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Exide Industries CMP

Rs. 120

Target

Rs. 132

Rating

Add

1

Stock performance (%)

1m 3m 12m

Exide -14.0 -3.7 -10.9

Sensex -5.9 -0.8 9.8

BSE Auto -3.6 4.5 12.9

Takeaways from the FY13 Annual Report The key take-away from Exide’s annual report in our view is the recent efforts to improve process efficiencies

and product quality. We note that with regard to the Shin-Kobe and East Penn technical collaborations, the

annual report highlights “new manufacturing processes…to manufacture quality automotive batteries” and

“enhancement of processes for manufacturing, designs, quality control and procurement” respectively.

Interestingly, for the first time in six years reduction in warranty finds a mention in the discussion on ‘benefits

derived from R&D’ which has traditionally focused on new products and cost reduction. Also, emphasis on

‘selection of more robust manufacturing technologies’ (primarily for improving quality) is a new addition to the

discussion on ‘future plan of action’ which follows. We believe these are steps in the right direction the efficacy

of which remains to be seen.

We continue to value the company at 14x FY15E standalone EPS of Rs 8.4, assign Rs 10 for ING Vysya and Rs 5

for other subsidiaries and arrive at a TP of Rs 132. We upgrade to an Add rating given the price correction.

A gross margin improvement of 70bps during the year translated to a 50bps EBITDA margin decline driven primarily by

a 100bps increase in other expenses to sales. The key drivers were a 40bps increase in power cost and a 50bps

increase in freight costs as a percentage of sales. Power cost for Exide has been higher at 4.8% of sales vs. 2.3% of

sales for Amara Raja in FY12. Warranty costs also increased and stood at 2.2% of sales vs. 1.7% in FY11.

Imported raw materials as a percentage of sales declined from 13% to 9%. We believe this was led by increased

sourcing from Hindustan Zinc (HZL). We don’t expect this to protect against rupee depreciation given that HZL prices

are benchmarked to landed costs of imported lead. However, this is beneficial for working capital management.

Sourcing from Chloride Metals and Chloride Alloys declined from 29% of sales to 23% driven primarily by capacity

constraints at these smelters. The company is upgrading technology at these smelters and will take a decision on

capacity expansion only by Sep-Oct 2013. The expansion will have a lead time of 6-8 months after ordering for

equipment. We therefore expect sourcing from captive smelters to continue declining in FY14.

The company has been pushing tubular batteries for the inverter market and recently developed the tubular gel

technology. This is unlike Amara Raja which only trades in tubular batteries. We also believe that AMRJ is betting on

the future of inverter batteries to be dominated by flat plate technology

Financial summary (Standalone)

Year Revenues (Rs. mn) EBITDA (Rs. mn) Adj. PAT (Rs. mn) Adj. EPS (Rs.) P/E(x) EV/EBITDA(x)

FY13 60,768 7,895 5,228 6.2 19.5 12.8

FY14E 68,468 9,565 6,192 7.3 16.5 10.1

FY15E 77,035 10,953 7,160 8.4 14.2 8.6

Rating: ▲ Target price: ◄► EPS: ◄►

Find Spark research on Bloomberg (SPAK <go>), Thomson First Call, Reuters Knowledge and Factset

Date June 25, 2013

Market Data

SENSEX 18541

Nifty 5590

Bloomberg EXID IN

Shares o/s 850mn

Market Cap Rs. 103bn

52-wk High-Low Rs. 166-115

3m Avg. Daily Vol Rs. 156mn

Index member BSE200

Latest shareholding (%)

Promoters 46.0

Institutions 31.3

Public 22.7

Mukesh Saraf

[email protected]

+91 44 4344 0041

Narayanan Ravindranathan

[email protected]

+91 44 4344 0020

Company Update


Rs. 120

Target

Rs. 132

Rating

Add

2

Business Overview

Warranty costs have been heading higher for Exide

Source: Spark Capital Research (FY13 for AMRJ is estimated based on mgmt interaction)

Capacity constraints at smelters to cap sourcing in FY14

Source: Spark Capital Research

Purchase of RM from captive

smelters (Rs Mn) FY11 FY12 FY13

Chloride Metals 4,376 5,063 6,055

% to Sales 10% 10% 10%

Chloride Alloys 8,309 9,536 7,905

% to Sales 18% 19% 13%

2.9%2.7%

2.2%

1.7%

2.1%2.2%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

FY11 FY12 FY13

Amara Raja Exide

Non lead RM costs have been on the rise


Rs Mn Revenue RM Cost Lead % of Sales Non Lead % of Sales

Exide

FY13 60,714 41,602 32,107 53% 9,495 16%

FY12 51,070 34,607 27,665 54% 6,942 14%

FY11 45,473 29,624 23,414 51% 6,209 14%

FY10 37,940 22,240 17,539 46% 4,709 12%

FY09 33,930 22,102 17,222 51% 4,880 14%

Amara Raja

FY12 23,674 14,994 12,880 54% 2,114 9%

FY11 17,611 11,816 10,216 58% 1,600 9%

FY10 14,652 9,197 7,729 53% 1,468 10%

FY09 13,177 8,691 6,681 51% 2,011 15%

Power and Freight Costs for Exide have been higher

Source: Spark Capital Research (Costs as a percentage of Sales)

Exide Amara Raja

FY11 FY12 FY13 FY11 FY12

Power and Fuel 4.5% 4.8% 5.2% 2.7% 2.3%

Freight Cost 2.8% 2.7% 3.1% 2.4% 2.0%

Publicity and Sales Promotion 0.5% 1.1% 1.2% 0.6% 0.9%

Discounts/Other Selling Expenses 0.9% 0.9% 1.0% 1.1% 1.0%

Stores and Spare Parts 1.0% 1.0% 0.9% 1.8% 1.3%

Research and Development 0.21% 0.24% 0.18% 0.13% 0.18%


Rs. 120

Target

Rs. 132

Rating

Add

3

Business Overview

ING Vysya Life turns profitable


-1200

-1000

-800

-600

-400

-200

0

200

400

FY08 FY09 FY10 FY11 FY12 FY13

Exide's Share of ING Vysya Life's Loss/Profit (Rs Mn)

Financial Performance of Subsidiaries


Name Country % Stake Revenues (Rs Mn) PBT (Rs Mn) PAT (Rs Mn)

FY13 FY12 FY11 FY13 FY12 FY11 FY13 FY12 FY11

Chloride International Limited India 100% 5 36 207 3 1 5 3 1 3

Chloride Power Systems and Solutions Ltd India 100% 759 733 442 62 48 23 42 32 15

Chloride Batteries SE Asia Pte Ltd Singapore 100% 1,547 1,345 1,059 72 56 45 61 48 37

Espex Batteries Ltd UK 100% 433 460 441 2 22 14 1.2 17 11

Associated Battery Manufacturers (Ceylon) Ltd Sri Lanka 61.5% 949 802 808 68 82 86 48 57 48

Chloride Metal Ltd. India 100% 5,166 4,400 3,815 176 127 198 118 85 132

Chloride Alloys India Ltd India 100% 7,026 8,501 7,449 184 124 326 117 81 214

Technology tie-ups of Exide

Source: Spark Capital Research *Discussions going on for renewal

Company Technology for Year of

Agreement Valid Upto

Shin Kobe Automotive and Industrial VRLA Batteries

(Haldia, Chinchwad and Hosur Plants) Apr-10 Mar-15

Furukawa Automotive Batteries (Taloja Plant) Dec-10 Nov-15

Furukawa Motorcycle VRLA (Taloja, Bawal and

Ahmednagar Plants) Mar-07 Mar-13*

Changxing

Noble (China) Deep Cycle E-Bike Batteries Jun-08 Jun-10

Furukawa Idling Stop System (Taloja Plant) Feb-10 Jan-15

East Penn,

USA

Auto, Industrial, Motorcycle and Other

Applications, Smelting Technology Jan-12 Jan-17

Shin Kobe Special conventional batteries for automotive Feb-13 Feb-23


Rs. 120

Target

Rs. 132

Rating

Add

4

Financial Summary (standalone)

Abridged Financial Statements (Standalone) Key metrics

Rs. mn FY12 FY13 FY14E FY15E FY12 FY13 FY14E FY15E

Profit & Loss Growth ratios

Revenues 51,111 60,768 68,468 77,035 Revenues 12.1% 18.9% 12.7% 12.5%

Manufacturing & Other Expenses 44,232 52,873 58,903 66,082 EBITDA -22.1% 14.8% 21.1% 14.5%

EBITDA 6,879 7,895 9,565 10,953 PAT -24.9% 13.3% 18.4% 15.6%

Depreciation 1,007 1,135 1,391 1,480 Margins

EBIT 5,873 6,760 8,174 9,473 EBITDA 13.5% 13.0% 14.0% 14.2%

Net Interest Exp / (inc) 53 42 44 55 EBIT 11.5% 11.1% 11.9% 12.3%

Profit Before Tax 6,452 7,423 8,677 10,033 PAT 9.0% 8.6% 9.0% 9.3%

Tax 1,840 2,195 2,485 2,873 Leverage & WC ratios

Adj. Net Profit 4,612 5,228 6,192 7,160 Debt to equity (x) 0.0 0.0 0.0 0.0

Balance Sheet (Rs. mn) Current ratio (x) 1.6 1.8 2.1 2.4

Shareholders Equity 30,573 34,236 38,873 44,478 Debtor days (Sales) 27 27 27 27

Loan funds - - - - Inventory days (COGS) 96 95 95 95

SOURCES OF FUNDS 31,398 35,212 39,850 45,454 Creditor Days (COGS) 58 51 51 51

Net block 9,666 9,944 10,603 11,430 Performance & turnover ratios

Investments 15,546 16,401 16,401 16,401 RoACE 14.1% 14.3% 15.5% 15.8%

Capital WIP 266 588 274 308 RoAE 15.9% 16.1% 16.9% 17.2%

Current assets, loans & advances 15,466 18,550 24,322 29,665 Total asset turnover (x) 1.4 1.5 1.4 1.4

Current liabilities & provisions 9,546 10,271 11,750 12,349 Fixed asset turnover (x) 3.1 3.3 3.4 3.5

Net Current Assets 5,920 8,279 12,572 17,316 Valuation metrics

APPLICATION OF FUNDS 31,398 35,212 39,850 45,454 Current price (Rs.)

Cash Flows (Rs. mn) Shares outstanding (mn) 850 850 850 850

Cash flow s from operations 5,102 3,597 8,369 5,891 Market capitalisation (Rs. mn) 102,000 102,000 102,000 102,000

Capex (1,996) (1,598) (1,736) (2,341) Enterprise value (Rs. mn) 101,423 101,252 96,174 94,179

Cash flow s from investments (3,230) (1,801) (1,736) (2,341) EV/EBIDTA (x) 14.7 12.8 10.1 8.6

Cash flow s from financing (1,443) (1,625) (1,555) (1,555) Adj. Per-share earnings (Rs.) 5.4 6.2 7.3 8.4

Free cashflow 3,107 1,999 6,633 3,550 Price-earnings multiple (x) 22.1 19.5 16.5 14.2

Cash generated during the year 430 171 5,078 1,995 Dividend yield (%) 1.3% 1.3% 1.3% 1.3%

120


Rs. 120

Target

Rs. 132

Rating

Add

Absolute Rating Interpretation

Buy Stock expected to provide positive returns of >15% over a 1-year horizon

Add Stock expected to provide positive returns of >5% – <15% over a 1-year horizon

Reduce Stock expected to provide returns of <5% – -10% over a 1-year horizon

Sell Stock expected to fall >10% over a 1-year horizon

Recommendation History

Date CMP Target price Rating

06-May-13 136 132 Reduce

21-Jan-13 127 117 Reduce

23-Oct-12 140 125 Reduce

17-Jul-12 133 136 Reduce

25-Jun-12 135 139 Reduce

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