Exide Industries Joseph George (91 22) 6628 2452 S O
W H A T ?
CHLR IN
India Consumer Discretionary/Automobiles & Components
T H E
B N P
P A R I B A S
Change in Numbers 18 May 2009
A N G L E
We are one of the only three institutional brokers covering the stock.
Net Profit 10 ... INR3,763m ........................(From INR4,022m)
Target Price ....... INR70.00 .................................. (Unchanged)
We have conducted detailed checks to ascertain pricing in the auto replacement market.
Diff from Consensus.... 4.3% Consensus (mean) ..INR3,607.8m Consensus (momentum) ..........
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 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.
Joseph George (91 22) 6628 2452 BNP Paribas Securities India Pvt Ltd
[email protected]
Manish A Gupta (91 22) 6628 2451 BNP Paribas Securities India Pvt Ltd
[email protected]
Earnings Estimates And Valuation Ratios YE Mar (INR m) Revenue Reported net profit Recurring net profit Previous rec net profit Chg from previous (%) Recurring EPS (INR) Prev rec EPS (INR) Rec EPS growth (%) Recurring P/E (x) Dividend yield (%) EV/EBITDA (x) Price/book (x) ROE (%) Net debt/equity (%)
2009
2010E
2011E
2012E
33,930 2,844 2,981 3,124 (4.6) 3.73 3.91 16.8 13.5 1.2 7.8 3.1 25.8 22.1
35,332 3,763 3,763 4,022 (6.4) 4.70 5.03 26.2 10.7 0.9 6.4 2.5 26.0 10.1
42,047 4,573 4,573 4,994 (8.4) 5.72 6.24 21.5 8.8 1.0 5.2 2.0 25.2 (3.3)
49,795 5,531 5,531 — — 6.91 — 21.0 7.3 1.0 4.1 1.6 24.3 (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 May-08
(%)
Aug-08
Nov-08
Next results/event
Feb-09
1 May-09 July 2009
Market cap (USD m)
809
3m avg daily turnover (USD m)
0.4
Free float (%) Major shareholder 12m high/low (INR)
51 Chloride Eastern Limited (49%) 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
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.
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BNP
PARIBAS
JOSEPH
GEORGE
FINANCIAL
EXIDE INDUSTRIES
CHLR IN
18
MAY 2009
STATEMENTS
Exide Industries Profit and Loss (INR m) Year Ending Mar Revenue Cost of sales ex depreciation Gross profit ex depreciation Other operating income Operating costs Operating EBITDA Depreciation Goodwill amortisation Operating EBIT Net financing costs Associates Recurring non operating income Non recurring items Profit before tax Tax Profit after tax Minority interests Preferred dividends Other items Reported net profit Non recurring items & goodwill (net) Recurring net profit
2008A
2009A
2010E
2011E
2012E
28,449 (18,741) 9,709 0 (5,013) 4,695 (642) 0 4,053 (374) 0 65 0 3,743 (1,240) 2,503 0 0 0 2,503 0 2,503
33,930 (22,484) 11,447 0 (5,999) 5,448 (679) 0 4,768 (342) 0 65 (137) 4,354 (1,510) 2,844 0 0 0 2,844 137 2,981
35,332 (22,102) 13,230 0 (6,661) 6,568 (751) 0 5,817 (247) 0 88 0 5,659 (1,896) 3,763 0 0 0 3,763 0 3,763
42,047 (26,819) 15,228 0 (7,493) 7,735 (837) 0 6,898 (127) 0 105 0 6,876 (2,303) 4,573 0 0 0 4,573 0 4,573
49,795 (32,200) 17,595 0 (8,429) 9,167 (897) 0 8,270 (77) 0 124 0 8,317 (2,786) 5,531 0 0 0 5,531 0 5,531
Per share (INR) Recurring EPS * Reported EPS DPS
3.19 3.19 0.41
3.73 3.55 0.60
4.70 4.70 0.45
5.72 5.72 0.48
6.91 6.91 0.48
Growth Revenue (%) Operating EBITDA (%) Operating EBIT (%) Recurring EPS (%) Reported EPS (%)
52.1 52.6 59.8 60.0 60.0
19.3 16.0 17.7 16.8 11.4
4.1 20.6 22.0 26.2 32.3
19.0 17.8 18.6 21.5 21.5
18.4 18.5 19.9 21.0 21.0
Operating performance Gross margin inc depreciation (%) 31.9 Operating EBITDA margin (%) 16.5 Operating EBIT margin (%) 14.2 Net margin (%) 8.8 Effective tax rate (%) 33.1 Dividend payout on recurring profit (%) 12.8 Interest cover (x) 11.0 Inventory days 94.2 Debtor days 26.1 Creditor days 76.9 Operating ROIC (%) 34.6 Operating ROIC – WACC (%) (34.6) ROIC (%) 22.4 ROIC – WACC (%) (22.4) ROE (%) 29.5 ROA (%) 16.0 * Pre exceptional, pre-goodwill and fully diluted
31.7 16.1 14.1 8.8 34.7 16.1 14.1 94.1 28.1 74.1 33.2 (33.2) 21.1 (21.1) 25.8 15.2
35.3 18.6 16.5 10.7 33.5 9.6 23.9 100.4 30.2 76.2 37.2 (37.2) 22.8 (22.8) 26.0 16.7
34.2 18.4 16.4 10.9 33.5 8.4 55.1 92.9 30.6 71.5 41.4 (41.4) 24.3 (24.3) 25.2 17.3
33.5 18.4 16.6 11.1 33.5 6.9 108.4 92.0 30.6 71.6 46.4 (46.4) 26.4 (26.4) 24.3 17.2
Revenue By Division (INR m)
2008A
2009A
2010E
2011E
2012E
Batteries
28,449
33,930
35,332
42,047
49,795
Revenue growth appears muted due to pass-through of lower lead prices. Focus on improving margins and 24% EPS CAGR in FY09-11
Margin expansion driven by lower lead prices, greater use of recycled lead and improved product mix
Our 12% volume growth assumption is conservative given strong demand across high-margin segments
Sources: Exide Industries; BNP Paribas estimates
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PARIBAS
JOSEPH
GEORGE
EXIDE INDUSTRIES
CHLR IN
18
Cash Flow (INR m) Year Ending Mar
2008A
2009A
2010E
2011E
2012E
Recurring net profit Depreciation Associates & minorities Other non-cash items Recurring cash flow Change in working capital Capex - maintenance Capex – new investment Free cash flow to equity Net acquisitions & disposals Dividends paid Non recurring cash flows Net cash flow Equity finance Debt finance Movement in cash
2,503 642 (5) 12 3,153 (1,662) 0 (1,571) (79) (1,403) (307) 15 (1,774) 1,486 291 3
2,981 679 0 0 3,660 (76) 0 (1,600) 1,985 (970) (374) 0 640 0 (328) 312
3,763 751 0 0 4,514 (448) 0 (1,000) 3,066 (1,300) (547) 0 1,218 0 (1,400) (182)
4,573 837 0 0 5,410 (518) 0 (1,000) 3,892 (1,200) (410) 0 2,281 0 (996) 1,285
5,531 897 0 0 6,428 (778) 0 (1,000) 4,650 (1,200) (438) 0 3,012 0 0 3,012
4.02 (0.10)
4.58 2.48
5.64 3.83
6.76 4.86
8.03 5.81
2008A
2009A
2010E
2011E
2012E
Working capital assets 8,748 8,832 9,890 Working capital liabilities (5,725) (5,733) (6,343) Net working capital 3,023 3,099 3,548 Tangible fixed assets 6,018 6,938 7,187 Operating invested capital 9,041 10,037 10,735 Goodwill 0 0 0 Other intangible assets 0 0 0 Investments 5,183 6,153 7,453 Other assets 0 0 0 Invested capital 14,224 16,190 18,188 Cash & equivalents (17) (329) (147) Short term debt 0 0 0 Long term debt * 3,498 3,170 1,770 Net debt 3,481 2,841 1,623 Deferred tax 479 479 479 Other liabilities 0 0 0 Total equity 10,264 12,870 16,086 Minority interests 0 0 0 Invested capital 14,224 16,190 18,188 * includes convertibles and preferred stock which is being treated as debt
11,664 (7,598) 4,065 7,350 11,416 0 0 8,653 0 20,068 (1,433) 0 774 (659) 479 0 20,248 0 20,069
13,938 (9,094) 4,843 7,453 12,297 0 0 9,853 0 22,149 (4,445) 0 774 (3,670) 479 0 25,341 0 22,149
Per share (INR) Recurring cash flow per share FCF to equity per share
Balance Sheet (INR m) Year Ending Mar
Per share (INR) Book value per share Tangible book value per share
13.08 13.08
16.09 16.09
20.11 20.11
25.31 25.31
31.68 31.68
33.9 17.4 1.5 5.0
22.1 12.8 1.6 11.5
10.1 6.6 1.6 17.5
(3.3) (2.3) 1.7 39.5
(14.5) (10.3) 2.0 74.0
2008A
2009A
2010E
2011E
2012E
Recurring P/E (x) * 15.8 13.5 10.7 Recurring P/E @ target price (x) * 21.9 18.8 14.9 Reported P/E (x) 15.8 14.2 10.7 Dividend yield (%) 0.8 1.2 0.9 P/CF (x) 12.5 11.0 8.9 P/FCF (x) (498.6) 20.3 13.1 Price/book (x) 3.8 3.1 2.5 Price/tangible book (x) 3.8 3.1 2.5 EV/EBITDA (x) ** 9.0 7.8 6.4 EV/EBITDA @ target price (x) ** 12.2 10.6 8.7 EV/invested capital (x) 3.0 2.7 2.3 * Pre exceptional, pre-goodwill and fully diluted ** EBITDA includes associate income and recurring non-operating income
8.8 12.2 8.8 1.0 7.4 10.4 2.0 2.0 5.2 7.2 2.0
7.3 10.1 7.3 1.0 6.3 8.7 1.6 1.6 4.1 5.8 1.7
Financial strength Net debt/equity (%) Net debt/total assets (%) Current ratio (x) CF interest cover (x)
Valuation
MAY 2009
Expect INR1.2b – INR1.3b annual investment in ING Vysya Life Insurance
Sources: Exide Industries; BNP Paribas estimates
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JOSEPH
GEORGE
DISCLAIMERS
&
EXIDE INDUSTRIES
CHLR IN
18
MAY 2009
DISCLOSURES
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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
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