Exide Industries

Joseph George India

CHLR IN
Change in Numbers
(91 22) 6628 2452 Consumer Discretionary/Automobiles & Components 18 May 2009

S O W H A T ? T H E B N P P A R I B A S A N G L E

We are one of the only three

institutional brokers covering
Net Profit 10 ... INR3,763m Target Price ....... INR70.00 BUY
........................(From INR4,022m) .................................. (Unchanged)
the stock. (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%
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.

Joseph George (91 22) 6628 2452

Thesis reiterated post mgmt call BNP Paribas Securities India Pvt Ltd
joseph.george@asia.bnpparibas.com
Improved confidence in sustainable earnings growth
Manish A Gupta (91 22) 6628 2451
Our recent call with Exide’s management gave us confidence in our
BNP Paribas Securities India Pvt Ltd
expectation of a greater than 25% EPS growth in FY10, on strong manish.a.gupta@asia.bnpparibas.com
volume growth led by the replacement segment of automotive batteries
and margin expansion led by lower lead price. The replacement Earnings Estimates And Valuation Ratios
segment, which accounts for more than half of Exide’s operating profits, YE Mar (INR m) 2009 2010E 2011E 2012E
Revenue 33,930 35,332 42,047 49,795
rose 18-20% in 4QFY09. The segment will continue to impress in FY10
Reported net profit 2,844 3,763 4,573 5,531
due to battery replacements driven by a higher vehicle base post the Recurring net profit 2,981 3,763 4,573 5,531
auto boom in FY03-07. The management was also confident about Previous rec net profit 3,124 4,022 4,994 —
Chg from previous (%) (4.6) (6.4) (8.4) —
continued growth in the industrial segment, which was up more than Recurring EPS (INR) 3.73 4.70 5.72 6.91
15% in FY09. Prev rec EPS (INR) 3.91 5.03 6.24 —
Rec EPS growth (%) 16.8 26.2 21.5 21.0
Pick-up in auto OEM demand a long-term positive Recurring P/E (x) 13.5 10.7 8.8 7.3
Dividend yield (%) 1.2 0.9 1.0 1.0
Exide is seeing improvement in demand from auto OEMs, coming out of EV/EBITDA (x) 7.8 6.4 5.2 4.1
the trough in the December 2008 quarter. Sales to auto OEMs, being Price/book (x) 3.1 2.5 2.0 1.6
ROE (%) 25.8 26.0 25.2 24.3
low-margin, may only be marginally beneficial for the bottom-line in the
Net debt/equity (%) 22.1 10.1 (3.3) (14.5)
near-term. However, it is a key long-term positive since higher OEM Sources: Exide Industries; BNP Paribas estimates

sales will eventually translate to higher replacement sales, due to

increase in the vehicle base, and also because customers tend to largely Share Price Daily vs MSCI India

replace worn-out batteries with the same brand which is pre-fitted in the (INR) Exide Industries (%)
vehicle. Rel to MSCI India
41
Expect strong margin expansion in FY10 70
We expect a 250bp EBITDA margin expansion in FY10, driven by lower 50 21
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 30 1
May-08 Aug-08 Nov-08 Feb-09 May-09
the problem of ‘high-cost inventory in a falling lead price environment’
which affected 2HFY09, since about 55% of Exide’s revenue is Next results/event July 2009
governed by pass-through agreements. Since lead prices have Market cap (USD m) 809
3m avg daily turnover (USD m) 0.4
stabilized in the USD1,200-1,400 range, the full margin potential should Free float (%) 51
be visible starting 1QFY10. Major shareholder Chloride Eastern Limited (49%)
12m high/low (INR) 80.00/35.05
Stock attractively valued ADR (USD) Nil
Our TP of INR70 is based on INR60 for the core business based on 13x Avg daily turnover (USD m) Nil
Discount/premium (%) Nil
FY10E EPS and INR10 for Exide’s 50% stake in ING Vysya life Disc/premium vs 52-wk avg (%) Nil
insurance. Even if we assign a zero value to the stake in the insurance Sources: Datastream; Bloomberg

business, Exide is currently trading at 10.7x FY10 EPS.

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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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JOSEPH GEORGE EXIDE INDUSTRIES CHLR IN 18 MAY 2009

FINANCIAL STATEMENTS

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) (32,200)
Gross profit ex depreciation 9,709 11,447 13,230 15,228 17,595
Other operating income 0 0 0 0 0
Operating costs (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 (374) (342) (247) (127) (77)
Associates 0 0 0 0 0
Recurring non operating income 65 65 88 105 124
Non recurring items 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) Revenue growth

Recurring EPS * 3.19 3.73 4.70 5.72 6.91 appears muted due to
Reported EPS 3.19 3.55 4.70 5.72 6.91 pass-through of lower
DPS 0.41 0.60 0.45 0.48 0.48 lead prices. Focus on
Growth improving margins and
Revenue (%) 52.1 19.3 4.1 19.0 18.4 24% EPS CAGR in
Operating EBITDA (%) 52.6 16.0 20.6 17.8 18.5 FY09-11
Operating EBIT (%) 59.8 17.7 22.0 18.6 19.9
Recurring EPS (%) 60.0 16.8 26.2 21.5 21.0
Reported EPS (%) 60.0 11.4 32.3 21.5 21.0
Operating performance
Gross margin inc depreciation (%) 31.9 31.7 35.3 34.2 33.5
Operating EBITDA margin (%) 16.5 16.1 18.6 18.4 18.4
Operating EBIT margin (%) 14.2 14.1 16.5 16.4 16.6 Margin expansion driven
Net margin (%) 8.8 8.8 10.7 10.9 11.1 by lower lead prices,
Effective tax rate (%) 33.1 34.7 33.5 33.5 33.5 greater use of recycled
Dividend payout on recurring profit (%) 12.8 16.1 9.6 8.4 6.9 lead and improved
Interest cover (x) 11.0 14.1 23.9 55.1 108.4 product mix
Inventory days 94.2 94.1 100.4 92.9 92.0
Debtor days 26.1 28.1 30.2 30.6 30.6
Creditor days 76.9 74.1 76.2 71.5 71.6
Operating ROIC (%) 34.6 33.2 37.2 41.4 46.4
Operating ROIC – WACC (%) (34.6) (33.2) (37.2) (41.4) (46.4)
ROIC (%) 22.4 21.1 22.8 24.3 26.4
ROIC – WACC (%) (22.4) (21.1) (22.8) (24.3) (26.4) Our 12% volume growth
ROE (%) 29.5 25.8 26.0 25.2 24.3 assumption is
ROA (%) 16.0 15.2 16.7 17.3 17.2 conservative given
* Pre exceptional, pre-goodwill and fully diluted
strong demand across
Revenue By Division (INR m) 2008A 2009A 2010E 2011E 2012E high-margin segments
Batteries 28,449 33,930 35,332 42,047 49,795
Sources: Exide Industries; BNP Paribas estimates

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JOSEPH GEORGE EXIDE INDUSTRIES CHLR IN 18 MAY 2009

Cash Flow (INR m)

Year Ending Mar 2008A 2009A 2010E 2011E 2012E
Recurring net profit 2,503 2,981 3,763 4,573 5,531
Depreciation 642 679 751 837 897
Associates & minorities (5) 0 0 0 0
Other non-cash items 12 0 0 0 0
Recurring cash flow 3,153 3,660 4,514 5,410 6,428
Change in working capital (1,662) (76) (448) (518) (778)
Capex - maintenance 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 (1,403) (970) (1,300) (1,200) (1,200)
Expect INR1.2b –
Dividends paid (307) (374) (547) (410) (438) INR1.3b annual
Non recurring cash flows 15 0 0 0 0 investment in ING
Net cash flow (1,774) 640 1,218 2,281 3,012 Vysya Life Insurance
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 4.02 4.58 5.64 6.76 8.03
FCF to equity per share (0.10) 2.48 3.83 4.86 5.81
Balance Sheet (INR m)
Year Ending Mar 2008A 2009A 2010E 2011E 2012E
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 0 0 0 0 0
Investments 5,183 6,153 7,453 8,653 9,853
Other assets 0 0 0 0 0
Invested capital 14,224 16,190 18,188 20,068 22,149
Cash & equivalents (17) (329) (147) (1,433) (4,445)
Short term debt 0 0 0 0 0
Long term debt * 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 13.08 16.09 20.11 25.31 31.68
Tangible book value per share 13.08 16.09 20.11 25.31 31.68
Financial strength
Net debt/equity (%) 33.9 22.1 10.1 (3.3) (14.5)
Net debt/total assets (%) 17.4 12.8 6.6 (2.3) (10.3)
Current ratio (x) 1.5 1.6 1.6 1.7 2.0
CF interest cover (x) 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

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JOSEPH GEORGE EXIDE INDUSTRIES CHLR IN 18 MAY 2009

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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

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