exide 23 july 2014 edelweiss

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Edelweiss Securities Limited

Exide Industries’ (Exide) Q1FY15 top line and EBITDA surpassed our

estimates by 11% and 23%, respectively. Key positives were: 1) strong

sales growth of 17.5% YoY led by 31% YoY growth in inverter segment

and telecom market share uptick from 8% to 21%; and 2) EBITDA margin

uptick of 161bps QoQ to 15.2% owing to cost-cutting measures and

operating leverage benefits. We revise upwards our FY15E and FY16E

earnings by 8% and 10% respectively, leading to 26% CAGR over FY14-

16E. We upgrade our target multiple to 18x standalone FY16E EPS (15x

earlier), led by cyclical uptick in OEM segment (big contributor at ~25% of

sales), quantum loss of market share to competition getting arrested and

improvement in margins, driven by technology upgradation, cost-cutting

initiatives and operating leverage benefits on increasing capacity

utilisation (currently 75% in 4W, ~78% in 2W). We maintain ‘BUY’, with a

revised SOTP of INR182 (INR142 earlier).

Strong sales growth

Sales grew 17.5% YoY and exceeded our estimate by 11%, primarily driven by strong

growth in industrial segment led by inverter segment growth of 31% YoY and market

share gains in telecom segment from 8% to 21%; automotive growth of 9% YoY was

driven by growth in replacement sales. Sales were up 18.6% QoQ.

Operating leverage drives profitability

While gross margin improved by 50bps QoQ (higher share of high-margin inverter

business in revenues), EBITDA margin improved by 161bps QoQ due to cost cutting

measures undertaken by the company. Operating profit and PAT growth at 9% and

14% YoY (32.6% and 39.5% QoQ) exceeded estimates by ~17%/23% at

INR2.9bn/INR1.85bn, led by operating leverage.

Outlook and valuations: Positive; maintain ‘BUY’

Considering cyclical uptick in OEM segment, loss of market share getting arrested and

better margins, led by technology upgradation, cost cutting initiatives and operating

leverage benefits due to increasing capacity utilisation, we have raised our

FY15E/FY16E earnings to 28%/24%. We upgrade our target multiple to 18x standalone

FY16E EPS, which gives revised SOTP of INR182 (INR142 earlier). Maintain ‘BUY’.

RESULT UPDATE

EXIDE INDUSTRIES Strong all-round beat

EDELWEISS RATINGS

Absolute Rating BUY

Investment Characteristics Performer

MARKET DATA (R: EXID.BO, B: EXID IN)

CMP : INR 160

Target Price : INR 182

52-week range (INR) : 170 / 99

Share in issue (mn) : 850.0

M cap (INR bn/USD mn) : 136 / 2,264

Avg. Daily Vol. BSE/NSE (‘000) : 2,109.8

SHARE HOLDING PATTERN (%)

Current Q4FY14 Q3FY14

Promoters *

46.0 46.0 46.0

MF's, FI's & BKs 17.2 17.2 16.1

FII's 17.3 17.3 17.2

Others 19.6 19.6 20.6

* Promoters pledged shares

(% of share in issue)

: NIL

PRICE PERFORMANCE (%)

BSE Midcap

Index Stock

Stock over

Index

1 month 7.7 6.2 (1.5)

3 months 32.6 29.5 (3.1)

12 months 59.6 30.6 (29.0)

Shradha Sheth

+91 22 6623 3308

[email protected]

Manoj Bahety, CFA

+91 22 6623 3362

[email protected]

Ind

ia M

idca

ps

India Equity Research| Automobiles

July 23, 2014

Financials (INR mn)

Year to March Q1FY15 Q1FY14 % change Q4FY14 % change FY14 FY15E FY16E

Total revenues 19,124 16,275 17.5 16,130 18.6 59,642 66,810 79,024

EBITDA 2,911 2,662 9.4 2,196 32.6 8,168 9,823 12,031

Adj. net profit 1,853 1,626 14.0 1,328 39.5 4,870 6,213 7,718

Diluted EPS (INR) 2.2 1.9 14.0 1.6 39.5 5.7 7.3 9.1

Diluted PE (x) 27.9 21.9 17.6

EV/EBITDA (x) 14.1 11.5 9.0

Adj. ROACE (%) 19.7 21.8 24.0

Automobiles

2 Edelweiss Securities Limited

Concall Q1FY15: Key highlights

• Sales were up 17.5% YoY and 18.6% QoQ, led by 31% YoY uptick in inverter sales and

strong growth in telecom battery segment. Exide indicated that it has gained market

share in telecom segment from 8% to 21% QoQ. Automotive revenues grew by 9% YoY.

• Automotive segment growth of 9% YoY, was led by 5%/8% YoY growth in 2W/4W. Auto

OEM volume was same as last year in Q1FY15, while automotive replacement volumes

grew at moderate pace of ~3% YoY. This was as compared to 10%YoY drop last year.

The market share loss to competition seems to be arrested in the replacement

segment.

• There were no price changes in Q1FY15, post the 5% cut towards mid–November 2013.

However, in inverter segment company introduced value for growth segment spurred

by high competition.

• Replacement OEM ratio in 4W segment was 62:38, 1.63x by volume and 76:24, 3.2x by

value; in 2W the ratio was 33:67, 0.48x by volume, and 42:58, 0.71x by value.

• Capacity utilisation for 4W/2W/industrial batteries stood at 76%/78%/100%. Capacity

utilisation improved strongly on sequential basis in industrial segment led by inverters

and telecom segment. Capacity utilisation stood at 75%/80%/70% in Q4FY14 for

4W/2W/industrial batteries.

• Market share of OEM segment stood at 63% in 4W, and increased by 0.5% and 66.3% in

2W segment. Management highlighted market share loss in replacement segment to

competition getting arrested.

• Management highlighted that since telecom industry capacity was at 4x demand,

segment capacity will not be augmented significantly as the segment is not very

profitable. On current capacity, management expects to attain 30% market share on

full capacity utilisation basis.

• Gross margin improved by 50bps QoQ led by strong growth in inverter segment.

EBITDA margin spurted 161bps QoQ due to cost cutting measures undertaken by the

company. Productivity gains and sharp cut in operating expenses (16bps decline in staff

cost and 92bps dip in other expenses) led to sequential improvement in margins.

• Capex for FY14 stood at INR1.4bn. Going forward, management guided capex plans of

INR4bn in automotive segment and INR1.5bn in industrial for FY15. Of the above,

INR2bn of automotive capex could spill over to FY16.

• Investment in insurance business in FY14 stood at INR1.4bn, leading to total

investments of INR14.2bn till date. This business has turned profitable in the past two

years. In FY14, the company attained INR530mn PAT versus INR231mn in FY13.

Exide Industries


Annual Report FY14 highlights

• Net sales declined by 2% YoY in FY14, due to 21% YoY dip in industrial battery division

(largely due to inverter battery segment), though offset by growth in automotive

battery segment owing to net price hikes taken during the year.

• Automotive replacement 4W battery volumes declined by 8% YoY in FY14. 2W

replacement battery volumes grew 5% YoY in FY14. This was as compared to 12% YoY

volume growth in 4W replacement and 30% YoY volume growth in 2W replacement

sales for Amara Raja batteries.

• Automotive 4W OEM volumes fell 7% YoY; 2W OEM volumes however, grew 1% YoY in

FY14. This was as compared to 2% YoY decline in 4W OEM sales for Amara Raja

batteries.

• Industrial battery segment revenues slumped 21% YoY due to significant decline in

inverter battery and UPS battery segment revenues.

• EBITDA margins improved by 80bps YoY in FY14, due to 100bps YoY improvement in

gross margins.

• Power costs declined 8% YoY to 3.5% of net sales (3.7% of sales in FY13) as compared to

2.7% for AMRJ (3.3% of sales in FY13), due to fall in process cycle time. The company

also uses renewable energy sources like solar and wind power.

• Freight costs declined by 6% YoY in FY14 to 3.1% of net sales (3% of sales in FY13) in

line with the fall in sales.

• Publicity expenses rose 13% YoY to 1.38% of net sales (1.2% of sales in FY13).

• Warrant costs declined by 1% YoY in FY14 to 2.2% of net sales (2.2% of sales in FY13) in

line with the dip in sales.

• The company’s selling expenses rose marginally by 4% YoY in FY14 due to competitive

intensity in the automotive segment.

• The company increased sourcing of raw materials from imports in FY14 at 16.4% of raw

materials (14.5% last year). The company sources 40% of its requirements from its own

smelters and 43% from Hindustan Zinc.

• The company generated INR576mn profit from subsidiaries in FY14 (INR266mn in

FY13). ING Vysya Life reported profit of INR530.3mn in FY14 (INR231mn in FY13), which

was the key reason for the subsidiaries’ profit. The profitability of other key subsidiaries

like Chloride Alloys India, Chloride Metals, Chloride Batteries SE Asia and Associated

Batteries Manufactures deteriorated in FY14.

• The company tied up with East Penn Manufacturing Company (US), which provides

technical assistance to improve manufacturing capabilities at its automotive, industrial

and smelter plants. The company also entered into a technical license agreement with

Shin Kobe Electric Machinery to implement new manufacturing processes.

• Working capital cycle was brought under control leading to operating cash flow

increase of 79% YoY to INR6.46bn in FY14 (INR3.59bn in FY13).

• As a result, the company generated strong free cash of INR5.12bn in FY14 (INR1.99bn in

FY13).

Automobiles


Chart 1: Sales growth trajectory

Source: Company, Edelweiss research

Chart 2: Lead price and profit margins

Source: Company, Edelweiss research

(24.0)

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Lead prices (USD/tonne) (LHS) Gross margin (RHS) EBITDA margin (RHS)

Exide Industries


Financial snapshot (INR mn)

Year to March Q1FY15 Q1FY14 % change Q4FY14 % change FY14 FY15E FY16E

Total operating income 19,124 16,275 17.5 16,130 18.6 59,642 66,810 79,024

Raw material costs 12,670 10,464 21.1 10,773 17.6 39,104 44,121 52,164

Staff costs 1,000 938 6.6 870 15.0 3,559 3,594 4,025

Other expenses 2,542 2,210 15.0 2,292 10.9 8,812 9,271 10,803

Total expenditure 16,212 13,612 19.1 13,934 16.3 51,474 56,987 66,993

EBITDA 2,911 2,662 9.4 2,196 32.6 8,168 9,823 12,031

Depreciation 323 300 7.6 326 (0.8) 1,256 1,273 1,404

Other income 87 62 40.7 98 (10.9) 330 325 398

Interest 2 4 (33.3) - (1,300.0) 12 - -

Profit before tax 2,673 2,420 10.4 1,968 35.8 7,231 8,875 11,025

Tax 820 795 3.2 640 28.1 2,361 2,663 3,308

PAT 1,853 1,588 16.7 1,328 39.5 4,870 6,213 7,718

Adjusted net profit 1,853 1,626 14.0 1,328 39.5 4,870 6,213 7,718

Adj. EPS (INR) 2.2 1.9 1.6 5.7 7.3 9.1

Raw material 66.3 64.3 66.8 65.6 66.0 66.0

Employee cost 5.2 5.8 5.4 6.0 5.4 5.1

Other expenses 13.3 13.6 14.2 14.8 13.9 13.7

EBITDA 15.2 16.4 13.6 13.7 14.7 15.2

Adjusted net profit 9.7 10.0 8.2 8.2 9.3 9.8

Tax rate 30.7 32.8 32.5 32.6 30.0 30.0

Change in Estimates

FY15E FY16E

New Old % change New Old % change Comments

Net Revenue 66,810 64,858 3.0 79,024 73,761 7.1 Led by better than expected

industrial growth and revision in

OEM sales growth

EBITDA 9,823 9,098 8.0 12,031 10,929 10.1 Led by operating leverage benefit

with increasing utilization

EBITDA Margin 14.7 14.0 15.2 14.8

Core profit 6,213 5,735 8.3 7,718 7,011 10.1 Led by improved margin

PAT Margin 9.3 8.8 9.8 9.5

Capex 2,500 1,300 92.3 2,000 1,500 33.3 For technology upgradation

Automobiles


Company Description

Exide is a leading battery producer in India and one of the largest power storage producers

in South Asia. It supplies batteries to the automotive, industrial, infrastructure

development, information technology and defence sectors in India. It has six battery

manufacturing facilities located across India. In addition, through its subsidiaries, the

company has two lead smeltering facilities that supply a significant amount of the

company's lead requirement. The company is servicing 8 mn customers via all different

types of batteries. Current capacity in 4W, 2W and industrial batteries is at 12.2mn units,

22mn units and 2.5mn amph, respectively. The company recently increased its stake in ING

Vysya Life Insurance Company (IVL) to 100%. IVL began its operations in 2001 and currently

services more than 1mn customers.

Investment Theme

Company is well poised for cyclical uptick in OEM within automotives and inverters and

telecom segment within industrial batteries. This would result into improvement of margins

led by operating leverage with increasing capacity utilization as well as technology

upgradation and cost cutting initiatives by the management which will offset the decline in

margin due to product mix favoring OEM segment. As a result we expect 26%CAGR in

earnings over FY14-16E.

Key Risks

Downside risks

If economic slowdown prolongs, not only would it affect OEM demand but also prolong the

replacement cycle, thus affecting the replacement demand.

Destructive Competition

Any increase in competitive activity which triggers price war kind of scenario will negatively

impact margins

Upside risks

Fall in commodity prices

USD-INR has also been very volatile in recent days. Any significant fall in lead prices in INR

term poses upside risks to margin.

Exide Industries


Financial Statements

Income statement (INR mn)

Year to March FY13 FY14 FY15E FY16E

Income from operations 60,713 59,642 66,810 79,024

Materials costs 40,387 39,104 44,121 52,164

Manufacturing expenses 574 539 577 635

Employee costs 3,492 3,559 3,594 4,025

Total SG&A expenses 8,415 8,272 8,694 10,169

Total operating expenses 52,868 51,474 56,987 66,993

EBITDA 7,845 8,168 9,823 12,031

Depreciation and amortisation 1,135 1,256 1,273 1,404

EBIT 6,711 6,912 8,550 10,628

Non-Operational Income 753 330 325 398

Interest expenses 42 12 - -

Profit before tax 7,422 7,231 8,875 11,025

Provision for tax 2,195 2,361 2,663 3,308

Net profit 5,227 4,870 6,213 7,718

Reported PAT 5,227 4,870 6,213 7,718

Basic EPS (INR) 6.1 5.7 7.3 9.1

Shares outstanding (mn) 850 850 850 850

Diluted EPS (INR) 6.1 5.7 7.3 9.1

CEPS (INR) 7.5 7.3 8.8 10.7

Dividend per share (INR) 1.6 1.3 1.7 2.1

Dividend payout (%) 26.0 22.7 23.3 23.1

Common size metrics


Materials costs 66.5 65.6 66.0 66.0

S G & A expenses 13.9 13.9 13.0 12.9

EBITDA margins 12.9 13.7 14.7 15.2

Net profit margins 8.6 8.2 9.3 9.8

Growth ratios (%)


Revenues 18.9 (1.8) 12.0 18.3

EBITDA 14.7 4.1 20.3 22.5

PBT 15.0 (2.6) 22.7 24.2

Net profit 13.3 (6.8) 27.6 24.2

EPS 13.3 (6.8) 27.6 24.2

Key Assumptions


Macro

GDP(Y-o-Y %) 5.0 4.8 5.4 6.3

Inflation (Avg) 7.8 6.0 5.5 6.0

Repo rate (exit rate) 7.5 8.0 7.8 7.3

USD/INR (Avg) 54.5 62.0 58.0 56.0

Sector

4W OEM - Volume sold (mn units) 3.8 3.4 3.7 4.4

4W replacement - Volume sold (mn units) 6.0 6.5 7.0 7.9

2W OEM - Volume sold (mn units) 10.2 10.9 11.8 13.0

2W replacement - Volume sold (mn units) 5.1 5.6 6.4 7.2

Company

Automotive 63 70 69 69

OEM 28 28 27 28

Aftermarket 34 41 41 40

Others 1 1 1 1

Industrial 36 30 31 31

UPS 5 4 4 4

Inverters 20 14 15 14

Infrastructure 7 8 8 8

Traction 1 1 1 1

Exports 2 2 3 3

Others 1 1 1 1

Submarine 0.4 0.5 0.5 0.4

RM cost (% sales) 67.5 66.5 66.9 66.8

Other costs as % of sales 19.6 19.8 19.4 19.0

Average Depreciation rate (%) 6.2 6.3 5.8 12.1

Tax rate (%) 29.6 31.6 30.0 30.0

Dividend payout ratio (%) 26.0 22.7 23.3 23.1

Capex (INR mn) 1,587 1,346 2,500 2,000

Debtor days 31 32 31 30

Inventory days 105 111 106 98

Payable days 57 61 58 59

Cash conversion cycle (days) 79 81 79 69

Automobiles


Peer comparison valuation

Market cap Diluted PE (X) EV/EBITDA (X) ROAE (%)

Name (USD mn) FY15E FY16E FY15E FY16E FY15E FY16E

Exide Industries 2,264 21.9 17.6 13.1 10.3 15.6 17.2

Amara Raja Batteries 1,392 20.7 17.2 12.3 10.3 26.6 25.9

Median - 21.3 17.4 12.7 10.3 21.1 21.6

AVERAGE - 21.3 17.4 12.7 10.3 21.1 21.6

Source: Edelweiss research

Cash flow metrics


Operating cash flow 4,123 6,469 6,329 8,328

Investing cash flow (2,442) (4,598) (2,500) (2,000)

Financing cash flow (1,587) (1,414) (1,282) (1,676)

Net cash flow 94 457 2,547 4,652

Capex (1,587) (1,346) (2,500) (2,000)

Dividends paid (1,578) (1,661) (1,282) (1,676)

Profitability & efficiency ratios


ROAE (%) 16.1 13.6 15.6 17.2

ROACE (%) 22.4 19.7 21.8 24.0

Inventory day 105 111 106 98

Debtors days 31 32 31 30

Payable days 57 61 58 59

Cash conversion cycle (days) 79 81 79 69

Current ratio 1.7 1.6 1.6 1.6

Fixed asset turnover (x) 5.9 5.7 5.9 6.4

Operating ratios


Total asset turnover 1.8 1.6 1.6 1.7

Fixed asset turnover 5.9 5.7 5.9 6.4

Equity turnover 1.9 1.7 1.7 1.8

Valuation parameters


Diluted EPS (INR) 6.1 5.7 7.3 9.1

Y-o-Y growth (%) 13.3 (6.8) 27.6 24.2

CEPS (INR) 7.5 7.3 8.8 10.7

Diluted PE (x) 26.0 27.9 21.9 17.6

Price/BV (x) 4.0 3.6 3.2 2.8

EV/Sales (x) 2.0 1.9 1.7 1.4

EV/EBITDA (x) 17.0 16.0 13.1 10.3

Dividend yield (%) 1.0 0.8 1.1 1.3

Market Capitalisation 136,000 136,000 136,000 136,000

Balance sheet (INR mn)

As on 31st March FY13 FY14 FY15E FY16E

Equity capital 850 850 850 850

Reserves & surplus 33,386 36,465 41,261 46,908

Shareholders funds 34,236 37,315 42,111 47,758

Deferred tax liability 977 1,051 977 977

Sources of funds 35,212 38,365 43,088 48,735

Tangible assets 9,776 9,768 11,223 11,820

Intangible assets 168 212 212 212

CWIP (incl. intangible) 588 510 640 640

Total net fixed assets 10,532 10,490 12,075 12,672

Non current investments 14,593 15,946 15,899 15,899

Current Investments 1,807 3,724 3,724 3,724

Cash and equivalents 748 1,199 3,829 8,479

Inventories 11,671 11,856 12,813 14,073

Sundry debtors 5,092 5,166 5,674 6,497

Loans and advances 947 1,173 1,034 1,235

Other current assets 93 12 12 12

Total current assets (ex cash) 17,803 18,207 19,533 21,816

Trade payable 6,362 6,530 6,956 8,444

Others current liabilities 3,910 4,671 5,018 5,413

Total current liabilities & 10,271 11,201 11,974 13,856

Net current assets (ex cash) 7,531 7,006 7,559 7,960

Uses of funds 35,212 38,365 43,088 48,735

Book value per share (INR) 40.3 43.9 49.5 56.2

Free cash flow (INR mn)


Net profit 5,227 4,871 6,213 7,718

Depreciation 1,135 1,256 1,273 1,404

Gross cash flow 6,362 5,995 7,486 9,121

Less: Changes in WC 2,238 (474) 1,157 793

Operating cash flow 4,123 6,469 6,329 8,328

Less: Capex 1,587 1,346 2,500 2,000

Free cash flow 2,536 5,123 3,829 6,328

Exide Industries


Insider Trades Reporting Data Acquired / Seller B/S Qty Traded

No Data Available

*as per last available data

Bulk Deals Data Acquired / Seller B/S Qty Traded Price

No Data Available


Holding – Top10 Perc. Holding Perc. Holding

Chloride eastern ltd 45.99 Life insurance corp 7.19

Hathway investments 4.32 Nalanda india equity 3.56

Prudential icici ass 2.44 New india assurance 2.22

Hdfc life insurance 2.17 Govt pension fund gl 1.91

Nalanda india fund l 1.86 Idfc mutual fund 1.47


Additional Data

Directors Data

Non-Executive Independent Directors R G Kapadia, Chairman Non-Executive Independent Directors R B Raheja, Vice Chairman

Non-Executive Independent Directors H M Kothari Non-Executive Independent Directors Bhaskar Mitter

Non-Executive Independent Directors Vijay Aggarwal Non-Executive Independent Directors D S Parekh (Alternate to S B Raheja)

Non-Executive Independent Directors Mona N Desai Other Non-Executive Directors S B Raheja

Other Non-Executive Directors W Wong Executive Directors T V Ramanathan

Executive Directors G Chatterjee Executive Directors P K Kataky

Executive Directors A K Mukherjee Executive Directors Nadeem Kazim

Auditors - S. R. Batliboi & Co.


Automobiles


Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.

Board: (91-22) 4009 4400, Email: [email protected]

Vikas Khemani Head Institutional Equities [email protected] +91 22 2286 4206

Nischal Maheshwari Co-Head Institutional Equities & Head Research [email protected] +91 22 4063 5476

Nirav Sheth Head Sales [email protected] +91 22 4040 7499

Coverage group(s) of stocks by primary analyst(s): Automobiles

Amara Raja Batteries, Exide Industries

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe

Rating Distribution* 149 40 12 202

* 1 stocks under review

Market Cap (INR) 139 57 6

> 50bn Between 10bn and 50 bn < 10bn

Date Company Title Price (INR) Recos

Buy Hold Reduce Total

Recent Research

29-May-14 Amara Raja

Batteries

Moderating performance;

Result Update

415 Hold

30-Ap4-14 Exide

Industries

Operating leverage kicks in ;

Result Update

120 Buy

23-Jan-14 Amara Raja

Batteries

Outperformance continues;

Result Update

339 Buy

Rating Interpretation

Buy appreciate more than 15% over a 12-month period

Hold appreciate up to 15% over a 12-month period

Reduce depreciate more than 5% over a 12-month period

Rating Expected to

Exide Industries


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