>EXIDE INDUSTRIES (NOMURA)

STEADY RETURNS

We initiate coverage of Exide Industries with a BUY rating and a 12-month price target of INR92.1, representing 38.5% potential upside. Exide is primarily a play on the strong replacement demand for batteries from the automobile segment, where the past five years’ CAGR has been 12.5%. In addition, power shortages in India have led to strong demand from the power invertor segment. We estimate that Exide will be able to improve its margins from 16.2% in FY09E to 17.9% in FY10E, because the fall in lead prices (41% y-y in FY09) may not be passed on completely in the replacement segment. This should lead to strong earnings growth of 26.8% in FY10E. The stock currently trades at 11.4x (excluding investments in insurance business) FY11 EPS of INR5.2. We believe that given the high demand visibility, high return ratios and strong earnings growth, the stock should trade at 16x FY11E EPS in line with the Sensex multiple it has traded on average over the past five years.

■ Note that according to the company, it lost INR400mn in FY09 due to translation losses on lead imports because of the depreciating rupee (INR0.5/share). If the currency appreciates, the company could benefit from lower lead prices.

■ With a new stable government, the likelihood of insurance reforms going through has increased. This may lead to a re-rating of its investment in the insurance business.


To see full report: EXIDE INDUSTRIES