>Exide Industries(BNP Paribas)

Immune to slowdown, unlike auto-component peers
We initiate coverage of Exide, the leader of the Indian automotive and
industrial storage batteries markets, with a BUY rating. Exide’s earnings
should be immune to an auto slowdown as it depends on replacement
demand from the existing vehicle base and not on sales to originalequipment
manufacturers (OEMs). Our thesis is supported by a similar
demand pattern observed in auto tyre sales. Exide’s auto replacement
volumes (with 70% market share in branded batteries) should expand
15-20% in FY08-10 due to a higher vehicle base following the auto boom
in FY03-07 (our checks confirm average battery life of three years).

Lead recycling to boost market share, help margins
We expect branded batteries’ share in the auto replacement market to
improve from the current 50% to 58-60% by FY10 due to Exide’s
strategy of procuring exhausted batteries, thereby cutting supply of
recyclable lead to unbranded players. Exide’s recent acquisition of two
smelters for recycling lead from exhausted batteries will meet 25% of its
requirements. Use of cheaper recycled lead, combined with the recent
44% drop in lead prices, presents strong margin-expansion potential.

Don’t ignore the industrial batteries segment
Sales of high-margin industrial batteries (40% of revenue; 45% market
share) should post 18-20% growth in FY08-10 driven by the telecom and
export segments. Exide’s telecom segment should expand at least at a
conservative 40% CAGR in FY08-10, with telecom base stations
expected to expand at a 50% CAGR and battery replacement adding to
demand. We also expect exports to expand to about 8% of sales by
FY10 from 5% as the recent expansion eases capacity constraints.

Initiate with BUY; TP of INR82 implies 19.2% upside
We estimate EPS growth at a 27% CAGR in FY08-10 on 15% volume
growth and 150bp margin expansion in FY09. Our TP of INR86 is a sum
of INR71/share for the standalone business, based on 14x FY10E EPS,
and INR15/share for the 50% stake in ING Vysya Life Insurance. We
believe Exide deserves a premium to auto-component peers given that
its medium-term profitability appears immune to the current slowdown

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