>EXIDE INDUSTRIES LIMITED: Smelter stake hike adds value

Raising PO on smelter acquisition & rising competitiveness
We interacted with Exide recently and learnt that (1) stake in battery smelter Leadage
has been hiked to 100% from 51% for a nominal sum; and (2) capacity expansion
from Sep onward is likely to boost volume growth and improve product mix. We
maintain Buy with PO raised to Rs171 driven by (1) higher EPS; and (2) higher PE
owing to rise in competitiveness leading to higher margin than peers.

Higher in-house smelting to help gain from rising lead price
Exide has hugely benefited from recycling of old batteries in own smelters. This is
evident from the fact that Exide’s EBITDA margin expanded to 24.6% in FY10 and
remained at 22.8% in Q1FY11 compared to an average of 16.4% in FY07-09.
Whereas Amara Raja, key competitor of Exide has seen its margin sliding to
13.9% in Q1FY11. Benefit of smelter is likely to rise further with rise in lead price
and rise in extent of in-house smelting from 50% in FY11e to 70% by FY14e.

Hiking EPS on Leadage stake hike and strong demand
We have raised FY11e EPS by 3% and FY12/13e EPS by 5% owing to (1) hike in
stake in Leadage having PAT of Rs545mn in FY11e and Rs673mn in FY12e; and
(2) stronger sales growth in automotive replacement battery driven by easing of
capacity constraint from Q3FY11 as new capacity will kick in.

Re-rating on rising competitiveness & growth upside risk
Exide is trading at PE of 16.7x FY11e and 14.4x FY12e and could re-rate further
owing to (1) rise in Exide’s profit margin relative to peers driven by lower cost; and
(2) likely positive surprise to earnings from stronger retail battery sales driven by
capacity expansion and change in product mix in favor of premium car battery.
Our PO of Rs171 is the sum of (1) Rs159 for core earnings based on 15.5x
FY12e; and 2) insurance JV at Rs12 equivalent to 1.2x the investment amount.

To read the full report: EXIDE INDUSTRIES LIMITED