You are on page 1of 5

Exide Industries CHLR IN

SO

WHAT?

India Consumer Discretionary/Automobiles & Components

THE

BNP

PARIBAS

ANGLE

Change in Numbers 18 May 2009

We are one of the only three institutional brokers covering the stock.

We have conducted detailed checks to ascertain pricing in the auto replacement market.

Net Profit 10

INR3,763m

(From INR4,022m)

Diff from Consensus

Consensus (mean)

Consensus (momentum)

4.3%

INR3,607.8m

Target Price

INR70.00

(Unchanged)

Diff from Consensus Consensus (median) Consensus (momentum)

12.5%

INR62.20

Current Price

Upside/(Downside)

INR50.35

39.0%

BUY

(Unchanged)

Recs in the Market

Positive

Neutral

Negative

Consensus (momentum)

9

0

0

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 our expectation of a greater than 25% EPS growth in FY10, on strong volume growth led by the replacement segment of automotive batteries and margin expansion led by lower lead price. The replacement segment, which accounts for more than half of Exide’s operating profits, rose 18-20% in 4QFY09. The segment will continue to impress in FY10 due to battery replacements driven by a higher vehicle base post the auto boom in FY03-07. The management was also confident about continued growth in the industrial segment, which was up more than 15% in FY09.

Pick-up in auto OEM demand a long-term positive

Exide is seeing improvement in demand from auto OEMs, coming out of the trough in the December 2008 quarter. Sales to auto OEMs, being low-margin, may only be marginally beneficial for the bottom-line in the near-term. However, it is a key long-term positive since higher OEM sales will eventually translate to higher replacement sales, due to increase in the vehicle base, and also because customers tend to largely replace worn-out batteries with the same brand which is pre-fitted in the vehicle.

Expect strong margin expansion in FY10

We expect a 250bp EBITDA margin expansion in FY10, driven by lower lead price (lead cost accounts for more than 50% of revenue) as well as greater reliance on cheaper recycled lead. FY10 will not be affected by the problem of ‘high-cost inventory in a falling lead price environment’ which affected 2HFY09, since about 55% of Exide’s revenue is governed by pass-through agreements. Since lead prices have stabilized in the USD1,200-1,400 range, the full margin potential should be visible starting 1QFY10.

Stock attractively valued

Our TP of INR70 is based on INR60 for the core business based on 13x FY10E EPS and INR10 for Exide’s 50% stake in ING Vysya life insurance. Even if we assign a zero value to the stake in the insurance business, Exide is currently trading at 10.7x FY10 EPS.

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.

Earnings Estimates And Valuation Ratios

YE Mar (INR m)

2009

2010E

2011E

2012E

Revenue Reported net profit Recurring net profit

33,930

35,332

42,047

49,795

2,844

3,763

4,573

5,531

2,981

3,763

4,573

5,531

Previous rec net profit Chg from previous (%)

3,124

(4.6)

4,022

4,994

(6.4)

(8.4)

Recurring EPS (INR)

3.73

4.70

5.72

6.91

Prev rec EPS (INR)

3.91

5.03

6.24

Rec EPS growth (%) Recurring P/E (x) Dividend yield (%) EV/EBITDA (x) Price/book (x) ROE (%) Net debt/equity (%)

16.8

26.2

21.5

21.0

13.5

10.7

8.8

7.3

1.2

0.9

1.0

1.0

7.8

6.4

5.2

4.1

3.1

2.5

2.0

1.6

25.8

26.0

25.2

24.3

22.1

10.1

(3.3)

(14.5)

Sources: Exide Industries; BNP Paribas estimates

Share Price Daily vs MSCI India

(INR) Exide Industries Rel to MSCI India (%) 41 70 21 50 30 1 May-08
(INR)
Exide Industries
Rel to MSCI India
(%)
41
70
21
50
30
1
May-08
Aug-08
Nov-08
Feb-09
May-09

Next results/event

July 2009

Market cap (USD m)

809

3m avg daily turnover (USD m)

0.4

Free float (%)

51

Major shareholder

Chloride Eastern Limited (49%)

12m high/low (INR)

80.00/35.05

ADR (USD)

Nil

Avg daily turnover (USD m)

Nil

Discount/premium (%)

Nil

Disc/premium vs 52-wk avg (%)

Nil

Sources: Datastream; Bloomberg

(USD m) Nil Discount/premium (%) Nil Disc/premium vs 52-wk avg (%) Nil Sources: Datastream; Bloomberg

JOSEPH

GEORGE

EXIDE

INDUSTRIES

CHLR

IN

18

MAY

2009

Captive smelting units present multiple benefits

Exide had acquired two companies with smelting capacities of up to 36,000 tonnes per annum (tpa) – a 100% stake in Tandon Metals in October 2007 and a 50% stake in Leadage Alloys in June 2008. The smelting capability is being complemented with an aggressive dealer-level campaign to source recyclable lead by collecting exhausted batteries, 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 to almost zero a year back. By the end of FY10, Exide targets getting recycled lead to meet 40% of their requirement by ramping up smelter capacities and aggressive buyback of exhausted batteries.

Expansion of branded battery market: Exide’s strategy of buying back exhausted batteries will cut the supply of recyclable lead to unbranded battery manufacturers (who currently account for 50% of the automobile replacement market), thereby resulting in expansion of Exide’s target branded battery market. The only source of lead for manufacturers of unbranded batteries is recycled lead from exhausted batteries. Since these smaller units do not have the scale to procure lead from the spot market, we expect them to gradually go out of business.

Lower exposure to lead price and currency fluctuations: Prior to commencement of recycling, more than 50% of Exide’s lead requirement was met using imported lead. With increased reliance on recycled lead, imports may drop to 30% of total lead requirement, leading to lower exposure to international price and currency fluctuations.

Lower time-to-delivery and reduced working capital needs: Sourcing of lead involves a lead-time of up to three months. The company thus bears the risk of volatility in lead price during the time-to-delivery period. In a falling lead price scenario, this can hurt the company as sales to institutional customers are governed by pass-through clauses and build in monthly reset of battery prices based on international spot prices. Reduction in lead-time will help in efficient revenue-cost matching.

Other takeaways from management call

Expect lower capex in FY10: The company expects capital expenditure in FY10 to be much lower at INR800m compared to INR1,600m in FY09, since the auto OEM slowdown in FY09 has left excess capacity, which can partially sustain growth in FY10. Exide plans to utilise spare OEM capacity to meet demand from replacement segment. In case OEM demand sustains the current uptrend, the company will revisit capacity expansion accordingly.

Reduced debt-equity ratio a positive: Exide ended FY09 with a net debt of INR2.8b compared to INR3.5b at the end of FY08. The net debt-equity has dropped to 0.22x compared to 0.34x a year back.

JOSEPH

GEORGE

FINANCIAL

STATEMENTS

EXIDE

INDUSTRIES

CHLR

IN

18

MAY

2009

Exide Industries

Profit and Loss (INR m) Year Ending Mar

2008A

2009A

2010E

2011E

2012E

Revenue 28,449 33,930 35,332 42,047 49,795 Cost of sales ex depreciation (18,741) (22,484) (22,102) (26,819)
Revenue
28,449
33,930
35,332
42,047
49,795
Cost of sales ex depreciation
(18,741)
(22,484)
(22,102)
(26,819)
(32,200)
Gross profit ex depreciation
9,709
11,447
13,230
15,228
17,595
Other operating income
Operating costs
0
0
0
0
0
(5,013)
(5,999)
(6,661)
(7,493)
(8,429)
Operating EBITDA
4,695
5,448
6,568
7,735
9,167
Depreciation
(642)
(679)
(751)
(837)
(897)
Goodwill amortisation
0
0
0
0
0
Operating EBIT
4,053
4,768
5,817
6,898
8,270
Net financing costs
Associates
(374)
(342)
(247)
(127)
(77)
0
0
0
0
0
Recurring non operating income
Non recurring items
65
65
88
105
124
0
(137)
0
0
0
Profit before tax
3,743
4,354
5,659
6,876
8,317
Tax
(1,240)
(1,510)
(1,896)
(2,303)
(2,786)
Profit after tax
2,503
2,844
3,763
4,573
5,531
Minority interests
0
0
0
0
0
Preferred dividends
0
0
0
0
0
Other items
0
0
0
0
0
Reported net profit
2,503
2,844
3,763
4,573
5,531
Non recurring items & goodwill (net)
0
137
0
0
0
Recurring net profit
2,503
2,981
3,763
4,573
5,531
Per share (INR)
Recurring EPS *
Reported EPS
DPS
3.19
3.73
4.70
5.72
6.91
3.19
3.55
4.70
5.72
6.91
0.41
0.60
0.45
0.48
0.48
Growth
Revenue growth
appears muted due to
pass-through of lower
lead prices. Focus on
improving margins and
24% EPS CAGR in
Revenue (%)
Operating EBITDA (%)
Operating EBIT (%)
Recurring EPS (%)
Reported EPS (%)
52.1
19.3
4.1
19.0
18.4
52.6
16.0
20.6
17.8
18.5
FY09-11
59.8
17.7
22.0
18.6
19.9
60.0
16.8
26.2
21.5
21.0
60.0
11.4
32.3
21.5
21.0
Operating performance
Gross margin inc depreciation (%)
Operating EBITDA margin (%)
Operating EBIT margin (%)
Net margin (%)
Effective tax rate (%)
Dividend payout on recurring profit (%)
Interest cover (x)
Inventory days
Debtor days
Creditor days
Operating ROIC (%)
Operating ROIC – WACC (%)
ROIC (%)
ROIC – WACC (%)
ROE (%)
ROA (%)
31.9
31.7
35.3
34.2
33.5
16.5
16.1
18.6
18.4
18.4
14.2
14.1
16.5
16.4
16.6
8.8
8.8
10.7
10.9
11.1
33.1
34.7
33.5
33.5
33.5
12.8
16.1
9.6
8.4
6.9
11.0
14.1
23.9
55.1
108.4
Margin expansion driven
by lower lead prices,
greater use of recycled
lead and improved
product mix
94.2
94.1
100.4
92.9
92.0
26.1
28.1
30.2
30.6
30.6
76.9
74.1
76.2
71.5
71.6
34.6
33.2
37.2
41.4
46.4
(34.6)
(33.2)
(37.2)
(41.4)
(46.4)
22.4
21.1
22.8
24.3
26.4
(22.4)
(21.1)
(22.8)
(24.3)
(26.4)
29.5
25.8
26.0
25.2
24.3
16.0
15.2
16.7
17.3
17.2
* Pre exceptional, pre-goodwill and fully diluted
Revenue By Division (INR m)
2008A
2009A
2010E
2011E
2012E
Our 12% volume growth
assumption is
conservative given
strong demand across
high-margin segments
Batteries
28,449
33,930
35,332
42,047
49,795

Sources: Exide Industries; BNP Paribas estimates

JOSEPH

GEORGE

EXIDE

INDUSTRIES

CHLR

IN

18

MAY

2009

Cash Flow (INR m) Year Ending Mar

2008A

2009A

2010E

2011E

2012E

Recurring net profit Depreciation

2,503

2,981

3,763

4,573

5,531

642

679

751

837

897

Associates & minorities Other non-cash items

(5)

0000

12

0

0

0

0

Recurring cash flow

3,153

3,660

4,514

5,410

6,428

Change in working capital Capex - maintenance

(1,662)

(76)

(448)

(518)

(778)

0

0

0

0

0

Capex – new investment

(1,571)

(1,600)

(1,000)

(1,000)

(1,000)

Free cash flow to equity

(79)

1,985

3,066

3,892

4,650

Net acquisitions & disposals Dividends paid Non recurring cash flows

(1,403)

(970)

(1,300)

(1,200)

(1,200)

(307)

(374)

(547)

(410)

(438)

15

0

0

0

0

Net cash flow

(1,774)

640

1,218

2,281

3,012

Equity finance

1,486

0

0

0

0

Debt finance

291

(328)

(1,400)

(996)

0

Movement in cash

3

312

(182)

1,285

3,012

Per share (INR)

Recurring cash flow per share FCF to equity per share

4.02

4.58

5.64

6.76

8.03

(0.10)

2.48

3.83

4.86

5.81

Balance Sheet (INR m) Year Ending Mar

2008A

2009A

2010E

2011E

2012E

Expect INR1.2b – INR1.3b annual investment in ING Vysya Life Insurance
Expect INR1.2b –
INR1.3b annual
investment in ING
Vysya Life Insurance

Working capital assets

8,748

8,832

9,890

11,664

13,938

Working capital liabilities

(5,725)

(5,733)

(6,343)

(7,598)

(9,094)

Net working capital

3,023

3,099

3,548

4,065

4,843

Tangible fixed assets

6,018

6,938

7,187

7,350

7,453

Operating invested capital

9,041

10,037

10,735

11,416

12,297

Goodwill

0

0

0

0

0

Other intangible assets Investments Other assets

0

0

0

0

0

5,183

6,153

7,453

8,653

9,853

0

0

0

0

0

Invested capital

14,224

16,190

18,188

20,068

22,149

Cash & equivalents Short term debt Long term debt *

(17)

(329)

(147)

(1,433)

(4,445)

0

0

0

0

0

3,498

3,170

1,770

774

774

Net debt

3,481

2,841

1,623

(659)

(3,670)

Deferred tax

479

479

479

479

479

Other liabilities

0

0

0

0

0

Total equity

10,264

12,870

16,086

20,248

25,341

Minority interests

0

0

0

0

0

Invested capital

14,224

16,190

18,188

20,069

22,149

*

includes convertibles and preferred stock which is being treated as debt

 

Per share (INR)

Book value per share Tangible book value per share

13.08

16.09

20.11

25.31

31.68

13.08

16.09

20.11

25.31

31.68

Financial strength

Net debt/equity (%) Net debt/total assets (%) Current ratio (x) CF interest cover (x)

33.9

22.1

10.1

(3.3)

(14.5)

17.4

12.8

6.6

(2.3)

(10.3)

1.5

1.6

1.6

1.7

2.0

5.0

11.5

17.5

39.5

74.0

Valuation

2008A

2009A

2010E

2011E

2012E

Recurring P/E (x) *

15.8

13.5

10.7

8.8

7.3

Recurring P/E @ target price (x) *

21.9

18.8

14.9

12.2

10.1

Reported P/E (x)

15.8

14.2

10.7

8.8

7.3

Dividend yield (%)

0.8

1.2

0.9

1.0

1.0

P/CF (x)

12.5

11.0

8.9

7.4

6.3

P/FCF (x)

(498.6)

20.3

13.1

10.4

8.7

Price/book (x)

3.8

3.1

2.5

2.0

1.6

Price/tangible book (x)

3.8

3.1

2.5

2.0

1.6

EV/EBITDA (x) **

9.0

7.8

6.4

5.2

4.1

EV/EBITDA @ target price (x) **

12.2

10.6

8.7

7.2

5.8

EV/invested capital (x)

3.0

2.7

2.3

2.0

1.7

* Pre exceptional, pre-goodwill and fully diluted

** EBITDA includes associate income and recurring non-operating income

Sources: Exide Industries; BNP Paribas estimates

JOSEPH

GEORGE

DISCLAIMERS

&

DISCLOSURES

EXIDE

INDUSTRIES

CHLR

IN

18

MAY

2009

This report was produced by a member company of the BNP Paribas Group (“Group”). This report is for the use of intended recipients only and may not be reproduced (in whole or in part) or delivered or transmitted to any other person without our prior written consent. By accepting this report, the recipient agrees to be bound by the terms and limitations set out herein.

The information contained in this report has been obtained from public sources believed to be reliable and the opinions contained herein are expressions of belief based on such information. No representation or warranty, express or implied, is made that such information or opinions is accurate, complete or verified and it should not be relied upon as such. This report does not constitute a prospectus or other offering document or an offer or solicitation to buy or sell any securities or other investments. Information and opinions contained in this report are published for reference of the recipients and are not to be relied upon as authoritative or without the recipient’s own independent verification or taken in substitution for the exercise of judgement by the recipient. All opinions contained herein constitute the views of the analyst(s) named in this report, they are subject to change without notice and are not intended to provide the sole basis of any evaluation of the subject securities and companies mentioned in this report. Any reference to past performance should not be taken as an indication of future performance. No member company of the Group accepts any liability whatsoever for any direct or consequential loss arising from any use of the materials contained in this report.

The analyst(s) named in this report certifies that (i) all views expressed in this report accurately reflect the personal views of the analyst(s) with regard to any and all of the subject securities and companies mentioned in this report and (ii) no part of the compensation of the analyst(s) was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed herein.

This report is prepared for professional investors and is being distributed in Hong Kong by BNP Paribas Securities (Asia) Limited to persons whose business involves the acquisition, disposal or holding of securities, whether as principal or agent. BNP Paribas Securities (Asia) Limited, a subsidiary of BNP Paribas, is regulated by the Securities and Futures Commission for the conduct of dealing in securities and advising on securities. This report is being distributed in the United Kingdom by BNP Paribas London Branch to persons who are not private customers as defined under U.K. securities regulations. BNP Paribas London Branch, a branch of BNP Paribas, is regulated by the Financial Services Authority for the conduct of its designated investment business in the U.K. This report is being distributed in the United States by BNP Paribas Securities (Asia) Limited and is intended for distribution in the United States only to “major institutional investors’ (as such term is defined in Rule 15a-6 under the Securities Exchange Act of 1934, as amended) and is not intended for the use of any person or entity that is not a major institutional investor. Major institutional investors receiving this report should effect transactions in securities discussed in the report through BNP Paribas Securities Corp. BNP Paribas Securities Corp. is a member of the New York Stock Exchange, the National Association of Securities Dealers and the Securities Investor Protection Corporation. Reproduction, distribution or publication of this report in any other places or to persons to whom such distribution or publication is not permitted under the applicable laws or regulations of such places is strictly prohibited.

Information on Taiwan listed stocks is distributed in Taiwan by BNP Paribas Securities (Taiwan) Co., Ltd.

Distribution or publication of this report in any other places to persons which are not permitted under the applicable laws or regulations of such places is strictly prohibited.

Recommendation structure

All share prices are as at market close on 15 May 2009 unless otherwise stated. Stock recommendations are based on absolute upside (downside), which we define as (target price* - current price) / current price. If the upside is 10% or more, the recommendation is BUY. If the downside is 10% or more, the recommendation is REDUCE. For stocks where the upside or downside is less than 10%, the recommendation is HOLD. In addition, we have key buy and key sell lists in each market, which are our most commercial and/or actionable BUY and REDUCE calls and are limited to at most five key buys and five key sells in each market at any point in time.

Unless otherwise specified, these recommendations are set with a 12-month horizon. Thus, it is possible that future price volatility may cause a temporary mismatch between upside/downside for a stock based on market price and the formal recommendation.

*In most cases, the target price will equal the analyst's assessment of the current fair value of the stock. However, if the analyst doesn't think the market will reassess the stock over the specified time horizon due to a lack of events or catalysts, then the target price may differ from fair value. In most cases, therefore, our recommendation is an assessment of the mismatch between current market price and our assessment of current fair value.

© 2009 BNP Paribas Group