>EXIDE INDUSTRIES LIMITED : Leveraging cost advantage (MERRILL LYNCH)

■ Raising FY11/12E PAT by 6% on new biz; maintain Buy & PO
We have raised FY10E PAT for Exide marginally and PAT of FY11e and FY12e by 6% as we expect additional benefit from (1) increased cost savings from growth in recycling; and (2) introduction of new product lines. However, we maintain our PO at Rs142 as our EPS for FY11E remains unchanged owing to recent issuance of 50mn new equity shares. Our PO is based on (1) P/E of 15x FY11E EPS of Rs8.7; and (2) Rs11/sh as value of investment in ING Vysya Life.

■ Higher recycling amidst rising lead price to sustain margin
EBITDA margin of Exide has gone up by nearly 700bp y-o-y to around 25% in FY10E driven by (1) increase in extent of in-house recycling of old batteries from 28% in FY09 to 45% in FY10E boosted margin by about 400bp; (2) inventory gain boosted margin by 200bp; and (3) increase in product mix in favor of retail sales boosted margin by remaining 100bp.

We expect Exide to sustain its margin going forward driven by (1) further increase in the extent of recycling to 70% by FY12E; and (2) further rise in lead price by 25% in FY12E vs FY10E.

■ New product plans boost growth outlook
Exide aims to launch new products including (1) battery electric bike; and (2) lowcost battery for grabbing unorganized market share. Exide is targeting to increase its share of the commercial vehicle and tractor battery market from around 10%- 15% now to 25% in three years through the introduction of batteries at lower price points. Increased cost savings from in-house re-cycling is likely to help Exide introduce such product. These new products and capacity expansion at a total cost of about Rs6bn by FY12E are likely to help sustain 20%+ sales growth.

To read the full report: EXIDE INDUSTRIES