 -1,291 -685 -519 -873 -1,600 -1,600

FCF 22 -1,075 -867 949 1,458 343 2,089 1,599 1,876

% of EBITDA 4 -117 -47 46 51 13 59 36 35


n Secular growth: commendable growth track record

Exhibit 12: Healthy revenue growth trend

0

20

40

60

80100

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E

EXID AMRJ

% YoY


Companies saw double-digit

revenue growth even in the

toughest environment in FY09


5/15



Why BUY now?

n Replacement cycle to kick-in during FY13/14; Industry shift towards electric-start 2w provides new opportunities

Exhibit 13: Overall auto industry growth (All vehicle segments combined)

13% 14%

-4%

1%

27% 26%

13%

-10%

0%

10%

20%

30%

FY06 FY07 FY08 FY09 FY10 FY11 FY12

% YoYPo or growth led to current

scenario of weakreplacement demand

Strong growth to aid replacement

demand from FY12-15


Exhibit 14: Till FY08, industry was primarily dominated by kick-startmotorcycles

Electric Start

2-Wheeler

10%

Kick-Start 2-

Wheeler

90% Source: Emkay Research

Exhibit 15: Higher share of Electric-start bikes to fuel replacementdemand in coming years

Electric Start

2-Wheeler

60%

Kick-Start 2-

Wheeler

40%


n Capacity expansion on-stream now; companies preparing themselves for next leg of demand upswing

Exhibit 16: Companies still in capacity expansion mode in FY13

Mn Units FY10 FY11 FY12 FY13-14E

Amara Raja

4W 4.2 4.2 5.6 6.0

2W 1.8 3.6 4.8 6.0

UPS 1.8 1.8 2.0 3.0

Total 7.8 9.6 12.4 15.0

Exide Industries

4W 8.4 10.6 12.0 12.0

2W 10.0 18.0 20.0 20.0

Inverters 0.04 0.2

Industrial 5.8 5.8 5.8 5.8

Total 24.2 34.4 37.8 38.0


Typical 3 year life of a battery

would mean that the strong

25%+ industry growth in

FY10/11 will translate into

strong replacement demand in

FY13/14

Since FY10, both EXID &

AMRJ have increased capacity

by more than 50%


6/15



n International lead prices have cooled off; High lead inventory might keep lead prices under check

Exhibit 17: Strong inventory build-up indicating lead prices to remain subdued

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Jul-05

Jan-0

6

Jul-06

Jan-0

7

Jul-07

Jan-0

8

Jul-08

Jan-0

9

Jul-09

Jan-1

0

Jul-10

Jan-1

1

Jul-11

Jan-1

2

Jul-12

0

50

100

150

200250

300350

400

450

Inventory USD/ton

USD/ton '000 tons

Source: Bloomberg, Emkay Research

n Good proxy to automotive sector; Replacement stories better investment plays, given weak auto demand

Exhibit 18: EXID/AMRJ to see significantly better revenues than OEMs

0

20

40

60

80

100

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14EAuto OEM's EXID AMRJ

% YoY

Source: Emkay ResearchNote: Auto OEMs considered were HMCL, BJAUT, TVSL, TTMT (S), MM, MSIL, EIM, AL

n Expectations from companies low, despite a potential high growth period ahead

Exhibit 19: Upgrades a result of consecutive quarters of earnings beat

10

1214

16

18

20

Oct-11

Nov-1

1

Dec-1

1

Jan-1

2

Feb-1

2

Mar-12

Apr-12

May-1

2

Jun-1

2

Jul-12

Aug-1

2

FY13 FY14

AMRJ


Exhibit 20: Expectations very low; chances of beating estimates high

7

89

10

11

12

Oct-11

Nov-1

1

Dec-1

1

Jan-1

2

Feb-1

2

Mar-12

Apr-12

May-1

2

Jun-1

2

Jul-12

Aug-1

2

FY13 FY14

EXID


Although most benefit of lower

lead prices have been offset byrupee depreciation, risks to

margins are reduced due to

benign lead prices

We expect both the battery

players to report higher revenue

earnings growth than the

automotive OEMs (to see

subdued financial performance

in the next few quarters)


7/15



A case for stock re-rating?

We believe that battery sector companies Exide and Amara Raja are similar in nature to

the consumption-driven companies like biscuits, paints and consumer electricals where the

consumer stickiness to well known brands is high but relatively lesser when compared to

segment like personal products. Building brand equity and distribution network is the key to

getting the business right, where we believe both Exide and Amara Raja have done a

remarkable job.

However, when it comes to valuations, we believe the stocks are still cheap (especially

Amara Raja) not giving due credit to the consumption-like nature of business. Both

companies report >20% ROEs and >3x gross asset turns, similar to the consumer names

but still trade relatively cheaper. Even on PEG ratios, the battery stocks look cheaper and

in our view deserve re-rating.

Exhibit 21: Stock P/E at historical average despite consistent delivery

0

2

4

6

810

12

14

16

Apr-04

Oct-04

Apr-05

Oct-05

Apr-06

Oct-06

Apr-07

Oct-07

Apr-08

Oct-08

Apr-09

Oct-09

Apr-10

Oct-10

Apr-11

Oct-11

Apr-12

AMRJ

+1 SD

-1 SD


Exhibit 22: Post a wash out year in FY12, expectations are fairly low

0

5

10

15

20

25

30

Apr-04

Oct-04

Apr-05

Oct-05

Apr-06

Oct-06

Apr-07

Oct-07

Apr-08

Oct-08

Apr-09

Oct-09

Apr-10

Oct-10

Apr-11

Oct-11

Apr-12

EXID

+1 SD

-1 SD


Exhibit 23: Despite high return ratios, EXID/AMRJ look cheap on P/BV basis

Berger PaintsVIP

HavellAsian Paints

Akzo Nobel

Kansai Nerolac

Britannia

Bajaj Electrical

Exide

Amara Raja

-

5

10

15

20

25

30

35

40

45

- 2 4 6 8 10 12

P/BV vs ROE

Source: Company, Emkay Research, Bloomberg

Exhibit 24: Valuations look cheap even when analyzed based on earnings growth rate

PEG

-

0.5

1.0

1.5

2.0

2.5

Asian

Paints

Berger

Paints

Akzo

Nobel

Kansai

Nerolac

Britannia Havell Bajaj

Electrical

EXID AMRJ



8/15



Exhibit 25: P/BV and ROE trend for select consumer and battery stocks

P/B ROE

FY11 FY12 FY13 FY14 FY11 FY12 FY13 FY14

Asian Paints 17.1 13.9 11.1 9.1 44 39 37 36

Berger Paints 7.2 6.4 5.2 4.3 24 23 23 24

Akzo Nobel 3.0 2.7 2.8 2.6 14 15 15 17

Kansai Nerolac 5.5 4.7 4.0 3.5 23 22 21 22

Britannia 12.2 11.3 9.7 7.2 33 42 42 43

VIP - 4.1 3.7 3.1 44 34 27 26

Havell 12.7 7.7 5.8 4.4 49 44 38 34

Bajaj Electrical 3.0 2.6 2.3 2.0 26 19 20 21

Exide 4.4 4.0 3.4 2.9 24 16 20 22

Amara Raja 5.6 4.4 3.5 2.7 25 29 29 28


Exhibit 26: Valuation ratios of select consumer and battery stocks

P/E EV/EBITDA

FY11 FY12 FY13 FY14 FY11 FY12 FY13 FY14

Asian Paints 43.4 39.5 32.5 27.1 27.4 25.1 20.8 17.4

Berger Paints 32.8 27.8 23.5 19.6 21.4 17.7 14.3 12.0

Akzo Nobel 21.7 18.5 20.3 17.3 18.7 22.5 16.4 13.3

Kansai Nerolac 23.2 22.7 20.1 16.9 16.4 13.9 12.3 10.3

Britannia 41.7 29.0 25.4 19.6 27.7 19.4 17.3 13.6

VIP - 13.6 15.2 12.8 9.2 9.4 7.7

Havell 29.1 20.3 16.9 14.3 17.3 12.5 11.2 9.8

Bajaj Electrical 12.5 14.1 12.4 9.9 9.4 9.5 8.5 6.9

Exide 20.2 26.3 18.4 14.0 12.3 15.6 10.9 8.0

Amara Raja 24.5 16.9 13.2 10.8 14.3 9.8 8.1 6.7



9/15


Emka

9

Initiating

Coverage


Financial Snapshot (Standalone) (Rs mn)

YE- Net EBITDA EPS EPS RoE EV/

Mar Sales (Core) (%) APAT (Rs) % chg (%) P/E EBITDA P/BV

FY12A 23,674 3,540 15.0 2,151 12.6 45.2 29.3 16.9 9.8 4.4

FY13E 28,618 4,426 15.5 2,755 16.1 28.1 29.4 13.2 8.1 3.5

FY14E 33,408 5,349 16.0 3,375 19.8 22.5 28.3 10.8 6.7 2.7

FY15E 38,405 6,137 16.0 3,898 22.8 15.5 26.1 9.3 5.8 2.2

Amara Raja

Consistent performer

September 25, 2012

Rating

Buy

CMP

Rs212

Target Price

Rs250

EPS Chg FY13E/FY14E (%) NA

Target Price change (%) NA

Nifty 5,670

Sensex 18,673

Price Performance

(%) 1M 3M 6M 12M

Absolute 11 41 48 103

Rel. to Nifty 6 28 37 76

Source:Bloomberg


90

117

144

171

198

225


Rs

-10

8

26

44

62

80%

Amara Raja Batteries (LHS) Rel to Nifty (RHS) Source: Bloomberg

Stock Details

Sector Auto AncillariesBloomberg AMRJ IB

Equity Capital (Rs mn) 171

Face Value(Rs) 1

No of shares o/s (mn) 171

52 Week H/L 216/ 90

Market Cap (Rs bn/USD mn) 36/ 679

Daily Avg Volume (No of sh) 185,613

Daily Avg Turnover (US$mn) 1.3

Shareholding Pattern (%)Jun12 Mar12 Dec11

Promoters 52.1 52.1 52.1

FII/NRI 6.4 6.2 6.3

Institutions 19.4 19.7 19.6

Private Corp 3.0 2.7 3.0

Public 19.1 19.4 19.1

Source: Bloomberg

Kaushal Maroo

[email protected]

+91-22-66121252

Siddhartha Bera

[email protected]

+91-22-66242494

n Capacity expansion to help increase revenue share of the

more stable automotive segment to ~60% in FY14

n

Expect healthy growth momentum with a 18%/22%revenue/profit CAGR in FY12-FY15

n Quasi consumption play and consistent track record warrant

stock re-rating

n Initiate with a BUY rating and a target price of Rs 250, based

on 12.5xFY14E EPS

Superb track record

Amara Raja is, in our view, amongst the most exciting small cap companies with a

superb track record of revenue growth, market share gain and profitability. The company

has grown its revenues/profits at a CAGR of 31%/36% respectively in the last five years

and held ground even when industry leader resorted to price cuts to gain market share.We believe that the AMARON brand has gained significant brand equity/presence and

would continue to see strong revenue growth and sustainable profits within the battery

space.

Increasing focus on automotive segment a structural positive

Amara Raja has increasingly been focusing on automotive capacity addition adding 1.8

mn 4w and 2.4 mn 2w units in the last two years. As a result, automotive revenue share

is likely to increase from 50% in FY10 to 60% in FY14. Having improved its market share

to 26% in 4 wheeler OEMs, the company is now eyeing the 2 wheeler OEM segment,

wherein it was not present until now. Higher OEM share augurs well for the company as

it is likely to help improve replacement market share as well. The company has set up an

enviable network of >18,000 retail touch points, a tall task by any order.

Historically, Amara Raja had been very strong in the telecom tower space which saw

poor demand and high competitive pricing in FY11-12, thereby impacting profitability of

the company. However, the segment is now looking up in terms of profitability as well.

Nonetheless, due to relatively competitive nature of the industrial segment, we believe

that the revenue mix shift towards the automotive segment is structurally positive.

Initiate with BUY; TP at Rs 250

We initiate coverage on Amara Raja with a BUY recommendation and a target price of

Rs 250. We expect the company to clock 18%/22% revenue/earnings growth CAGR over

FY12-FY15 with strong ROE of >25%. Despite aggressive marketing from Exide, which

could help it gain market share, we believe that the battery sector as a whole provides

significant growth opportunities for both the players in the quasi-duopoly.

We believe that the stock is a re-rating candidate given its consistent track record, quasi

consumption nature of business, enviable returns profile and strong earnings growth

trajectory. We value AMRJ at a 20% valuation discount to Exide Industries at 12.5x

FY14E EPS. BUY for an upside potential of 18%.


10/15

Amara Raja Initiating Coverage


Company Profile Amara Raja

Amara Raja is the second largest automotive battery manufacturer and the largest supplier

of Industrial storage battery in India. It entered the automotive battery segment only in

2000-01 post its JV with Johnson Controls Inc (JCI, USA) when it introduced AMARON

batteries based on Zero maintenance technology for the first time in India. From 2007-08, it

entered two-wheeler replacement segment with launch of Amaron Pro bike brand. It plans

to enter the two wheeler OEM segment from FY13 onwards.

The industrial battery product portfolio offers capacities ranging from 4.5 Ah to 5,000 Ah.

ARBL is the market leader in the telecom and UPS battery business with ~42% and ~32%

market share respectively.

Company is investing significantly to expand capacities in both automotive and UPS

segment. It has increased its capex guidance to Rs 2.3 bn in FY13 (from Rs 1.9 bn).

Currently, it has only one manufacturing plant in Andhra Pradesh. It is actively looking for a

second strategic manufacturing location to facilitate all future expansions.

Johnson Controls, the global leader in lead-acid automotive batteries and advanced

batteries for Start-Stop, hybrid and electric vehicles, holds a 26% stake in Amara Raja and

provides technical support to the company

Exhibit 1: Overall revenue mix

OEM

19%

Replaceme

nt

34%

Industrial

47%


Exhibit 2: Industrial revenue mix

Railw ay &

Other

17%

UPS

38%

Telecom

45%


Exhibit 3: Production Capacities

mn units FY10 FY11 FY12 FY13-14E

4 Wheeler 4.2 4.2 5.6 6.0

2 Wheeler 1.8 3.6 4.8 6.0

UPS 1.8 1.8 2.0 3.0


A significant portion (~60%) of its lead requirement is met through imports from Korea and

Australia while ~20% is obtained from Hindustan Zinc and balance from other local

sources. Though it has pass through contracts with its customers, adverse forex movementimpacts margins in the short term.

Key competitive strength of Amara Raja is its pan-India distribution and service network

which has increased exponentially to 18,000 Amaron retailers, 274 Amaron Franchisees,

900+ PowerZone retailers and 100 AQuA dealers.

Amara Rajas management comprises of Mr Ramachandra Galla (Chairman) and Mr

Jayadev Galla (MD) who have been with the company since its inception.

Revenues doubled to Rs 20 bn

in past 4 years, targets Rs 40

bn in another 4 years

Automot ive Brands: PC- Pro,

Flo, Go, Black and Fresh; CV -

Hi-way; Tractors Harvest; 2W

- Pro Bike Rider

Industr ial Brands:Volt, Power

Stack, Quanta, Power Sleek

Next 3 years capex to be higher

than in the past

Only internal accruals would be

used to fund capex

Client Profi le

Auto-motive

Major TW, PV, CV

and Tractor OEMs

Telecom

Indus Towers, Viom Networks,

ATC, Bharti Infratel, Airtel,

Vodafone, Aircel, BSNL

Power

NTPC/NHPC, Power Grid,

Raichur/Chennai Thermal

Power Station

Motive

Power

APC, Siemens, Alstom,

Crompton Greaves

UPS

APC, Numeric, DB Power,

APLab, Electronics &

Controls

Others Indian Railways

Market Share (%)

4W OEM 26

4W Replacement (organised) 34

2W Replacement (organised) 24

UPS 32

Telecom 46


11/15

Amara Raja Initiating Coverage


Key Financials (Standalone)

Income Statement

Y/E Mar (Rsmn) FY12A FY13E FY14E FY15E

Net Sales 23,674 28,618 33,408 38,405

Growth (%) 34.4 20.9 16.7 15.0

Expenditure 20,134 24,192 28,059 32,268Raw Materials 15,955 18,927 21,878 25,240

Employee Cost 1,003 1,202 1,403 1,575

Other Exp 3,176 4,064 4,777 5,454

EBITDA 3,540 4,426 5,349 6,137

Growth (%) 37.5 25.0 20.9 14.7

EBITDA marg in (%) 15.0 15.5 16.0 16.0

Depreciation 465 547 655 772

EBIT 3,075 3,879 4,695 5,365

EBIT mar gin (%) 13.0 13.6 14.1 14.0

Other Income 152 221 323 427

Interest expenses 41 18 18 18

PBT 3,186 4,082 5,000 5,774Tax 1,036 1,327 1,625 1,877

Effective tax rate (%) 32.5 32.5 32.5 32.5

Adjusted PAT 2,151 2,755 3,375 3,898

Growth (%) 45.2 28.1 22.5 15.5

Net Marg in (%) 9.1 9.6 10.1 10.1

(Profit)/loss from JVs/Ass/MI 0 0 0 0

Adj. PAT After JVs/Ass/MI 2,151 2,755 3,375 3,898

E/O items 0 0 0 0

Reported PAT 2,151 2,755 3,375 3,898

PAT after MI 2,151 2,755 3,375 3,898

Growth (%) 45.2 28.1 22.5 15.5

Balance Sheet


Equity share capital 171 171 171 171

Reserves & surplus 8,064 10,342 13,132 16,354

Net worth 8,235 10,512 13,303 16,525Minority Interest 0 0 0 0

Secured Loans 56 100 100 100

Unsecured Loans 785 785 785 785

Loan Funds 841 885 885 885

Net deferred tax liability 220 220 220 220

Total Liabilities 9,295 11,617 14,407 17,630

Gross Block 6,212 7,812 9,412 10,912

Less: Depreciation 2,667 3,214 3,868 4,641

Net block 3,546 4,599 5,544 6,272

Capital work in progress 315 315 315 315

Investment 161 2,661 4,161 5,661

Current Assets 9,493 9,462 10,594 12,410Inventories 2,666 3,111 3,417 3,942

Sundry debtors 3,197 3,607 4,027 4,630

Cash & bank balance 2,292 1,243 1,424 1,853

Loans & advances 1,306 1,501 1,727 1,986

Other current assets 33 0 0 0

Current lia & Prov 4,220 5,420 6,207 7,028

Current liabilities 2,013 2,823 3,204 3,683

Provisions 2,207 2,597 3,003 3,346

Net current assets 5,274 4,042 4,387 5,382

Misc. exp 0 0 0 0

Total Assets 9,295 11,617 14,407 17,630

Cash Flow


PBT (Ex-Other income) 3,035 3,861 4,677 5,347

Depreciation 465 547 655 772

Interest Provided 41 18 18 18

Other Non-Cash items 0 0 0 0

Chg in working cap 461 182 -164 -565

Tax paid -1,036 -1,327 -1,625 -1,877

Operating Cashflow 2,963 3,281 3,560 3,696

Capital expenditure -765 -1,600 -1,600 -1,500

Free Cash Flow 2,198 1,681 1,960 2,196

Other income 152 221 323 427Investments 0 -2,500 -1,500 -1,500

Investing Cashflow -696 -3,879 -2,777 -2,573

Equity Capital Raised 0 0 0 0

Loans Taken / (Repaid) -60 44 0 0

Interest Paid -41 -18 -18 -18

Dividend paid (incl tax) -375 -477 -585 -675

Income from investments 0 0 0 0

Others -29 0 0 0

Financing Cashflow -505 -451 -602 -693

Net chg in cash 1,762 -1,049 181 430

Opening cash position 451 2,292 1,243 1,424

Closing cash position 2,213 1,243 1,424 1,853

Key Ratios

Y/E Mar FY12A FY13E FY14E FY15E

Profitability (%)

EBITDA Margin 15.0 15.5 16.0 16.0

Net Margin 9.1 9.6 10.1 10.1

ROCE 38.3 39.2 38.6 36.2

ROE 29.3 29.4 28.3 26.1

RoIC 46.9 55.7 59.0 58.6

Per Share Data (Rs)

EPS 12.6 16.1 19.8 22.8

CEPS 15.3 19.3 23.6 27.3

BVPS 48.2 61.5 77.9 96.7DPS 1.9 2.4 3.0 3.4

Valuations (x)

PER 16.9 13.2 10.8 9.3

P/CEPS 13.9 11.0 9.0 7.8

P/BV 4.4 3.5 2.7 2.2

EV / Sales 1.5 1.3 1.1 0.9

EV / EBITDA 9.8 8.1 6.7 5.8

Dividend Yield (%) 0.9 1.1 1.4 1.6

Gearing Ratio (x)

Net Debt/ Equity -0.2 0.0 0.0 -0.1

Net Debt/EBIDTA -0.4 -0.1 -0.1 -0.2

Working Cap Cycle (days) 46.0 35.7 32.4 33.5


12/15


Emka

12

Initiating

Coverage


Financial Snapshot (Standalone) (Rs mn)

YE- Net EBITDA EPS EPS RoE EV/

Mar Sales (Core) (%) APAT (Rs) % chg (%) P/E EBITDA P/BV

FY12A 51,070 6,839 13.4 4,612 5.4 -23.4 15.9 26.3 15.6 4.0

FY13E 60,000 9,581 16.0 6,575 7.7 42.6 19.9 18.4 10.9 3.4

FY14E 72,690 12,350 17.0 8,658 10.2 31.7 22.2 14.0 8.0 2.9

FY15E 86,943 14,808 17.0 10,445 12.3 20.6 22.5 11.6 6.2 2.4

Exide Industries

Turning around

September 25, 2012

Rating

Buy

CMP

Rs143

Target Price

Rs175

EPS Chg FY13E/FY14E (%) NA

Target Price change (%) NA

Nifty 5,670

Sensex 18,673

Price Performance

(%) 1M 3M 6M 12M

Absolute 6 6 -2 9

Rel. to Nifty 1 -4 -9 -6

Source:Bloomberg


100

110

120

130

140

150


Rs

-30

-22

-14

-6

2

10%

Exide Industri es (LHS) Rel to Ni fty ( RHS ) Source: Bloomberg

Stock Details

Sector Auto AncillariesBloomberg EXID IB

Equity Capital (Rs mn) 850

Face Value(Rs) 1

No of shares o/s (mn) 850

52 Week H/L 152/ 99

Market Cap (Rs bn/USD mn) 121/ 2,270

Daily Avg Volume (No of sh) 1,150,649

Daily Avg Turnover (US$mn) 2.9

Shareholding Pattern (%)Jun12 Mar12 Dec11

Promoters 46.0 46.0 46.0

FII/NRI 18.1 18.1 18.8

Institutions 13.3 13.4 13.5

Private Corp 12.0 11.9 10.6

Public 10.7 10.7 11.2

Source: Bloomberg

Kaushal Maroo

[email protected]

+91-22-66121252

Siddhartha Bera

[email protected]

+91-22-66242494

n Capacity expansion to help capitalize on replacement

demand recovery. See revenue CAGR of 19% in FY12-15E

n

Improving product mix to lead to ~200 bps margin expansionover the next two years

n Expectations are low pedigree strong

n Initiate with a TP of Rs 175 based on 16xFY14E EPS; BUY

Murphys Law at play in FY12

FY12 was a bad year for Exide with the company facing multiple issues, most important

being, capacity constraints and a resultant shift in product mix towards the lower margin

OEM segment. Loss of market share owing to capacity constraints warranted a price cut,

further impacting margins. Moreover, poor inverters demand owing to a relatively

pleasant summer, lead to accumulation of high cost lead inventory which needed to be

liquidated. We believe that the worst of these are behind us and business has startedlooking up and should deliver better-than-anticipated results on more than one

parameter.

Replacement demand to kick in; expect market share gains

Exides capacity commissioning, which got delayed, is now on stream adding further

capacity of 2.0 mn for 2 wheelers and 1.4 mn for 4 wheelers. Resolution of capacity

constraints, in our view, will position Exide favorably to capitalize on the uptick in the

replacement demand in FY13/14, which we expect on the back of the strong 26% growth

seen in FY10/11 and a three year replacement cycle. Also, the company is likely to

regain some of its lost market share in the replacement market with the capacity addition

and aggressive marketing initiatives undertaken. We expect Exide to report FY12-15E

revenue CAGR of 19% as against our OEM universe revenue CAGR of 13%.

Product mix improvement to drive margins

With stronger growth coming from the high margin replacement segment (owing to both,

a cyclical recovery and market share gains) as against low-single-digit margins in the

OEM business, we expect Exides margin profile to improve over the next couple of

years. Replacement demand for 2wheelers is also in a structural growth phase given

increased usage of electric-start two-wheelers. In-house smelters give Exide a

competitive edge, providing it with a source for cheaper and stable supply of lead, the

key raw material. We expect the company to report margin improvement of 200 bps over

the next two years and stabilize at ~17%.

Initiate with a TP of Rs 175; BUYWe initiate coverage on Exide with a one-year target price of Rs 175 and a BUY

recommendation. Our target price is based on 16xFY14E earnings for the core business

and Rs 9/share for its stake in ING Vysya Life Insurance business. We expect the

company to report earnings CAGR of 31% in FY12-FY15 and act as a counter cyclical

stock when OEMs are facing demand slowdown pressures.


13/15

Exide Industries Initiating Coverage


Company Profile- Exide Industries

Exide manufactures lead-acid storage batteries from 2.5Ah to 20,400 Ah in the automotive,

industrial and submarine segments. It is the market leader in the automotive lead storage

battery industry in India and the second largest player in Industrial lead storage battery. It

has forayed into manufacture and marketing of home usage inverters from Jan12. Exide

has a strong brand franchise with the widest network of dealers and distributors in India.

The company operates seven manufacturing plants across India with a total manufacturing

capacity of 33 mn automotive batteries (FY12).

The company has seven subsidiaries aiding in manufacturing and marketing of products in

India and foreign markets. This includes two lead smelters that recycle lead and constitute

>50% of its overall lead consumption. It also has a 50% stake in ING Vyasa Life Insurance,

whose book value of investments stands at Rs 7.4 bn (FY12).

Exhibit 1: Overall Revenue mix

Industrial

36%

Replaceme

nt

39%

OEM

25%


Exhibit 2: Industrial segment mix

Export

5%

Inverter

30%

Infrastruct

ure

35%

UPS

30%


Exhibit 3: Production Capacities

mn units 2009 2010 2011 2012E

4 wheeler 7.5 8.4 10.6 12.0

2 wheeler 9.3 10.0 18.0 20.0

Industrial 5.8 5.8 5.8 5.8Total 22.7 24.2 34.4 37.8


Exhibit 4: Subsidiaries/ JV Profile

Rs mn Business % Stake Investment Sales PAT Dividend

Indian

Chloride International Limited Non conventional energy 100 2 36 1

Chloride Power Systems High end chargers for industrial use 100 29 733 32 15

Chloride Metals Ltd Manufacture and supply of recycled lead 100 347 4,400 85 54

Chloride Alloys India Ltd Manufacture and supply of recycled lead 100 744 8,501 81 140Foreign

Espex Batteries Limited, UKSupply of industrial batteries in UK and its

neighboring areas51 8 460 17

Associated Battery Manufacturers (Ceylon) LtdManufacture of Lead acid automotive and

motorcycle batteries61.5 73 802 57 45

Chloride Batteries S.E. Asia Pte Ltd.

Production and distribution of industrial battery

chargers, rectifiers and parts thereof and the

distribution of industrial and automotive batteries

100 104 1,345 48 54

Associate

ING Vysya Life insurance company 50 7,444

Source: Company

Captive lead consumption isexpected to reach >60% in the

next 2 years

Automot ive brands: Exide,

SF, Sonic, Standard Furukawa

Industr ial brands: Exide,

Index, SF, CEIL, Power Safe

The smelters provide Exide with

recycled lead that is at least 8-

10% cheaper than market rate

Client Profi le

AutomotiveMajor TW, PV, CV

and Tractor OEMs

Telecom

Motorota, BSNL,Tata Comm.,

Lucent, Alcatel, Siemens,

Nokia, Ericsson

AutomationABB, APC, Emerson,

Voltas, L&T

Power NTPC, BHEL

Others Indian Railways, Godrej

Market Share (%)

4W OEM 72

2W OEM 714W Replacement (Total) 30

2W Replacement (Total) 23

UPS/ Inverter 35


14/15

Exide Industries Initiating Coverage


Key Financials (Standalone)

Income Statement


Net Sales 51,070 60,000 72,690 86,943

Growth (%) 12.1 17.5 21.1 19.6

Expenditure 44,232 50,419 60,341 72,135Raw Materials 34,330 38,848 46,815 56,132

Employee Cost 2,862 3,291 3,785 4,353

Other Exp 7,040 8,280 9,741 11,650

EBITDA 6,839 9,581 12,350 14,808

Growth (%) -22.4 40.1 28.9 19.9

EBITDA marg in (%) 13.4 16.0 17.0 17.0

Depreciation 1,007 1,109 1,224 1,326

EBIT 5,832 8,472 11,126 13,482

EBIT mar gin (%) 11.4 14.1 15.3 15.5

Other Income 673 838 1,117 1,279

Interest expenses 53 49 49 49

PBT 6,452 9,261 12,194 14,712Tax 1,840 2,686 3,536 4,266

Effective tax rate (%) 28.5 29.0 29.0 29.0

Adjusted PAT 4,612 6,575 8,658 10,445

Growth (%) -23.4 42.6 31.7 20.6

Net Marg in (%) 9.0 11.0 11.9 12.0

(Profit)/loss from JVs/Ass/MI 0 0 0 0

Adj. PAT After JVs/Ass/MI 4,612 6,575 8,658 10,445

E/O items 0 0 0 0

Reported PAT 4,612 6,575 8,658 10,445

PAT after MI 4,612 6,575 8,658 10,445

Growth (%) -23.4 42.6 31.7 20.6

Balance Sheet


Equity share capital 850 850 850 850

Reserves & surplus 29,723 34,826 41,520 49,806

Net worth 30,573 35,676 42,370 50,656Minority Interest 0 0 0 0

Secured Loans 0 700 700 700

Unsecured Loans 0 0 0 0

Loan Funds 0 700 700 700

Net deferred tax liability 825 825 825 825

Total Liabilities 31,398 37,201 43,895 52,181

Gross Block 17,766 20,466 22,466 24,466

Less: Depreciation 8,100 9,209 10,433 11,759

Net block 9,666 11,257 12,033 12,707

Capital work in progress 266 266 266 266

Investment 15,546 19,046 23,546 26,546

Current Assets 15,466 17,781 20,910 26,991Inventories 9,681 11,708 13,467 15,379

Sundry debtors 4,023 4,438 4,979 5,479

Cash & bank balance 577 315 1,011 4,569

Loans & advances 1,185 1,320 1,454 1,565

Other current assets 0 0 0 0

Current lia & Prov 9,546 11,149 12,861 14,330

Current liabilities 7,899 8,515 9,620 10,765

Provisions 1,646 2,634 3,241 3,565

Net current assets 5,920 6,632 8,050 12,661

Misc. exp 0 0 0 0

Total Assets 31,398 37,201 43,896 52,181

Cash Flow


PBT (Ex-Other income) 5,779 8,423 11,077 13,433

Depreciation 1,007 1,109 1,224 1,326

Interest Provided 53 49 49 49

Other Non-Cash items 0 0 0 0

Chg in working cap -18 -974 -722 -1,053

Tax paid -1,840 -2,686 -3,536 -4,266

Operating Cashflow 5,102 5,921 8,091 9,489

Capital expenditure -1,761 -2,700 -2,000 -2,000

Free Cash Flow 3,341 3,221 6,091 7,489

Other income 673 838 1,117 1,279Investments -1,767 -3,500 -4,500 -3,000

Investing Cashflow -3,230 -5,362 -5,383 -3,721

Equity Capital Raised 0 0 0 0

Loans Taken / (Repaid) -22 700 0 0

Interest Paid -53 -49 -49 -49

Dividend paid (incl tax) -1,404 -1,473 -1,964 -2,160

Income from investments 0 0 0 0

Others 36 0 0 0

Financing Cashflow -1,443 -822 -2,013 -2,209

Net chg in cash 429 -262 696 3,559

Opening cash position 148 577 315 1,011

Closing cash position 577 314 1,011 4,569

Key Ratios

Y/E Mar FY12A FY13E FY14E FY15E

Profitability (%)

EBITDA Margin 13.4 16.0 17.0 17.0

Net Margin 9.0 11.0 11.9 12.0

ROCE 21.9 27.1 30.2 30.7

ROE 15.9 19.9 22.2 22.5

RoIC 40.9 52.0 60.7 67.6

Per Share Data (Rs)

EPS 5.4 7.7 10.2 12.3

CEPS 6.6 9.0 11.6 13.8

BVPS 36.0 42.0 49.8 59.6DPS 1.5 1.5 2.0 2.2

Valuations (x)

PER 26.3 18.4 14.0 11.6

P/CEPS 21.6 15.8 12.3 10.3

P/BV 4.0 3.4 2.9 2.4

EV / Sales 2.1 1.7 1.4 1.1

EV / EBITDA 15.6 10.9 8.0 6.2

Dividend Yield (%) 1.1 1.1 1.4 1.5

Gearing Ratio (x)

Net Debt/ Equity -0.5 -0.5 -0.5 -0.6

Net Debt/EBIDTA -2.2 -1.8 -1.8 -2.0

Working Cap Cycle (days) 38.2 38.4 35.3 34.0


15/15

E k R h S t b 25 2012 15

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Emkay Global Financial Services Ltd.

7th Floor, The Ruby, Senapati Bapat Marg, Dadar - West, Mumbai - 400028. India

Tel: +91 22 66121212 Fax: +91 22 66121299 Web: www.emkayglobal.com

BUY Expected total return (%) (stock price appreciation and dividend yield) of over 25% within the next 12-18 months.

ACCUMULATE Expected total return (%) (stock price appreciation and dividend yield) of over 10% within the next 12-18 months.

HOLD Expected total return (%) (stock price appreciation and dividend yield) of upto 10% within the next 12-18 months.

REDUCE Expected total return (%) (stock price depreciation) of upto (-)10% within the next 12-18 months.

SELL The stock is believed to under perform the broad market indices or its related universe within the next 12-18 months.

Emkay Rating Distribution


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