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BNP Paribas research is available on Thomson Reuters, Bloomberg, and on http://equities.bnpparibas.com. Please contact your salesperson for authorisation.Please see the important notice on the back page.
Exide Industries
CHLR IN
Joseph GeorgeIndia Change in Numbers(91 22) 6628 2452Consumer Discretionary/Automobiles & Components18 May 2009
SO WHAT? THE BNP PARIBAS ANGLE
We are one of the only threeinstitutional brokers coveringthe stock.
We have conducted detailedchecks to ascertain pricing inthe auto replacementmarket.
Net Profit 10...
INR3,763m
........................(From INR4,022m)
Diff from Consensus....4.3%
Consensus (mean)..INR3,607.8mConsensus (momentum)..........
Target Price.......
INR70.00
..................................(Unchanged)
Diff from Consensus..12.5%
Consensus (median)......INR62.20 Consensus (momentum) .....
Current Price
.......
INR50.35
Upside/(Downside)..............39.0%
BUY
(Unchanged)
Recs in the Market
Positive........................................
9
Neutral.........................................
0
Negative......................................
0
Consensus (momentum) .....
Sources: Thomson One Analytics; Bloomberg; BNP Paribas estimates
•
Impressive 20%, 17% growth in replacement, industrial volume in 4QFY09; demand remains unscathed by slowdown.
•
Company confident of improving margin given lower lead price, smelting capacity expansion and minimal price cuts.
•
TP of INR70 (based on 13x FY10E EPS and INR10 for ING Vysya Life stake). Reiterate BUY.
Thesis reiterated post mgmt call
Improved confidence in sustainable earnings growth
Our recent call with Exide’s management gave us confidence in ourexpectation of a greater than 25% EPS growth in FY10, on strongvolume growth led by the replacement segment of automotive batteriesand margin expansion led by lower lead price. The replacementsegment, which accounts for more than half of Exide’s operating profits,rose 18-20% in 4QFY09. The segment will continue to impress in FY10due to battery replacements driven by a higher vehicle base post theauto boom in FY03-07. The management was also confident aboutcontinued growth in the industrial segment, which was up more than15% in FY09.
Pick-up in auto OEM demand a long-term positive
Exide is seeing improvement in demand from auto OEMs, coming out ofthe trough in the December 2008 quarter. Sales to auto OEMs, beinglow-margin, may only be marginally beneficial for the bottom-line in thenear-term. However, it is a key long-term positive since higher OEMsales will eventually translate to higher replacement sales, due toincrease in the vehicle base, and also because customers tend to largelyreplace worn-out batteries with the same brand which is pre-fitted in thevehicle.
Expect strong margin expansion in FY10
We expect a 250bp EBITDA margin expansion in FY10, driven by lowerlead price (lead cost accounts for more than 50% of revenue) as well asgreater reliance on cheaper recycled lead. FY10 will not be affected bythe problem of ‘high-cost inventory in a falling lead price environment’which affected 2HFY09, since about 55% of Exide’s revenue isgoverned by pass-through agreements. Since lead prices havestabilized in the USD1,200-1,400 range, the full margin potential shouldbe visible starting 1QFY10.
Stock attractively valued
Our TP of INR70 is based on INR60 for the core business based on 13xFY10E EPS and INR10 for Exide’s 50% stake in ING Vysya lifeinsurance. Even if we assign a zero value to the stake in the insurancebusiness, Exide is currently trading at 10.7x FY10 EPS.
Earnings Estimates And Valuation Ratios
YE Mar (INR m)2009 2010E2011E2012E
Revenue33,930 35,33242,04749,795Reported net profit 2,844 3,7634,5735,531Recurring net profit 2,981 3,7634,5735,531Previous rec net profit 3,124 4,0224,994—Chg from previous (%) (4.6) (6.4)(8.4)—Recurring EPS (INR) 3.73 4.705.726.91Prevrec EPS(INR) 3.91 5.036.24—Rec EPS growth (%) 16.8 26.221.521.0Recurring P/E (x) 13.5 10.78.87.3Dividend yield (%) 1.2 0.91.01.0EV/EBITDA (x) 7.8 6.45.24.1Price/book (x) 3.1 2.52.01.6ROE (%)25.8 26.025.224.3Net debt/equity (%) 22.1 10.1(3.3)(14.5)
Sources: Exide Industries; BNP Paribas estimates
Share Price Daily vs MSCI India
305070May-08Aug-08Nov-08Feb-09May-09(INR)12141(%)Exide IndustriesRel to MSCI India
Next results/event July 2009Market cap (USD m) 8093m avg daily turnover (USD m) 0.4Free float (%) 51Major shareholder Chloride Eastern Limited (49%)12m high/low (INR) 80.00/35.05ADR (USD) NilAvg daily turnover (USD m) NilDiscount/premium (%) NilDisc/premium vs 52-wk avg (%) Nil
Sources: Datastream; Bloomberg
JOSEPH GEORGE EXIDE INDUSTRIES CHLR IN 18 MAY 2009
2
BNP PARIBAS
Captive smelting units present multiple benefits
Exide had acquired two companies with smelting capacities of up to 36,000 tonnes perannum (tpa) – a 100% stake in Tandon Metals in October 2007 and a 50% stake inLeadage Alloys in June 2008. The smelting capability is being complemented with anaggressive dealer-level campaign to source recyclable lead by collecting exhaustedbatteries, thus ensuring a steady supply of recycled lead, which would be 10-15%cheaper compared to current spot prices.Recycled lead accounted for 28% of Exide’s lead requirement in 4QFY09 compared toalmost zero a year back. By the end of FY10, Exide targets getting recycled lead tomeet 40% of their requirement by ramping up smelter capacities and aggressivebuyback of exhausted batteries.
Expansion of branded battery market:
Exide’s strategy of buying backexhausted batteries will cut the supply of recyclable lead to unbranded batterymanufacturers (who currently account for 50% of the automobile replacementmarket), thereby resulting in expansion of Exide’s target branded battery market.The only source of lead for manufacturers of unbranded batteries is recycled leadfrom exhausted batteries. Since these smaller units do not have the scale toprocure lead from the spot market, we expect them to gradually go out ofbusiness.
Lower exposure to lead price and currency fluctuations:
Prior tocommencement of recycling, more than 50% of Exide’s lead requirement was metusing imported lead. With increased reliance on recycled lead, imports may dropto 30% of total lead requirement, leading to lower exposure to international priceand currency fluctuations.
Lower time-to-delivery and reduced working capital needs:
Sourcing of leadinvolves a lead-time of up to three months. The company thus bears the risk ofvolatility in lead price during the time-to-delivery period. In a falling lead pricescenario, this can hurt the company as sales to institutional customers aregoverned by pass-through clauses and build in monthly reset of battery pricesbased on international spot prices. Reduction in lead-time will help in efficientrevenue-cost matching.
Other takeaways from management call
Expect lower capex in FY10:
The company expects capital expenditure in FY10to be much lower at INR800m compared to INR1,600m in FY09, since the autoOEM slowdown in FY09 has left excess capacity, which can partially sustaingrowth in FY10. Exide plans to utilise spare OEM capacity to meet demand fromreplacement segment. In case OEM demand sustains the current uptrend, thecompany will revisit capacity expansion accordingly.
Reduced debt-equity ratio a positive:
Exide ended FY09 with a net debt ofINR2.8b compared to INR3.5b at the end of FY08. The net debt-equity hasdropped to 0.22x compared to 0.34x a year back.
JOSEPH GEORGE EXIDE INDUSTRIES CHLR IN 18 MAY 2009
3
BNP PARIBAS
FINANCIAL STATEMENTS
Exide Industries
Profit and Loss (INR m)Year Ending Mar
2008A 2009A2010E2011E2012E
Revenue 28,449 33,93035,33242,04749,795Cost of sales ex depreciation (18,741) (22,484)(22,102)(26,819)(32,200)
Gross profit ex depreciation 9,709 11,44713,23015,22817,595
Other operating income 0 0000Operating costs (5,013) (5,999)(6,661)(7,493)(8,429)
Operating EBITDA 4,695 5,4486,5687,7359,167
Depreciation (642) (679)(751)(837)(897)Goodwill amortisation 0 0000
Operating EBIT 4,053 4,7685,8176,8988,270
Net financing costs (374) (342)(247)(127)(77)Associates 0 0000Recurring non operating income 65 6588105124Non recurring items 0 (137)000
Profit before tax 3,743 4,3545,6596,8768,317
Tax (1,240) (1,510)(1,896)(2,303)(2,786)
Profit after tax 2,503 2,8443,7634,5735,531
Minority interests 0 0000Preferred dividends 0 0000Other items 0 0000
Reported net profit 2,503 2,8443,7634,5735,531
Non recurring items & goodwill (net) 0 137000
Recurring net profit 2,503 2,9813,7634,5735,531
Per share (INR)
Recurring EPS * 3.19 3.734.705.726.91Reported EPS 3.19 3.554.705.726.91DPS 0.41 0.600.450.480.48
Growth
Revenue (%) 52.1 19.34.119.018.4Operating EBITDA (%) 52.6 16.020.617.818.5Operating EBIT (%) 59.8 17.722.018.619.9Recurring EPS (%) 60.0 16.826.221.521.0Reported EPS (%) 60.0 11.432.321.521.0
Operating performance
Gross margin inc depreciation (%) 31.9 31.735.334.233.5Operating EBITDA margin (%) 16.5 16.118.618.418.4Operating EBIT margin (%) 14.2 14.116.516.416.6Net margin (%) 8.8 8.810.710.911.1Effective tax rate (%) 33.1 34.733.533.533.5Dividend payout on recurring profit (%) 12.8 16.19.68.46.9Interest cover (x) 11.0 14.123.955.1108.4Inventory days 94.2 94.1100.492.992.0Debtor days 26.1 28.130.230.630.6Creditor days 76.9 74.176.271.571.6Operating ROIC (%) 34.6 33.237.241.446.4Operating ROIC – WACC (%) (34.6) (33.2)(37.2)(41.4)(46.4)ROIC (%) 22.4 21.122.824.326.4ROIC – WACC (%) (22.4) (21.1)(22.8)(24.3)(26.4)ROE (%) 29.5 25.826.025.224.3ROA (%) 16.0 15.216.717.317.2
* Pre exceptional, pre-goodwill and fully diluted
Revenue By Division (INR m)2008A 2009A2010E2011E2012E
Batteries 28,449 33,93035,33242,04749,795
Sources: Exide Industries; BNP Paribas estimates
Our 12% volume growthassumption isconservative givenstrong demand acrosshigh-margin segmentsMargin expansion drivenby lower lead prices,greater use of recycledlead and improvedproduct mixRevenue growthappears muted due topass-through of lowerlead prices. Focus onimproving margins and24% EPS CAGR inFY09-11
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| Upload Date: | 06/19/2009 |
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