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Exide: Visit note
Aug 23, 2005

We had recently met with the management of Exide Industries in Kolkata to have a reality check on the automobile sector. Here are the key takeaways from the meeting. What is the company’s business?
Exide Industries (EIL) is India’s largest storage battery company. It sells both automotive and industrial battery and the sales mix is estimated at 60:40. Over the years, the company has consolidated its position in the automotive OEM segment (90% share). Exide’s growth prospects are largely linked to the auto sector, considering its large presence in this segment. It has a technology tie up with Shin Kobe Electric Machinery Co and VRLA batteries and The Furukawa Battery Co. The company also caters to the needs of industrial customers (like telecom) and has a 50% market share.

FY05 – A roundup…

  1. Lead prices:  One of the key highlights of FY05 was the sharp spurt in lead prices in the global markets. As against the normal average of around US$ 500 per tonne, prices touched as high as US$ 950 per tonne in FY05 as against US$ 735 per tonne in FY04. Prices have come off their highs in the last three months and the company does not expect prices to touch new highs again in the medium-term. One of the key reasons attributed to strong lead prices is the sharp spurt in demand from China. The company opined that unlike in the past, due to environmental regulations, lead mining approvals are very stringent now, which is resulting in a number of existing mines not receiving approvals to mine lead. The company expects tightness in lead prices to continue, as not many capacities are expected to come on stream. However, the World Bank expects prices to fall significantly in the next three years.

  2. Market share continues to remain strong:  The company’s market share in the four-wheeler segment stands at 83% and in two-wheelers, the market share is lower at 55%. The OEM (original equipment manufacturers) to replacement ratio was at 50:50 with automobile and industrial mix at 60:40 in FY05.

  3. Margins lower:  Owing to higher raw material prices and weak pricing power, operating margins declined in FY05 (18.4% in FY04 to 15.1% in FY05). Though escalation clause at the OEM customer level resulted in the company passing cost increase to customers at the retail end, since the company was the only one raising prices, volume offtake was affected.

Key trends…

  1. Replacement cycle elongates:  As compared to the historical replacement cycle of 2.5 years (i.e. a automotive battery was being replaced every two and half years), the cycle has elongated to 3.5 to 4 years owing to advancement in technology. Since the electrical components of new cars have improved dramatically combined with improvement in battery technology, replacement demand is slower than anticipated. This trend is expected to continue in the future.

  2. Organised Vs Unorganised:  Currently, the unorganised segment commands a 10% market share in the passenger car segment and dominates the HCV (heavy commercial vehicles) segment with a 2/3rd market share. The company expects this to change going forward. As per our earlier talks, the unorganised segment market share in cars used to be at around 40% to 50% levels five to six years ago. As more multi-axle CVs and higher tonnage vehicles are sold, the unorganised players are expected to lose market share, which in turn will benefit Exide. The total addressable universe in the replacement market as far as cars is concerned is estimated at 120,000 units.

  3. Car demand to slowdown:  The company expects car demand to increase at around 7% to 8% over the next three years.

Industrial batteries – An opportunity
The company services the infrastructure segment, which includes telecom, power stations and railways (diesel starters). Apart from these, the industrial battery is also used in the manufacturing sector. The third and the final category in the industrial segment includes traction batteries, which are used in haulage equipments. All the traction batteries are export-oriented with key target markets being South East Asia, Africa and Australia. The industrial and infrastructure batteries accounted for 95% of overall industrial battery mix in FY05. Exide hopes to increase exports significantly in the next three years, through its wholly-owned subsidiary in Singapore and Sri Lanka.

Other key takeaways…

  1. Capex:  Capital expenditure is estimated at Rs 500 to Rs 550 m per annum and the cost of setting up a green-field plant with a capacity of 1 m units is estimated at Rs 750 m.

  2. Rational for insurance venture:  Exide to own 49% in the insurance company with ING holding at 26%. Other stakeholders include Gujarat Ambuja at 14% and Enam at 9.9%. Going forward, Exide and ING will consolidate their holdings, depending upon the capital requirements of the insurance venture. The main reason for this venture is to park the excess cash with the company. The company expects the payback period at around 6 years. Exide will be a passive investor in the company and understands that ING has the required expertise in running an insurance business.

What is our take?
The stock currently trades at Rs 191 implying a price to earnings multiple of 17.6 times FY05 earnings and at around 12 times our estimated FY08 preliminary estimates. We had recommended the stock as a HOLD in March 2005 at Rs 157 with a target price of Rs 205. Taking into account the valuations, we believe that investors have to exercise caution currently and once the target price is achieved (not too far away), it is advisable to sell it.

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