>EXIDE INDUSTRIES (BNP PARIBAS)

Thesis reiterated post mgmt call

• 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.

■ 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.

To see full report: EXIDE INDUSTRIES