>EXIDE INDUSTRIES (CLSA)

With strong demand and capacity utilisation of over 90%, Exide has increased its capex plans and expects to grow sales volume at a cagr of 17-18%. While after market demand in autos is strong, telecom replacement demand is likely to kick in from 2HFY11. Exposure to lead prices has steadily declined as 40% of requirement is now being sourced from in-house recycling smelters. Given the strong volume growth we are upgrading our forecasts by 19-23% over FY10-12. With lead prices moving up and strong demand in the OE segment limiting supplies to the after market, we believe that Exide’s margins in the next few quarters will decline to 20-22% as against the 24% achieved in the first nine-months of FY10. While we continue to like Exide’s long term potential and steady growth story, valuations are no longer compelling.

■ Demand growth remains strong
Exide believes that going forward replacement market in autos and telcos will drive demand and is targeting a 17-18% cagr volume growth. Exide also believes that unorganized players share will drop to 25% in 5-6 years from 42% presently as vehicle qualities improve and customers gravitate more towards well known reliable brands. With its facilities operating at 90%+ capacity utilization, Exide intends to spend Rs1.75-Rs2.0bn on capex per annum over FY10-12. Any greenfield venture will likely result in additional capex. On submarine batteries, the company has orders till March-11.

■ Customer reach being increased; in-house lead sourcing
Exide has a reach into 38,500 retailers through 12,500 dealers and 202 area offices in different cities and towns. By Mar-12, Exide expects to have a presence in over 400 cities. While improving customer reach, the network is also helping Exide to source more used batteries for its recycling smelter, which help the company to meet 41% of its total lead requirements. Recycling smelters will meet 70% of Exide’s lead requirements by March-12 at an investment of Rs1bn.

■ Investments, capital raising and valuations
Exide has 50% stake in ING Life Insurance and expects to invest about Rs1.25-1.5bn per annum in the venture. While ING Life is a marginal player at the national level, according to Exide, ING Life is among the top 4/ 5 players in south and western regions. Exide estimates that renewal premium/ new premium should be 2.5x for the business to break even and they are at 1.5x now. Operating expenses to premium and AUM have come down significantly in the last 3 years (66% to 40% and 28% to 18%), giving a sense that things are moving in the right direction. To meet its capex and investment requirements, Exide recently raised Rs5bn through QIP; however, Exide’s cash accruals are sufficient to meet its funds requirement. The stock is trading at 17.7xFY11 and we believe that while the long term story is very strong, valuations are no longer compelling.

To read the full report: EXIDE INDUSTRIES