Battery Sector StanC Dec2010

All rights reserved. Standard Chartered Bank 2010

IMPORTANT DISCLOSURES CAN BE FOUND IN THE DISCLOSURES APPENDIX. http://research.standardchartered.com

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Amit Kasat [email protected] +91 22 6751 5816

Aniket Mhatre [email protected]+91 22 6787 2505

Neha Kothari [email protected] +91 22 6787 2405

India | Automobiles & Parts

EQUITY RESEARCH

9 December 2010

India Battery Sector Charged up for growth

We estimate India’s battery sector would post a 17% CAGR over FY10-13E driven by 18% CAGR in auto segment sales and 15% CAGR in industrial segment sales over the same period.

We expect strong auto sector demand – from both the OEM and the replacement segments – to result in 18% CAGR in auto battery sales over FY10-13E.

Industrial battery sales, too, are likely to grow strongly driven by the demand outlook for UPS and railway/power application batteries.

Given the duopoly in the industry, we do not expect price wars to break out any time soon. The resultant pricing power and cushion against input prices deserve a premium valuation, especially for the vertically integrated player (Exide).

We initiate coverage on Exide with an OUTPERFORM rating and price target of Rs201 and on Amara Raja with IN-LINE and price target of Rs172.

BB code Rec Mkt cap Price PT EPS (Rs) EPS CAGR PE (x) EV/EBITDA (x) (US$bn) (Rs) (Rs) FY11E FY12E FY10-13E FY11E FY12E FY11E FY12EExide Industries* EXID IN O/P 3.03 163 201 8.2 9.9 26.0 19.9 16.4 12.0 9.0Amara Raja AMRJ IN I/L 0.33 178 172 15.3 21.4 11.0 11.7 8.3 6.2 4.4Note: OP = OUTPERFORM, UP = UNDERPERFORM, IL = IN-LINE; Prices as at 9 Dec 2010, *Standalone figures Source: Company, Bloomberg, Standard Chartered Research estimates

Sector research – India Battery Sector | 9 December 2010

2

Contents

Investment argument and valuation 4

Valuation 6

Risks 9

Auto demand to drive battery sales 10

Promising outlook for industrial batteries 12

Duopoly imparts pricing power 13

Company Section 17

Exide Industries 18

Amara Raja Batteries 32


3

Investment summary

Battery industry to grow at 17% CAGR – We expect strong demand from both the auto OEM and replacement segments to result in an 18% CAGR in automobile battery sales over FY10-13E. We believe the slowdown in telecom-sector battery demand is likely to be offset by robust demand for UPS batteries and for railway/power application batteries. We estimate overall industrial battery sales to post a 15% CAGR over FY10-13E. Overall, we expect the battery industry to post a strong 17% CAGR over FY10-13E.

Duopoly imparts pricing power, industry to continue to trade at a premium to peers – Given the duopoly in the industry (the top two players command over 80% organized market share), we do not expect any price wars in the immediate future. Moreover, given the top players’ pricing power, we expect them to be able to manage the volatility in lead prices without affecting earnings. Led by relatively stable cash flows and high return ratios, the battery industry will continue to trade at a premium to its peers, in our view.

Exide is our top pick – We expect Exide’s premium valuation over Amara Raja to rise given Exide’s backward integration benefits and small exposure to the telecom sector, which results in superior earnings growth (26% over FY10-13E) and robust return parameters. We initiate coverage on Exide with an OUTPERFORM rating and SOTP-based 12-month price target of Rs201. With no positive triggers for Amara Raja and slower earnings growth of 11% over FY10-13 (earnings remain highly sensitive to lead prices; exposure to telecom may hinder potential upside) and trading at 8.3x FY12E earnings, we believe the stock is fairly valued. Initiate with IN-LINE and price target of Rs172.

Risks – Lead price fluctuations and battery imports are the key risks.

Fig 1 – Battery sector valuation matrix Mkt cap Price PT Up/down EPS (Rs) CAGR (%)

BB code Rec (US$bn) (Rs) (Rs) (%) FY10 FY11E FY12E FY10-13E

Amara Raja AMRJ IN I/L 0.33 178 172 -3.4 18.6 15.3 21.4 11

Exide Ind* EXID IN O/P 3.03 163 201 23.3 6.2 8.2 9.9 26

PE(x) EV/EBITDA(x) P/BV(x)

FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E

Amara Raja 9.6 11.7 8.3 5.3 6.2 4.4 2.8 2.3 1.9

Exide Ind* 26.5 19.9 16.4 14.5 12.0 9.0 6.2 4.8 3.9

ROE(%) RoCE(%) Div Yield(%)


Amara Raja 30.7 19.9 22.9 38.0 26.2 31.9 1.9 1.3 2.4

Exide Ind* 23.6 24.4 23.5 33.9 33.2 34.1 0.6 0.7 0.8

*Standalone figures

Source: Companies, Standard Chartered Research estimates


4

Investment argument and valuation We believe strong demand from the domestic automobile sector (17% CAGR over FY10-13E) and sustained offtake from the replacement segment is likely to drive an 18% CAGR in auto battery sales over the same period. Moreover, we expect the lull in telecom battery demand to be offset by strong demand for UPS batteries and railway & power application batteries. We don’t expect any price wars either, given the duopolistic nature of the industry. Given the above, battery manufacturers trade at a premium to industry peers.

Auto sector growth to drive battery sales

We expect the domestic battery industry to maintain strong sales growth. We expect growth to be driven by 1) the robust outlook for the auto OEM segment (auto battery sales from this segment likely to grow at a 20% CAGR over FY10-13E) and 2) rising demand from the replacement category as more customers shift from the unorganised to the organised market (we factor in a 16% CAGR over FY10-13E). Overall, we expect auto battery sales to post an 18% CAGR over FY10-13.

Fig 2 – Likely 18% CAGR in auto battery sales over FY10-13E

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Industrial battery sales likely to grow at 15% CAGR

Computerisation of banking networks and government departments, creation of high-powered data centres in IT and financial services industries, increasing penetration of PCs and continued power shortages are likely to drive demand for UPS/inverters. We expect the UPS/inverter battery segment to grow at an 18% CAGR over FY10-13.

Furthermore, modernisation and expansion of the Indian Railways over the next five years are likely to drive battery sales for railway applications. We expect railway battery sales to post a 15% CAGR over FY10-13.

We expect these two sectors to offset the slowdown in telecom battery demand – we expect it to grow at a 5% CAGR over FY10-13. Thus, we estimate overall industrial battery sales to post a 15% CAGR over FY10-13.

Auto battery sales likely to post an 18% CAGR over FY10-13

UPS/inverter battery segment likely to grow at 18% CAGR, and railway battery at 15% over FY10-13

20% CAGR in auto OE battery sales

16% CAGR in replacement battery sales


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Fig 3 – 15% CAGR in industrial battery sales over FY10-13E

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Overall, we expect India’s battery industry to post a 17% CAGR over FY10-13E.

Duopoly imparts pricing power

Given that the top two battery manufacturers command ~80% market share, we believe they have significant pricing power. In addition, given that batteries are critical components of any application, we believe that an established brand is a key criterion in any customer’s purchase decision. This also gives top players pricing power. Given the above, we believe a price war is unlikely in the industry. This is one of the main reasons why the industry has reported relatively stable cash flows over the years despite sharp volatility in lead prices.

Fig 4 – Industry EBITDA on an uptrend despite lead price volatility

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Exide and Amara Raja command ~80% market share

18% CAGR in UPS battery sales

15% CAGR in railways battery sales

5% CAGR in telecom battery sales


6

Valuation

Led by sustained demand for batteries and price escalation clauses protecting their earnings from raw material volatility, the battery industry has traditionally experienced very high return ratios. This is especially true for vertically integrated players like Exide, which results in further insulation against input prices and the key reason for its superior earnings growth and return parameters vs. Amara Raja.

In addition, leading auto ancillary suppliers (including Bharat Forge, Bosch, Motherson Sumi and Exide) with substantial pricing power enjoy relatively stable margins, high return ratios and hence trade at a relative premium to their industry peers.

Fig 5 – Relative valuation: Auto component players BB code Margin ROE PE EV/EBITDA

Year end: Mar FY11E FY12E FY11E FY12E FY11E FY12E FY11E FY12E

Exide EXID IN 21.5 22.2 24.4 23.5 19.9 16.4 12.0 9.0

Amara Raja AMRJ IN 14.2 14.6 19.9 22.9 11.7 8.3 6.2 4.4

Amtek Auto*^ AMTK IN na na 9.9 11.8 7.3 5.6 na Na

Apollo Tyres APTY IN 10.4 13.0 16.6 20.2 8.8 5.9 6.0 4.4

Bharat Forge^ BHFC IN 17.1 18.7 15.2 19.0 34.0 21.4 14.4 11.0

Bosch India**^ BOS IN 19.0 19.9 20.4 21.3 25.8 20.6 16.1 12.9

Mahindra Forgings^ MFOL IN 10.5 12.2 0.5 11.2 174.3 8.1 7.1 4.8

Motherson Sumi^ MSS IN 10.3 11.3 25.2 27.9 22.2 16.0 9.9 7.6

Rico Auto^ RAI IN 10.3 10.2 4.5 7.2 23.2 12.7 6.1 5.4

Source: Standard Chartered Research estimates, ^Bloomberg consensus, *Year ending June, **Year ending December

Fig 6 – Price/book vs RoE

Amara Raja

GS Yuasa Corp

Exide

Johnson Controls

Bharat Forge Bosch India

Motherson Sumi

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Players with substantial pricing power enjoy relatively stable margins and high return ratios


7

Exide: Premium valuations justified We value Exide’s core business at Rs179 (at 18x FY12E earnings; 20% premium to its average one-year forward multiple of 15x) and its stake in ING at Rs14 and subsidiaries at Rs8, to arrive at our price target of Rs201. We believe the stock warrants a premium (over its historic multiple) given backward integration initiatives (captive sourcing to increase to 70% by FY13E).

Fig 7 – Exide: Sourcing from captive smelters to increase to 70% by FY13E

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This will not only lead to margin expansion going forward (our estimates factor in 100bps margin expansion over FY10-13E) but also improve the quality of earnings, which in our view will deserve premium valuations vs. historical average. At our price target, the stock would trade at 20x consolidated earnings and P/B of 4x, which given its return ratios (RoCE of 36%, RoE of 27%) and higher quality of earnings, is justified. Within the domestic battery industry, Exide has always traded at a 50% premium to Amara Raja given scale, leadership and distribution network.

Fig 8 – Exide’s return ratios have been stable vs Amara Raja’s

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Fig 9 – Exide: 1-yr forward PE & avg PE Fig 10 – Exide: Discount to Sensex

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Source: Standard Chartered Research estimates, Capitaline

Exide Rating: Outperform Price target: Rs201


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Fig 11 – Amara: 1-yr forward PE & avg. PE Fig 12 – Amara Raja: Discount to Sensex

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Amara Raja: Fairly valued Amara Raja’s revenue growth is likely to remain robust, but its earnings are highly sensitive to lead prices given the lack of backward integration. In addition, significant exposure to telecom may limit upside potential given slowdown in the sector. Nevertheless, with return ratios in excess of 20%, we believe the stock deserves to trade at least at its average multiple of 8x (which is also a 55% discount to Exide’s target multiple). We initiate coverage on Amara Raja with an IN-LINE rating and price target of Rs172. While the imputed P/B of 2x at the target price appears reasonable vs. RoE of 23%, we believe that the stock will not get re-rated easily given the high volatility of earnings to lead prices.

Fig 14 – Battery sector valuation matrix Mkt cap Price PT Up/down EPS (Rs) CAGR (%)

BB code Rec (US$bn) (Rs) (Rs) (%) FY10 FY11E FY12E FY10-13E

Amara Raja AMRJ IN I/L 0.33 178 172 -3.4 18.6 15.3 21.4 11

Exide Ind* EXID IN O/P 3.03 163 201 23.3 6.2 8.2 9.9 26

PE(x) EV/EBITDA(x) P/BV(x)


Amara Raja 9.6 11.7 8.3 5.3 6.2 4.4 2.3 2.3 1.9

Exide Ind* 26.5 19.9 16.4 14.5 12.0 9.0 6.2 4.8 3.9

ROE(%) RoCE(%) Div Yield(%)


Amara Raja 30.7 19.9 22.9 38.0 26.2 31.9 1.9 1.3 2.4

Exide Ind* 23.6 24.4 23.5 33.9 33.2 34.1 0.6 0.7 0.8

* Standalone figures ; Source: Companies, Standard Chartered Research estimates

Amara Raja Rating: In-Line Price target: Rs172


9

Fig 15 – Target valuation multiple

Companies Price target

(Rs) PT P/E (x) (FY12E)

PT EV/EBITDA (x) FY12E

View

Amara Raja 172 8 4.2

Valued at historic one year forward multiple

of 8x (also, at a 55% discount to Exide's

target multiple)

Exide Ind* 201 18 11.0 Standalone business valued at 18xFY12E.

20% premium to its historic one-year forward

multiple; expect a re-rating in the stock on

account of margin expansion led by

backward integration initiatives.

Stake in ING valued at Rs14.

Subsidiaries share at Rs8 per share.

*Standalone figures; Source: Standard Chartered Research estimates

Risks

Raw material cost volatility may impact earnings Lead prices, around 80% of total cost, has been very volatile off late. Volatility in lead prices remains a key risk to our estimates. Volatile crude oil prices in the international market also affect the price of PPCP, used to manufacture battery containers.

Large unorganized market may restrict potential upside The unorganized market (estimated at around Rs20-25bn) gives tough competition to the organized players, especially in rural areas where the latter has limited reach. The growing unorganised market poses a serious threat to the organised battery segment in India.

Rising threats from imports Imports from China and some ASEAN countries are a threat to existing players primarily because of product pricing. This price differential, though, has come down significantly owing to the cancellation of VAT export refund in China for all lead battery manufacturers.


10

Auto demand to drive battery sales We expect strong demand from both the auto OEM and replacement segments to result in an 18% CAGR in automobile battery sales over FY10-13E.

Strong OEM auto sales

We expect the domestic auto sector sales to post a 17% CAGR over FY10-13 given strong GDP growth and rising disposable incomes. This, in turn, is likely to drive OEM battery demand.

Fig 16 – Domestic automobile demand to drive OEM battery sales

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Furthermore, the strong growth witnessed by the automobile industry over the past five years (11% CAGR over FY05-10) should lead to high replacement demand for batteries. In addition, rising disposable incomes is likely to lead to customers shifting to the organised battery segment from the unorganised. Furthermore, as consumers move up the value chain, usage of battery driven applications (power windows, indicators, music systems, etc) would increase substantially, leading to reduced average battery life, in our view.

Fig 17 – Replacement battery sales likely to grow at 16% CAGR over FY10-13E

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Led by the sustained momentum in automobile demand and much better growth in the replacement battery segment, we expect overall battery sales to the automobile segment to grow at a 18% CAGR over FY10-13E.

Domestic auto sector sales likely to post a 17% CAGR over FY10-13

Battery usage to increase substantially


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Fig 18 – Auto battery sales likely to post 18% CAGR over FY10-13E

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Promising outlook for industrial batteries We believe the slowdown in telecom battery demand is likely to be offset by robust demand for UPS batteries and for railway/power application batteries. We estimate overall industrial battery sales to post a 15.4% CAGR over FY10-13.

The industrial battery market is largely influenced by demand from the UPS, railway, power and telecom segments. In the telecom sector, the batteries support switching and transmission networks, whereas the Indian Railways use batteries for train lighting, coach air conditioning and signalling. In the power sector, the batteries support generation, transmission and distribution networks. The UPS batteries support IT and ITeS operations; they form part of UPS systems, which provide backup power and regulate power supply to critical equipment during voltage fluctuations. Small VRLA batteries find application in small UPS and emergency lamps.

We highlight below a few factors that will continue to drive demand in the industrial battery segment.

Addition of high-powered data centres in telecom, IT, BFIS and government sectors, continued growth in ATMs at 18% CAGR and massive government-funded projects such as Accelerated Power Development and Reform Program (APDRP), National e-Governance Plan.

According to Gartner, India's IT end-user spending is likely to grow at a 14.8% CAGR (2007-12), generating US$110bn in business in 2012; e-Governance is a US$9bn business opportunity.

To address the continued demand-supply gap in power, the government has revised the incremental power capacity target from 78,577MW to 92,700MW during the 11th Plan (2007-12) with the objective of raising per capita consumption to 1,000kWh by 2012.

The large-scale computerisation of banking networks and government departments, creation of high-powered data centres in IT and financial services industry, increasing penetration of PCs and power shortages are likely to drive a sustained demand for UPS/inverters. We expect the UPS/inverter battery segment in the country to grow at a 18% CAGR over FY10-13.

Further, the robust modernisation and expansion plans of the Indian railways are likely to drive battery demand for railway applications, going forward. We expect the railways-led battery demand to grow at a 15% CAGR over FY10-13. We expect battery demand from telecom operations to grow at a slower 5% CAGR over FY10-13E. Therefore UPS, railways and power sectors are likely to offset the slowdown in the telecom space.

Thus, we expect overall industrial demand for batteries to post a 15% CAGR over FY10-13.

Fig 19 – Industrial battery sales to grow at 15% CAGR over FY10-13E

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Duopoly imparts pricing power Given the duopoly in the industry (the top two players command over 80% organized market share), we do not expect the industry to see any price wars in the immediate future.

Top two players command above 80% market share The Indian battery industry is a duopoly with Exide and Amara Raja controlling ~80% of the organised market. Exide is the market leader in the automotive segment, commanding over 70% market share. Amara Raja enjoys leadership in the industrial segment with 35% market share in the telecom segment. Amco, which is a marginal player in the overall market, commands a healthy 15% of the two-wheeler battery market.

Volatile lead prices Lead prices have become extremely volatile of late. In FY08, lead prices touched a low of US$1,945/tonne and a high of US$3,980/tonne. In FY09, the low was US$880/tonne and the high US$2,955/tonne. In FY10, the high-low was US$2300/US$1,500/tonne. To protect themselves from such volatile lead prices, most battery manufacturers have a lead price escalation clause agreement with OEMs wherein they are able to pass on the increase in raw material price, albeit with a lag of a quarter.

Fig 20 – Avg realizations have moved in line with lead price fluctuations

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Given that a battery is a critical component in any product, quality plays a key role in the purchase decision of a customer. Both Amara Raja and Exide have tie-ups with established international players and have established brands over the past several years. Thus, this industry has high entry barriers. Given the duopoly (the top two players command 80% of the organized market), we do not expect the industry to witness any price wars in the immediate future.

Thus, while margins may decline over a high base in a rising raw material cost scenario, this clause helps protect earnings in the long run.

Fig 21 – Earnings momentum maintained despite volatile lead prices

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Exide is market leader in automotive segment while AMRJ enjoys leadership in industrial segment


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Annexure Battery industry: Automotive segment comprises 64%, industrial comprises the rest 36% The Rs90bn Indian battery industry comprises two major segments, automotive batteries that account for ~64% and industrial batteries that account for 36%. The automotive battery segment could be divided into OEM and replacement segments. The industrial battery segment comprises railway & power sector, UPS/inverter and telecom sector.

Fig 22 – Industry structure

Source: Standard Chartered Research

Automotive battery segment Auto OEMs contribute about 30-35% of sales while the balance is driven by replacement batteries. OEM sales, despite being a low-margin business, provides for high visibility and brand building for the players. This segment has grown at 15.2% CAGR over FY08-10 driven by 14% demand CAGR of the automobiles.

Fig 23 – Vehicle sales and CAGR Fig 24 – OEM battery sales and CAGR

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Replacement demand provides a stable business by diversifying risk when OEM demand slows down. Stability is inherent to the industry given the replacement segment accounts for 60-65% of total auto sales and contributes 15-18% to operating margin. Typically, the life of a battery is about three years and has to be replaced after that. Buoyant growth in automobile demand has percolated to the replacement segment, which has grown at a CAGR of 15% over FY08-10.

Lead Storage

Battery Industry

Automotive Battery Industrial Battery

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Replacement Telecom UPS/Inverter Power &

Railway


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Industrial battery segment Industrial batteries are classified into conventional (lead acid), valve-regulated lead acid (VRLA) and nickel-cadmium batteries. The VRLA batteries have been gaining increasing acceptance and currently comprise ~75% of the Indian industrial storage battery market. Industrial battery sales, mainly driven by VRLA batteries, logged ~18.8% CAGR over FY08-10. Industrial and infrastructure growth is a major driver of this segment. The 11th plan expenditure for railways is estimated at Rs2trn, which will eventually percolate down to the industry. Further, the sustained demand supply mismatch of power in India has driven a 15% CAGR in UPS demand over the last five years. Telecom towers, which use batteries for power supply, contributes 35% to the segment.

Industry cost structure: highly raw material intensive Lead is the key raw material used in storage batteries accounting for around 80% of total RM cost. Typically, any increase in raw material prices is passed on by the players in the replacement market. In case of OEMs, players have ‘lead escalator pricing contracts’ i.e., rise in cost of production due to increase in lead prices is borne by the OEM. Thus, volatile lead prices in the recent past have marginally impacted industry margins as realization has increased consistently.

Fig 25 – Lead constitutes bulk of raw material costs

Lead and lead alloys, 80%

Polypropelene / Polyethelyne , 18%

Others, 2%

Source: Company, Standard Chartered Research


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17

Company Section


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India | Automobiles & Parts EQUITY RESEARCH

9 December 2010

Exide Industries

OUTPERFORM (initiating coverage) PRICE (as at 09 December 10)

Rs163 Price target

Rs201

Top pick in the sector; initiate with OUTPERFORM

Bloomberg code Reuters codeEXID IN EXID.BO

Market cap 12 month rangeRs137,020m (US$3,030m) Rs105 - 178

EPS est. change - - - -

We initiate coverage with an OUTPERFORM rating and price target of Rs201.

A preferred supplier for most Indian auto OEMs, we expect Exide to track India’s strong auto sales growth.

We estimate 26% earnings CAGR over FY10-13E driven by strong battery demand and margin expansion.

We value the core business at 18x FY12E earnings, yielding Rs179, insurance at Rs14 and subsidiaries at Rs8, to arrive at our price target of Rs201.

Standalone financialsYear end: March 2010 2011E 2012E 2013ESales (Rs m) 37,940 47,923 59,902 71,943EBIT (Rs m) 7,903 9,575 12,556 15,344EBITDA (Rs m) 8,709 10,304 13,319 16,234Pretax profit (Rs m) 8,106 10,449 12,722 15,524Earnings (Rs m) adjusted 5,229 6,970 8,447 10,308Diluted EPS (Rs ) adjusted 6.2 8.2 9.9 12.1Diluted EPS growth (%) adj. 63.0 33.3 21.2 22.0DPS (Rs ) 1.0 1.1 1.3 1.3DPS growth (%) 60.8 14.0 13.6 0.0EBITDA margin (%) 23.0 21.5 22.2 22.6EBIT margin (%) 20.8 20.0 21.0 21.3Net margin (%) 13.8 14.5 14.1 14.3Div payout (%) 15.7 13.4 12.6 10.3Book value/share (Rs ) 26.1 33.6 42.3 53.2Net gearing (%) 3.9 -0.8 -6.0 -13.2ROE (%) 23.6 24.4 23.5 22.8ROCE (%) 33.9 33.2 34.1 33.4FCF (Rs m) 4,330 3,528 5,001 6,855EV/Sales (x) 3.3 2.6 2.0 1.6EV/EBITDA (x) 14.5 12.0 9.0 7.0PBR (x) 6.2 4.8 3.9 3.1PER (x) 26.5 19.9 16.4 13.4Dividend yield (%) 0.6 0.7 0.8 0.8

Source: Company, Standard Chartered Research estimates Share price performance

100110120130140150160170180

Dec‐09 Mar‐10 Jun‐10 Sep‐10

Exide Industries Ltd BSE SENSEX 30 INDEX (rebased)

Share price (%) -1 mth -3 mth -12 mthOrdinary shares -4 2 41Relative to Index 4 0 25Relative to Sector - - -Major shareholder Promoter (46.0%)Free float 54%Average turnover (US$) 4,865,231

Preferred supplier status with OEMs – Given it is a preferred supplier for most auto OEMs in India, we expect Exide’s auto battery segment to track India’s strong auto sales growth. We estimate the segment’s revenue CAGR at 28% over FY10-13E.

Industrial battery segment growing well – Rising demand for UPS/inverters and strong railway demand are likely to result in 19% revenue CAGR over FY10-13E for the industrial segment, in our view. We expect such strong growth to also mitigate sector specific risk.

Rise in captive sourcing to boost margin – The company expects to increase captive sourcing of lead from own smelters to about 70% by FY13E from 45% currently. We estimate this move is likely to lead to a 100bps increase in EBITDA margin over FY11-13E.

Wide distribution reach – Exide has a strong and geographically diverse sales and distribution force. It also has asuperb after-sales service program. Both are clear competitive advantages.

Valuation: Price target of Rs201 – Robust earnings growth and better return ratios could lead to a re-rating, in our view. We value the core business at 18x FY12E earnings, yielding Rs179, and the insurance business at Rs14 and subsidiaries at Rs8. Our price target of Rs201 provides 23% upside potential.

Source: Company, Bloomberg


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Investment argument and valuation A preferred supplier for most Indian auto OEMs, we expect Exide to track India’s strong auto sales growth. We estimate 26% earnings CAGR over FY10-13E driven by strong battery demand and margin expansion. We value the core business at 18x FY12E earnings, yielding Rs179, subsidiaries at Rs8 and insurance at Rs14, to arrive at our price target of Rs201.

Preferred supplier status helps auto battery sales

The auto segment contributes 62% of Exide’s total revenue, of which 40% is from OEMs and the rest from the high-margin replacement market. Being a preferred supplier to OEMs and a major player in the replacement market, we expect Exide to track India’s strong auto sales growth. Most new models launched in FY10 feature Exide batteries: Chevrolet Beat, Honda’s Jazz and AccordV6, Toyota’s Fortuner, Maruti’s Ritz and EECO, Fiat’s Grand Punto, Premier RIO, Tata Sumo Grande and Caterpillar Dumpers. Being a preferred vendor for Tata Motors, Exide is also the sole supplier of batteries for the Nano. Thus, a ramp-up in Nano sales over FY11-13 is likely to benefit Exide in the long term.

Fig 1 – Leadership position in the automobile segment

OEM 40%

Replace60%

Market share

75%

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Exide’s leadership in the OEM space in turn drives replacement demand for its batteries. Customers usually replace their old batteries with the same brand as they are thought to be reliable. Thus, an established relationship provides a dual benefit in terms of future demand for all models as well as a recurring replacement demand over the life of the model. Replacement demand has historically been less cyclical than OEM demand and provides a cushion when automobile sales are in a cyclical downturn.

Led by strong brand equity, wide distribution network and excellent after-sales service, Exide is a market leader in the organised aftermarket segment and, hence, is able to garner a premium in this segment. Exide now plans to garner a higher share of the unorganized market (unorganized players constitute half of the domestic retail after market). It intends to compete against the unorganized players through brand awareness initiatives, after-sales service, targeted advertising campaigns, as well as competitive pricing across select brands. With rising disposable incomes and increasing awareness of branded products, we expect a natural shift to branded products and, hence, Exide is likely to be the key beneficiary over the long term.

A robust outlook for the domestic automobile industry (our estimates factor in 17% CAGR over FY10-13E) and likely growth in replacement demand (batteries are replaced on an average every three years) is likely to drive a 28% CAGR in automobile revenue for Exide over FY10-13E, in our view.

40% of auto battery sales is to OEMs; 60% in the replacement market

Brand awareness seen as key initiative in long-term benefits


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Fig 2 – Robust 28% CAGR in automotive battery revenue over FY10-13E

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Source: Company, , Standard Chartered Research estimates

Industrial battery segment diversifies sector specific risk

The industrial battery segment represents ~37.3% of Exide’s net sales, which also mitigates sector specific risk. Within the industrial segment, almost 65% is contributed by the inverter/UPS segment and 16% by telecom. The higher contribution from the inverter/UPS segment has two distinct advantages: 1) it is a relatively high-margin business and 2) this segment has significant growth potential in India given power shortages.

Fig 3 – Exide: Industrial battery breakdown

Infrastructure & Others13%

UPS / inverters65%

Telecom16%

Exports6%

Source: Company

Demand for UPS/inverters is likely to sustain going forward given large-scale computerisation of banking networks and government departments, creation of high-powered data centres in IT and financial services industries, increasing penetration of PCs and continued power shortages. The railways business is also likely to be a strong growth driver given the government's priority to expand railway connectivity, modernise facilities and make India a manufacturing hub for coaches in South Asia.

Exide gets only 6% of revenue (16% of industrial revenues) from the telecom segment. Hence, despite the slowdown in telecom in FY10 (due to the effect of tower sharing arrangements as also the slowdown in capex by major players), Exide posted overall growth of 10% in the industrial segment led by strong offtake from other segments.

Given the strong offtake expected in the UPS/inverter category as well as the incremental order flow from the railway segment, we expect them to more than offset the likely decline in the telecom space. We expect Exide to post 19% CAGR in the industrial segment over FY10-13E.

Automotive revenue CAGR likely to be 28% over FY10-13

Inverter/UPS segment the highest contributor (65%) in industrial battery segment

Exposure to telecom revenue limited to about 6% of total revenue


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Fig 4 – 19% CAGR in industrial battery revenue over FY10-13

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Rise in captive sourcing to boost margin

To reduce earnings’ sensitivity to fluctuations in raw material prices (primarily lead), the company has embarked upon a three-pronged strategy:

Backward integration to reduce dependence on imported lead

Inventory control

Pass through clauses

Backward integration through acquisition of smelters Exide currently procures ~25% of its lead supply from overseas markets, which exposes it to currency fluctuations in addition to lead price volatility. To reduce its dependence on outsourced lead, Exide acquired two smelting companies with total capacity of 36,000 tonnes at a cost of Rs580m – 100% in Chloride Metals Limited (formerly Tandon Metals Limited) in 2007 and a 51% stake in Leadage Alloys India Limited in 2008 (it recently hiked its stake to 100%). These acquisitions have greatly reduced Exide’s reliance on imported lead. As of FY10 end, ~45% of Exide’s lead requirements have been met by these two subsidiaries.

Fig 5 – Captive sourcing from smelters has steadily increased

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Since the acquisition of the two smelters, Exide has been improving its exhausted-battery collection efforts. It purchases exhausted batteries in the open market at recycling collection points located at its branch offices and other recycling stations, and from dealers and institutional clients who collect them from their customers. We believe this strategy of reducing the unorganised players’ supply of used batteries (by limiting the supply of exhausted batteries available to the unorganised sector) will help it compete more effectively in the retail aftermarket in addition to its recycling benefits at its own smelters.

Increase in captive sources of lead results in reduced reliance on imported lead

Buyback of exhausted batteries to reduce unorganised players’ supply of used batteries


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Other backward integration measures include adding capacity and raising productivity at its existing smelters, seeking out additional inorganic growth opportunities and increasing the number of battery recycling collection points, most notably in rural India.

Increase in captive sourcing provides Exide assured lead supply, reduces earnings fluctuations, reduces inventory carrying costs and provides significant price advantages.

Inventory control Exide typically maintains lead in stock for approximately 45 to 60 days. It continuously monitors its price movement and accordingly adjusts its lead stock level. The inventory ensures an assured supply of lead, more often at a reasonable cost relative to the prevailing market price.

Price escalation clause The company has price escalation clauses in its contracts with OEMs (auto as well as industrial). Thus, any fluctuations in the lead price are a pass through albeit with a lag of a quarter.

Fig 6 – Margins have continued to be on an upward trajectory despite lead fluctuation

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Given that Exide is the only player that is backward integrated, its business model is relatively hedged to lead price fluctuations compared with other manufacturers. These initiatives have helped Exide boost its margins in FY10. The company intends to increase captive sourcing from 40% in FY10 (has reached 45% currently) to 50% by FY11E end and further to 70% by FY13E.

Fig 7 – Sourcing from captive smelters to increase to 70% by FY13E

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A 10% increase in captive lead consumption increases operating margins by 50bps in our view. Our estimates factor in about 100bps margin expansion over FY11-13E.


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Fig 8 – Benefits from increased captive sourcing Year end: Mar FY10 FY11E FY12E FY13E

Captive lead consumption (%) 40 50 60 70

Imports (%) 25 15 10 5

Domestic procurement (%) 35 35 30 25

Incremental benefit from captive sourcing (Rsm) 1,157 238 295 352

EBITDA (Rsm) 8,709 10,304 13,319 16,234

Incremental benefit as a % of EBITDA 13.3 2.3 2.2 2.2

Incremental yoy swing in margin (bps) 300 50 50 50


Wide distribution reach

Exide has established an extensive automotive sales and distribution network that includes a dedicated in-house sales force for OEMs and approximately 38,500 retail outlets for aftermarket sales that include 12,500 dealers spread across 202 cities in India. The company distributes its industrial products through a network of 187 in-house sales staff who primarily sell to OEMs and institutional clients as well as 1,000 authorized dealers who sell to retail customers. Exide has started its Bat Mobile service, which offers free road-side assistance to both customers and non-customers alike thereby helping build brand awareness and loyalty.

Exide recently re-organised its marketing and distribution set up by setting up Hubs and Spokes, which are monitored by Regional Controlling Centres. Through this model, the company is present in 206 locations (and it is likely to increase the presence in 250 more towns and cities in FY11), which has enabled Exide to further increase its distribution network to reach customers in B class and C class cities. The Humsafar module has also helped improve its presence across the country wherein their batteries are sold through various motor garages, thereby reaching the customers doorstep.

In order to strengthen its foothold in rural markets, Exide has started a CRM initiative called Project Kisaan. The company has also tied up with companies like Indian Oil Corparation, HPCL, Toyota Kirloskar for distribution of Exide batteries through their retail outlets.

We believe, Exide’s strong and geographically diverse sales and distribution force coupled with its superior aftersales service program gives it a clear competitive advantage in the market.

Capex of Rs4bn to address capacity constraints, boost earnings

In order to address the growing demand in both the automobile and industrial segments, Exide has embarked upon a capex of about Rs4bn in FY11 across its six plants as well as the new facility in Ahmednagar. The company plans to expand its two-wheeler battery capacity by 60% and the four-wheeler battery capacity by 28%. The company is increasing its motorcycle battery capacity to 15.4m units (earlier 9.6m units) by setting up a new two-wheeler facility at its once abandoned plant at Ahmednagar at an investment of Rs800m. The company is also planning to increase its four wheeler battery capacity to 10.2m units in FY11 from 8m units earlier. The capex would partly be funded through the Rs5.3bn raised via QIP in Mar 2010 and partly through internal accruals.

Fig 9 – Capex of Rs4bn to expand automobile capacity FY10 FY11E

Four wheeler battery capacity (m units) 8.0 10.2

Two wheeler battery capacity (m units) 9.6 15.4

Industrial battery capacity (m Ahrs) 1,750 1,750


The capacity additions over FY11E would help avoid any further capacity constraints thereby recovering its lost market share as well as boosting overall earnings, going forward.

Set-up of Hubs and Spokes model for reorganising marketing and distribution; to add 250 more locations

Plans to expand two-wheeler battery capacity by 60% and four-wheeler battery capacity by 28%


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Valuation

We like Exide for its leadership, strong distribution network and robust growth potential with limited exposure to the telecom space. Its backward integration initiatives have relatively shielded the company’s earnings from lead price volatility. Given its pricing power and with its captive lead sources lending relative stability to earnings, Exide has traditionally traded at a 50% premium to Amara Raja. We highlight below the key factors that justify Exide’s premium over Amara Raja.

Fig 10 – Exide Vs Amara Raja: Key differentiating factors Exide Amara Raja

Installed capacity

Automotive 8m 4.2m

Motorcycle 9.6m 1.8m

Industrial (VRLA) 1,750m Ahrs 900m Ahrs

Leadership position (%)

OEM 75 20

Replacement 65 28

Telecom NA 35

UPS NA 28

Revenue mix (%)

OEM 16 13

Replacement 45 34

Exports 2 4

UPS + Inverter 25 16

Telecom 6 28

Infrastructure 6 5

Tie ups Shin Kobe Electric Machinery, Furukawa

Battery Co. Ltd, Johnson Controls Inc.

Distribution network 38,500 retail outlets 18,000 retail outlets

Backward integration Yes, Captive lead sourcing to increase to

70% (from 40% in FY10) by FY13E No, earnings are relatively

volatile Avg (FY08-10) operating margin 19.1% 16.2%

Source: Companies, , Standard Chartered Research

Fig 11 – Exide: One-year forward PE

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Source: Standard Chartered Research estimates, Bloomberg

Exide has traditionally traded at a 50% premium to Amara Raja; justified given its leadership, strong distribution and superior return ratios, in our view


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Fig 12 – Amara Raja has always traded at a 50% discount to Exide

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Increased sourcing from captive smelters (likely to increase to 70% from the present 45%) is likely to lead to margin expansion going forward. Led by a robust growth outlook for both automobile and industrial batteries coupled with margin expansion, the stock is likely to get re-rated. We value Exide’s core business at Rs179 (at 18x FY12E; a 20% premium to its historic one year forward multiple), its stake in ING at Rs14 per share, and the other subsidiaries at Rs8 per share valuing Exide at Rs201 per share, which provides a 23% upside from current levels. At our imputed target price, the stock would trade at 20x consolidated earnings which, given its return ratios in excess of 35%, looks reasonable.

Fig 13 – ING Vysya: Basis of valuation ( Rs m)

Embedded value 8,726

Goodwill 16,054

Appraisal value 24,780

Less: additional capital required 1,000

Estimated value of ING Vysya 23,780

Value per share of Exide @50% stake 14

Source: Standard Chartered Research estimates

Fig 14 – Exide: Sum of parts valuation FY12E

Exide Standalone valued @ 18xFY12E 179

ING Vysya Life per share value of Exide 14

Value of subsidiaries @10x FY12 earnings 8

Total per share value 201

Source: Standard Chartered Research estimates

Risks

Input Cost pressures Increasing lead prices in the international markets continue to be a cause of concern for the Indian battery industry. Volatile crude oil prices in the international market also affect the price of PPCP, which is used for manufacturing battery containers. Increases in crude oil prices also increase transportation costs for raw materials and finished goods.

Imports Relatively inexpensive imports from China and some ASEAN countries have been a key concern for the industry. Thailand, in particular, is seeking to expand the scope of its free trade agreement with India to include batteries. While Chinese batteries have been flooding certain Indian markets for quite some time, the price differential has come down over the last few years.


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Financials Expect 24% revenue CAGR over FY10-13E driven by auto segment We expect Exide’s automobile segment to post a robust 28% revenue CAGR led by string demand from both OEM and replacement segments. Strong demand from the UPS as well as railways segments is expected to drive 19% revenue CAGR in the industrial segment over FY10-13E. Overall, we expect Exide to post strong 24% revenue CAGR over FY10-13E.

Fig 15 –Exide likely to post 24% revenue CAGR over FY10-13E

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Ramp up of smelters to boost margins over FY10-13E Exide currently gets 45% of its lead requirement from its own smelters; it intends to raise this to 70% by FY13E. Reducing its dependence on lead imports could decrease earnings volatility – from both lead price and currency fluctuations. Our estimates factor in a 100bps margin expansion over FY10-13E driven by increased lead procurement from its smelters

Fig 16 – Expect a 100bps margin expansion over FY11-13E led by captive sourcing

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24% CAGR in overall revenues, driven by 28% CAGR in auto segment and 19% CAGR in replacement segment

Ramp-up in smelters to 70% lead requirement in FY13E could boost margins


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Strong topline growth, margin expansion to drive earnings CAGR A strong 24% revenue CAGR coupled with a 100bps margin expansion is likely to lead to a 23% EBITDA CAGR over FY10-13E, in our view. We estimate earnings to post a 26% CAGR over FY10-13E.

Fig 17 – Expect 26% PAT CAGR over FY10-13E

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Fig 18 – Standalone Quarterly Performance (Rs m) Year end: Mar FY10 FY11 FY10 FY11E

1Q 2Q 3Q 4Q 1Q 2Q

Net Sales 9,035 9,507 9,129 10,303 11,521 11,272 37,974 47,923

Change (%) -0.3 5.6 15.9 29.1 27.5 18.6 11.9 26.2

(Inc.)/dec in stock 681 -261 -902 -11 -15 -490 0 0

Net raw materials 4,586 5,496 6,193 6,201 6,927 7,176 21,932 28,754

RM/sales % 58.3 55.1 58.0 60.1 60.0 59.3 57.8 60.0

Total cost 6,950 7,056 7,058 8,158 8,937 8,817 29,231 37,618

EBITDA 2,084 2,451 2,072 2,145 2,583 2,455 8,743 10,304

As a % of sales 23.1 25.8 22.7 20.8 22.4 21.8 23.0 21.5

Change (%) 31.4 56.7 56.6 45.3 24.0 0.2 45.9 17.9

Non-operating income 9 11 10 57 62 191 88 420

Extraordinary income 51 20 116 30 49 469 226 518

Interest 45 39 29 26 13 17 139 63

Gross profit 2,048 2,424 2,053 2,176 2,632 2,629 8,912 11,179

Less: depreciation 188 222 189 208 194 201 807 730

PBT 1,860 2,202 1,864 1,968 2,437 2,428 8,106 10,449

Tax 672 716 640 644 818 627 2,735 3,132

Effective tax rate (%) 36.1 32.5 34.3 32.7 33.6 25.8 33.7 30.0Adj. PAT (before extraordinary)

1,188 1,487 1,224 1,324 1,619 1,801 5,229 6,970

Change (%) 35.0 78.1 76.3 65.7 36.3 21.1 63.0 33.3

Rep. PAT 1,224 1,497 1,305 1,345 1,653 2,129 5,371 7,317

Change (%) 48.9 92.3 132.4 97.2 35.1 42.2 88.9 36.2


EBITDA CAGR expected at 23% over FY10-13E


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Fig 19 – Standalone Income statement (Rsm) Year end: Mar FY08 FY09 FY10 FY11E FY12E FY13E

Net sales 28,449 33,929 37,940 47,923 59,902 71,943

Change (%) 52.1 19.3 11.8 26.3 25.0 20.1

Expenditure 24,044 27,939 29,231 37,618 46,584 55,709

EBITDA 4,405 5,990 8,709 10,304 13,319 16,234

Change (%) 43.1 36.0 45.4 18.3 29.3 21.9

% of Net sales 15.5 17.7 23.0 21.5 22.2 22.6

Depreciation 599 679 807 730 762 890

EBIT 3,806 5,311 7,903 9,575 12,556 15,344

Interest & finance charges 419 479 139 63 63 63

Other income 65 65 121 420 229 243

Non-recurring expense 48 543 5 0 0 0

Non-recurring income 340 0 226 518 0 0

PBT 3,743 4,353 8,106 10,449 12,722 15,524

Tax 1,240 1,510 2,735 3,132 4,275 5,216

Effective rate (%) 33 35 34 30 34 34

Adj. PAT (bef. extra) 2,308 3,207 5,229 6,970 8,447 10,308

Change (%) 48.3 39.0 63.0 33.3 21.2 22.0

% of Net sales 8.1 9.5 13.8 14.5 14.1 14.3

Rep. PAT 2,503 2,843 5,371 7,317 8,447 10,308

Change (%) 61.2 13.6 88.9 36.2 15.5 22.0


Fig 20 – Standalone Balance Sheet (Rsm) Year end: Mar FY08 FY09 FY10 FY11E FY12E FY13E

Sources of Funds

Share capital 800 800 850 850 850 850

Reserves 9,464 11,704 21,348 27,729 35,114 44,359

Net worth 10,264 12,504 22,198 28,579 35,964 45,209

Loans 3,498 3,172 900 900 900 900

Deferred tax liability 479 412 590 590 590 590

Capital employed 14,241 16,087 23,688 30,069 37,454 46,699

Application of funds

Gross fixed assets 10,975 12,567 13,365 17,365 20,742 23,742

Less: depreciation 5,424 5,887 6,598 7,328 8,090 8,979

Net fixed assets 5,551 6,680 6,767 10,037 12,652 14,763

Capital WIP 467 173 378 378 0 0

Investments 5,183 6,682 13,354 14,854 16,854 18,854

Current assets & advances 8,765 7,419 9,118 12,478 17,136 23,662

Inventory 5,707 4,385 6,068 7,664 9,580 11,506

Sundry debtors 2,592 2,310 2,546 3,216 4,019 4,827

Cash & bank balances 17 337 29 1,122 3,061 6,853

Loans & advances 448 387 476 476 476 476

Current liab. & prov. 5,725 4,866 5,929 7,677 9,188 10,579

Sundry creditors 4,545 3,343 4,382 5,535 6,919 8,310

Other liabilities 125 465 561 561 561 561

Provisions 1,054 1,059 985 1,580 1,708 1,708

Net current assets 3,040 2,552 3,190 4,801 7,948 13,083

Application of funds 14,241 16,087 23,688 30,069 37,454 46,699



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Fig 21 – Standalone Ratios Year end: Mar FY08 FY09 FY10 FY11E FY12E FY13E

Basic (Rs)

Standalone diluted EPS 2.7 3.8 6.2 8.2 9.9 12.1

Cash EPS 3.6 4.9 7.1 9.1 10.8 13.2

EPS growth (%) 48.3 39.0 63.0 33.3 21.2 22.0

Book value per share 12.8 15.6 26.1 33.6 42.3 53.2

DPS 0.4 0.6 1.0 1.1 1.3 1.3

Payout (incl. div. tax) % 13.9 15.0 15.7 13.4 12.6 10.3

Valuation (x)

P/E 60.0 43.2 26.5 19.9 16.4 13.4

Cash P/E 44.9 33.5 23.0 18.0 15.0 12.4

EV/EBITDA 29.2 21.1 14.5 12.0 9.0 7.0

EV/sales 4.5 3.7 3.3 2.6 2.0 1.6

Price to book value 12.7 10.4 6.2 4.8 3.9 3.1

Dividend yield (%) 0.2 0.4 0.6 0.7 0.8 0.8

Profitability ratios (%)

RoE 22.5 25.7 23.6 24.4 23.5 22.8

RoCE 27.2 33.4 33.9 33.2 34.1 33.4

Turnover ratios

Debtors (Days) 33.3 24.9 24.5 24.5 24.5 24.5

Inventory (Days) 86.6 57.3 75.8 74.4 75.1 75.4

Creditors (Days) 88.1 55.6 72.9 70.3 71.1 71.5

Working capital (Days) 31.8 26.6 27.3 28.6 28.5 28.4

Asset turnover (x) 2.0 2.1 1.6 1.6 1.6 1.5

Leverage ratio

Debt/equity (x) 0.34 0.25 0.04 0.03 0.03 0.02


Fig 22 – Standalone Cash flow statement (Rsm) Year end: Mar FY08 FY09 FY10 FY11E FY12E FY13E

OP/(loss) before tax 3,806 5,311 7,903 10,449 12,722 15,524

Depreciation & amortisation 599 679 807 730 762 890

Direct taxes paid -1,208 -1,577 -2,557 -3,132 -4,275 -5,216

(Inc)/dec in working capital -1,388 808 -945 -518 -1,209 -1,343

Other items 0 0 0 0 0 0

CF from oper. activity 1,810 5,221 5,207 7,528 8,001 9,855

Extra-ordinary items 292 -543 221 0 0 0

CF after EO items 2,102 4,678 5,428 7,528 8,001 9,855

(Inc)/DEC in FA+CWIP -1,648 -1,515 -1,098 -4,000 -3,000 -3,000

(Pur)/sale of invest. -1,403 -1,499 -6,672 -1,500 -2,000 -2,000

CF from inv. activity -3,051 -3,014 -7,770 -5,500 -5,000 -5,000

Issue of shares 1,376 -123 5,144 0 0 0

Inc/(dec) in debt 251 -326 -2,272 0 0 0

Interest rec./(paid) -355 -414 -18 0 0 0

Dividends paid -320 -480 -820 -935 -1,063 -1,063

CF from fin. activity 952 -1,344 2,034 -935 -1,063 -1,063

Inc/(dec) in cash 3 320 -308 1,093 1,939 3,792

Add: beginning balance 14 17 337 29 1,122 3,061

Closing balance 17 337 29 1,122 3,061 6,853



30

Fig 23 – Consolidated Income statement (Rsm) Fig 24 – Consolidated Balance sheet (Rsm) Year end: Mar FY10 FY11E FY12E FY13E Year end: Mar FY10 FY11E FY12E FY13E

Net sales 39,789 52,453 64,419 76,647 Sources of Funds

Change (%) 17 32 23 19 Share capital 850 850 850 850

Expenditure 30,217 41,789 50,698 59,963 Reserves 18,315 24,556 31,993 40,483

Raw material 22,651 31,629 38,201 45,452 Net worth 19,165 25,406 32,843 41,333

Change (%) 6 40 21 19 Loans 1,741 2,241 1,741 741

% of Net sales 1 1 1 1 Minority interest 366 556 746 936

EBITDA 9,572 10,665 13,721 16,685 Deferred tax liability 603 603 603 603

Change (%) 65.9 11.4 28.7 21.6 Capital employed 21,876 28,806 35,933 43,613

% of Net sales 24.1 20.3 21.3 21.8 Application of funds

Depreciation 675 777 893 1,027 Gross fixed assets 14,873 19,802 23,302 26,802

EBIT 8,897 9,888 12,828 15,657 Less: depreciation 6,935 7,712 8,605 9,632

Int. & finance charges 161 87 88 89 Net fixed assets 7,938 12,091 14,697 17,170

Other income 82 420 229 243 Investments 8,768 10,268 12,268 14,768

PBT 8,817 10,221 12,969 15,811 Curr. assets, & adv. 12,107 15,952 20,082 25,155

Non-recurring income 226 518 0 0 Inventory 7,969 9,341 11,472 13,650

Tax 3,009 3,373 4,280 5,217 Sundry debtors 2,981 3,929 4,826 5,742

Effective rate (%) 34.1 33.0 33.0 33.0 Cash & bank balances 301 1,825 2,929 4,908

Profit before MI 6,035 7,366 8,689 10,594 Loans & advances 856 856 856 856

Share of associates -684 -684 -684 -684 Current liab. & prov. 7,366 9,504 11,115 13,481

Minority interest 190 190 190 190 Sundry creditors 4,933 6,503 7,986 9,502

Profit after MI 5,162 6,492 7,816 9,720 Other liabilities 1,314 1,314 1,314 1,314

Adj. PAT 5,657 6,501 8,689 10,594 Provisions 1,119 1,687 1,815 2,665

Change (%) 92.2 14.9 33.7 21.9 Net current assets 4,741 6,448 8,967 11,674

% of Net sales 14.2 12.4 13.5 13.8 Application of funds 21,876 28,806 35,933 43,613

Fig 25 – Consolidated Ratios Fig 26 – Consolidated Cash Flow (Rsm) Year end: Mar FY10 FY11E FY12E FY13E Year end: Mar FY10 FY11E FY12E FY13E

Basic (Rs) OP/(loss) before tax 8,897 9,888 12,828 15,657

EPS 6.7 7.6 10.2 12.5 Depre & amortisation 675 777 893 1,027

Cash EPS 7.4 8.6 11.3 13.7 Direct taxes paid -2,837 -3,373 -4,280 -5,217

EPS growth (%) 92.2 14.9 33.7 21.9 (Inc)/dec in WC -1,373 -183 -1,416 -728

Book value per share 22.5 29.9 38.6 48.6 Other items 188 190 190 190

DPS 1.0 1.1 1.3 2.3 CF from oper. activity 5,632 7,718 8,444 11,172

Payout (Incl. Div. Tax) % 14.5 14.4 12.2 18.1 Extra-ordinary items 226 518 0 0

Valuation (x) CF after EO items 5,858 8,236 8,444 11,172

P/E 24.5 21.3 15.9 13.1 (Inc)/dec in FA+CWIP -1,108 -4,500 -3,500 -3,500

EV/EBITDA 13.7 12.1 9.1 7.2 (Pur)/sale of invest. -6,009 -1,500 -2,000 -2,500

Price to book value 7.2 5.5 4.2 3.4 CF from inv. activity -7,117 -6,000 -5,500 -6,000

Dividend yield (%) 0.6 0.7 0.8 1.4 Issue of shares 4,021 -190 -190 -191

Profitability ratios (%) Inc/(dec) in debt -1,869 500 -500 -1,000

RoE 29.5 25.6 26.5 25.6 Interest rec./(paid) -161 -87 -88 -89

RoCE 41.0 35.8 36.3 36.5 Dividends paid -820 -935 -1,063 -1,913

Turnover ratios CF from fin. activity 1,171 -712 -1,841 -3,193

Debtors (Days) 27.3 27.3 27.3 27.3 Inc/(dec) in cash -88 1,524 1,103 1,979

Creditors (Days) 79.5 75.0 76.3 76.3 Add: beginning bal. 390 301 1,825 2,929

Leverage ratio Closing balance 301 1,825 2,929 4,908

Debt/equity (x) 0.1 0.1 0.1 0.0



31

Company profile Exide Industries (Exide) is India’s largest battery manufacturer with an installed capacity of 8m PV batteries, 9.6m motorcycle batteries, and 1,750m Ah industrial batteries. In the automotive sector, the company is a leading supplier of batteries for motorcycles, passenger vehicles, commercial trucks and farm equipment. It sells its automotive batteries in the domestic market under the brand names EXIDE, SF, SONIC and Standard Furukawa, while it exports its DYNEX, INDEX and SONIC branded products.

Exide is also a leading supplier of batteries for industrial applications relating to railroads, telecom, power back-up systems and materials handling. The company markets its industrial batteries in India under the EXIDE, INDEX, SF, CEIL and POWER SAFE brands and in the international market primarily under the CEIL, CHLORIDE and INDEX brands. The company has six manufacturing facilities in India (Maharashtra, Haryana, Tamil Nadu and West Bengal) and two smelting operations. Its key export markets include Singapore, Australia and Europe.

Exide has agreements with Furukawa Battery Company Limited, Japan for Lead Acid Storage batteries including Hybrid batteries and Maintenance Free batteries for four-wheelers and VRLA batteries for two-wheelers, Idling Stop System for auto batteries and with Changxing Noble Power Sourcing Company Limited, China for manufacture of Deep Cycling E-bike batteries for electric bicycles and scooters.

The company also has a 50% stake in ING Vysya Life Insurance Company Ltd, a joint venture with ING Group, Netherlands, a significant player in the global life insurance industry.

Fig 27 – Shareholding pattern

Promoters46%

FIIs15%

Domestic Institutional Investors

17%

Public22%

Source: BSE

Fig 28 – Management

T V Ramanathan MD & CEO

He is a CA and a CS with a total experience of 41 years including

the World Bank, the United Breweries group before joining Exide.

He has been on the Company’s board since May 1996.

G Chatterjee Director - Industrial

division

He holds a BE degree and a PG Diploma in Business

Administration. Mr. Chatterjee has spent over 2 decades and has

been on the Board of Directors of the Company since May 1996

P K Kataky Director - Automotive

division

He holds a B.E. (Electrical) degree and has over 39 years of

experience. He has been associated with the battery

manufacturing industry for over two decades. Mr. Kataky has

been on the Company’s Board of Directors since March 2005

A K Mukherjee Director - Finance &

CFO

He is a CA and also a Cost Accountant. He joined the Company

in 1998. Mr. Mukherjee has been on the Company’s Board of

Directors since May 2007 Source: Company


32

India | Automobiles & Parts EQUITY RESEARCH

9 December 2010

Amara Raja Batteries

IN-LINE (initiating coverage) PRICE (as at 09 December 10)

Rs178 Price target

Rs172

Fairly valued, initiate with IN-LINE

Bloomberg code Reuters codeAMRJ IN AMAR.BO

Market cap 12 month rangeRs14,903m (US$330m) Rs148 - 223

EPS est. change - - - -

We initiate coverage on Amara Raja with an IN-LINE rating and price target of Rs172.

Significant exposure to declining telecom demand and rising lead prices are likely to slow earnings growth to 11% over FY10-13E.

At our price target of Rs172, Amara Raja would trade at 8x FY12E earnings, in line with its 4-yr average one-year forward multiple of 8x. Looks fairly valued.

Year end: March 2010 2011E 2012E 2013ESales (Rs m) 14,652 17,046 22,373 26,501EBIT (Rs m) 2,444 1,946 2,713 3,246EBITDA (Rs m) 2,873 2,422 3,269 3,859Pretax profit (Rs m) 2,546 1,953 2,733 3,283Earnings (Rs m) adjusted 1,590 1,305 1,831 2,167Diluted EPS (Rs ) adjusted 18.6 15.3 21.4 25.4Diluted EPS growth (%) adj. 67.8 -17.9 40.3 18.3DPS (Rs ) 3.4 2.3 4.3 6.3DPS growth (%) 262.8 -32.5 87.1 47.9EBITDA margin (%) 19.6 14.2 14.6 14.6EBIT margin (%) 16.7 11.4 12.1 12.2Net margin (%) 10.8 7.7 8.2 8.2Div payout (%) 18.2 15.0 20.0 25.0Book value/share (Rs ) 63.7 76.6 93.8 112.8Net gearing (%) 5.3 -1.0 -9.6 -22.3ROE (%) 30.7 19.9 22.9 22.5ROCE (%) 38.0 26.2 31.9 33.0FCF (Rs m) 1,855 531 1,037 1,877EV/Sales (x) 1.0 0.9 0.6 0.5EV/EBITDA (x) 5.3 6.2 4.4 3.3PBR (x) 2.8 2.3 1.9 1.6PER (x) 9.6 11.7 8.3 7.0Dividend yield (%) 1.9 1.3 2.4 3.6

Source: Company, Standard Chartered Research estimates Share price performance

140150160170180190200210220230

Dec‐09 Mar‐10 Jun‐10 Sep‐10

Amara Raja Batteries BSE SENSEX 30 INDEX (rebased)

Share price (%) -1 mth -3 mth -12 mthOrdinary shares -9 -17 6Relative to Index -1 -18 -6Relative to Sector - - -Major shareholder Promoter (52.1%)Free float 48%Average turnover (US$) 1,148,201

Significant exposure to declining telecom demand – Given the slowdown in the telecom industry, pricing pressure on telecom batteries (28% of Amara Raja’s revenue) could impact earnings, in our view. We estimate the 930bps yoy fall in margin in 1H FY11 to 14.2% is partly due to the telecom slowdown.

Impacted by rising lead prices – The lack of backward integration exposes Amara Raja’s earnings to lead price volatility. Over the past five quarters, higher lead prices have been one key reason for Amara Raja’s margin decline.

Expect slower 11% earnings CAGR over FY10-13 – Given its exposure to slowing telecom demand and lack of backward integration, we estimate Amara Raja’s earnings would grow at amuch slower 11% CAGR over FY10-13E (FY07-10 CAGR 35%) despite 22% revenue CAGR.

Capex plans to shift product mix favourably – The Rs1.6bn capex earmarked over FY11-13E will shift Amara Raja’s product mix in favour of the high-demand auto sector.

Valuation: Price target of Rs172 – At 8.3x FY12E earnings, the stock is trading at its 4-yr average one-year forward multiple(which is in line with its historic 50% discount to Exide) and appears fairly valued. Initiate coverage with an IN-LINE rating and price target of Rs172.

Source: Company, Bloomberg


33

Investment argument & valuation We initiate coverage on Amara Raja with an IN-LINE rating and price target of Rs172. Significant exposure to declining telecom demand and rising lead prices are likely to slow earnings growth to 11% over FY10-13E. At 8.3x FY12E earnings, it is trading at its average one-year forward multiple and looks fairly valued.

Significant exposure to declining telecom demand

Almost 28% of Amara Raja’s earnings come from the telecom segment, where it is a preferred supplier to all major telecom infrastructure and service providers and enjoys 35% market share. Amara Raja introduced the VRLA technology in India for telecom applications and today it has the largest installation base of VRLA products.

Vendors to the telecom sector have been impacted over the past few quarters because: 1) most telecom players have substantially pruned their capex plans and 2) significant competitive pressure has dented vendor margins.

The slowdown in the telecom sector and rising lead prices led to a sharp 930bps yoy decline in Amara Raja’s margin in 1H FY11 to 14.2%.

Fig 1 – Amara Raja’s margins have been erratic in the recent past

18.0

23.6

18.8

14.513.914.6

23.4

10

13

16

19

22

25

Q4

FY

09

Q1

FY

10

Q2

FY

10

Q3

FY

10

Q4

FY

10

Q1

FY

11

Q2

FY

11

%

Source: Company

We estimate battery demand from telecom to post 5% CAGR over FY10-13E. This coupled with wafer-thin margins in the segment is likely to impact Amara Raja’s margins going forward.

Impacted by rising lead prices

Despite price escalation clauses, Amara Raja’s earnings have been exposed to lead price fluctuations. It is also exposed to exchange rate movements, which magnify the impact of input cost pressures. To add to its woes, margins in the telecom space have significantly shrunk in the recent past due to decreasing capex and heightened competition.

The lack of backward integration exposes Amara Raja’s earnings to volatile lead price movements. We expect margins in FY11 to be impacted by rising lead prices and slowdown in telecoms (in 1H FY11 margin has contracted 930bps to 14.2%). Going forward, we expect margins to remain at these levels, which is near its historic average of 14.6%.

Amara Raja earns 28% of revenue from telecom

Vendors to telecom sector impacted

Lack of backward integration exposes Amara Raja’s earnings to volatile lead prices


34

Fig 2 – Margins likely to stabilise at lower levels

14.314.6

19.6

14.214.614.6

12

14

16

18

20

22

FY

08

FY

09

FY

10

FY

11

E

FY

12

E

FY

13

E

%


Capex plans to shift product mix favorably

Amara Raja plans to expand its auto battery capacities for which it has earmarked Rs1.6bn – doubling two-wheeler battery capacity to 3.6m in FY11 and to 5m by FY12; raising four-wheeler capacity 20% to 6m by FY12. The capex is likely to be funded by internal accruals (see details below).

Fig 3 – Amara Raja’s Rs1.6bn capex plans to expand 2W and 4W capacity Installed capacity FY10 FY11E FY12E

Two wheelers (m units) 1.8 3.6 5

Four wheelers (m units) 4.2 5.1 6

UPS (m units) 1.8 1.8 1.8

Industrial (m Ampere hrs) 900 900 900

Capex (Rs m) 900 700

Source: Company

Amara Raja also plans to cap exposure to the low-margin OEM segment to about 25% of its revenues. Post this capex plan, the product mix is likely to shift 60:40 in favour of the auto segment, thereby reducing its dependence on the slow-moving telecom segment.

Expect slower 11% earnings CAGR over FY10-13

With an established brand and a pan-India presence, Amara Raja is likely to benefit from the strong outlook for India’s battery market. We estimate Amara Raja to post 22% revenue CAGR over FY10-13E. Nevertheless, high exposure to telecom and lack of backward integration could result in margins stabilising at lower levels of about 14.6%. We thus expect Amara Raja to post a much slower 11% earnings CAGR over FY10-13E.

Fig 4 – Earnings to grow at a slower pace despite robust revenue ramp up

22

31

181611

0

5,000

10,000

15,000

20,000

25,000

30,000

FY

09

FY

10

FY

11E

FY

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FY

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Rsm

0

5

10

15

20

25

30

35

%

Net sales (LHS) Growth yoy (RHS)

0

41

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66

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2,500

FY

09

FY

10

FY

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FY

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13E

Rsm

-40

-20

0

20

40

60

80

%

PAT (LHS) Growth yoy (RHS)


Capex plans likely to shift product mix towards automobile batteries

Earnings likely to grow at a slower 11% CAGR despite 22% revenue CAGR


35

Valuation

At 8x FY12E earnings, the stock is trading at its 4-yr average one-year forward multiple (which is in line with its historic 50% discount to Exide) and appears fairly valued. Initiate coverage with an IN-LINE rating and price target of Rs172. With return ratios in excess of 20%, we believe the stock deserves to trade at least at its historic multiple of 8x.

Fig 5 – Amara: 1-yr forward PE & avg. PE Fig 6 – Amara Raja: Discount to Exide

0

2

4

6

8

10

12

14

Ap

r-0

7

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(x) Average PE 8x

0

20

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Apr

-07

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-07

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-08

Aug

-08

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-10

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-10

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-10

%



Risks

Input cost pressures Increasing lead prices in the international markets continue to be a cause of concern for the Indian battery industry. Volatile crude oil prices in the international market also affect the price of PPCP, which is used for manufacturing battery containers. Increases in crude oil prices also increase transportation costs for raw materials and finished goods.

Rising threats from imports Relatively inexpensive imports from China and some ASEAN countries have been a key concern for the indusrty. Thailand, in particular, is seeking to expand the scope of its free trade agreement with India to include batteries. While Chinese batteries have been flooding certain Indian markets for quite some time, the price differential has come down over the last few years.

Telecom sector slowdown Most of the telecom majors have substantially reduced their capex over the next few years. Also, led by heightened competitive pressures, telecom OEMs are squeezing margins of their ancillary suppliers including that of battery manufacturers. A sustained slowdown in the telecom space is likely to impact earnings for Amara Raja going forward.

Large unorganized market may restrict potential upside The unorganized market (estimated at around Rs20-25bn) gives tough competition to the organized players, especially in rural areas where the latter has limited reach. The growing unorganised market poses a serious threat to the organised battery segment in India.

At our price target, the stock is fairly valued


36

Financials 22% revenue CAGR expected over FY10-13 Volume growth in the auto battery segment/replacement category and strong potential in the UPS/railways could offset the decline in telecom, in our view. Furthermore, its capex plans would tilt the product mix towards autos and, hence, reduce Amara Raja’s overall exposure to telecom. We estimate its revenue to post a 22% CAGR over FY10-13.

Fig 7 – Revenue CAGR of 22% over FY10-13E

0

5,000

10,000

15,000

20,000

25,000

30,000F

Y09

FY

10

FY

11E

FY

12E

FY

13E

Rsm

22% CAGR


Margins to stabilise Amara Raja’s margin has declined 930bps yoy in 1H FY11 led by a slowdown in telecom and rising lead prices. With its product mix set to shift in favour of auto batteries, we expect margins to stabilise at its historical average of about 14.6%, going forward.

Fig 8 – Margins likely to stabilize at its historic average of about 14.6%

14.216.6

23.5

15.515.2

-

400

800

1,200

1,600

2,000

1HF

09

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2HF

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EBIDTA (LHS) Margin (RHS)

14.6 14.3

19.6

14.2 14.6 14.6

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%

EBIDTA (LHS) Margin(RHS)


Earnings to grow at a slower 11% CAGR over FY10-13E The robust revenue growth (22% CAGR over FY10-13E) is expected to be mellowed by margins stabilising at lower levels resulting in a much lower earnings CAGR of 11% over FY10-13E. We expect net profit margins for the company to stabilise at 8% levels over FY12-13E.

Steady volume from the auto segment, growth in replacement category, and strong potential from UPS could offset deceleration in telecom

Margins could stabilise with shift in product mix towards auto

Earnings CAGR of 11% over FY10-13E


37

Fig 9 – Expect a slower 11% CAGR in earnings over FY10-13E

8.77.2

10.7

7.6 8.18.1

0

1,000

2,000

3,000

FY

08

FY

09

FY

10

FY

11E

FY

12E

FY

13E

Rsm

0

2

4

6

8

10

12

%

PAT (LHS) PAT margin (RHS)

Source: Company, Standard Chartered Research estimates Fig 10 – Quarterly Performance (Rs mn)

FY10 FY11

1Q 2Q 3Q 4Q 1Q 2Q FY10 FY11E

Net sales 3,065 3,612 3,675 4,333 4,467 3,925 14,652 17,046

Change (%) -2.9 6.4 10.3 30.1 45.7 8.7 11.2 16.3

(Inc.)/dec in stock 87 -115 -450 122 131 48 0 0

Net raw materials 1,642 2,139 2,666 2,742 2,846 2,457 8,821 11,097

RM/sales % 56.4 56.0 60.3 66.1 66.6 63.8 60.2 65.1

Total cost 2,348 2,760 2,982 3,699 3,847 3,356 11,779 14,624

EBITDA 717 851 692 634 620 568 2,873 2,422

As a % of sales 23.4 23.6 18.8 14.6 13.9 14.5 19.6 14.2

Change (%) 58.5 57.5 60.5 5.9 -13.5 -33.2 52.3 -15.7

Non-operating income 6 10 6 6 9 16 50 38

Extraordinary income 49 3 38 30 11 -2 121 0

Interest 30 26 6 6 4 4 68 31

Gross profit 694 835 692 634 625 580 2,976 2,429

Depreciation 102 107 117 104 103 105 429 476

PBT 592 729 576 530 523 475 2,546 1,953

Tax 200 251 204 184 173 157 876 648

Effective tax rate (%) 33.9 34.5 35.4 34.8 33.1 33.0 34.4 33.2

Reported PAT 391 477 372 346 350 318 1,670 1,305

Change (%) 69.9 71.5 57.5 13.5 -10.6 -33.4 107.5 -21.9

Adjusted PAT 426 479 399 367 357 316 1,590 1,305

Change (%) 185.4 154.9 93.6 30.8 -16.2 -34.0 67.8 -17.9



38

Fig 11 – Income statement (Rsm) Year end: Mar FY08 FY09 FY10 FY11E FY12E FY13E

Net sales 10,833 13,177 14,652 17,046 22,373 26,501

Change (%) 81.8 21.6 11.2 16.3 31.3 18.5

Expenditure 9,256 11,291 11,779 14,624 19,104 22,642

EBITDA 1,577 1,886 2,873 2,422 3,269 3,859

Change (%) 93.5 19.6 52.3 -15.7 34.9 18.0

% of net sales 14.6 14.3 19.6 14.2 14.6 14.6

Depreciation 244 346 429 476 556 612

EBIT 1,333 1,541 2,444 1,946 2,713 3,246

Interest & finance charges 129 182 68 31 22 9

Other income 256 81 50 38 42 46

Non-recurring expense 0 212 0 0 0 0

Non-recurring income 0 0 121 0 0 0

PBT 1,459 1,227 2,546 1,953 2,733 3,283

Tax 516 422 876 648 902 1,116

Effective rate (%) 35.3 34.4 34.4 33.2 33.0 34.0

Rep. PAT 944 805 1,670 1,305 1,831 2,167

Change (%) 100.9 -14.7 107.5 -21.9 40.3 18.3

% of net sales 8.7 6.1 11.4 7.7 8.2 8.2

Adj. PAT 944 947 1,590 1,305 1,831 2,167

Change (%) 100.9 0.4 67.8 -17.9 40.3 18.3


Fig 12 – Balance Sheet (Rsm) Year end: Mar FY08 FY09 FY10 FY11E FY12E FY13E

Sources of funds

Share capital 114 171 171 171 171 171

Reserves 3,217 3,885 5,266 6,375 7,840 9,465

Net worth 3,331 4,056 5,437 6,546 8,011 9,636

Loans 3,163 2,859 912 813 412 112

Deferred tax liability 170 183 216 216 216 216

Capital employed 6,663 7,097 6,566 7,575 8,639 9,964

Application of funds

Gross fixed assets 3,106 4,271 4,911 6,038 6,738 7,338

Less: depreciation 1,217 1,458 1,854 2,330 2,886 3,498

Net fixed assets 1,889 2,813 3,057 3,708 3,852 3,840

Capital WIP 657 396 227 - - -

Investments 162 471 161 161 161 161

Curr.assets, & adv. 5,976 5,260 6,311 7,103 8,705 10,613

Inventory 1,943 1,608 2,176 2,335 3,065 3,630

Sundry debtors 2,265 2,078 2,423 2,802 3,371 3,630

Cash & bank balances 511 703 625 878 1,181 2,266

Loans & advances 1,248 870 1,087 1,087 1,087 1,087

Other current assets 8 - - - - -

Current liab. & prov. 2,021 1,843 3,190 3,397 4,078 4,650

Sundry creditors 808 937 1,376 1,635 2,145 2,541

Other liabilities 219 201 280 280 280 280

Provisions 993 705 1,534 1,482 1,653 1,828

Net current assets 3,955 3,417 3,121 3,706 4,626 5,964

Application of funds 6,663 7,097 6,566 7,575 8,639 9,964



39

Fig 13 – Ratios Year end: Mar FY08 FY09 FY10 FY11E FY12E FY13E

Per share

EPS 16.6 11.1 18.6 15.3 21.4 25.4

EPS fully diluted 11.0 11.1 18.6 15.3 21.4 25.4

Cash EPS 20.9 13.5 24.6 20.9 27.9 32.5

EPS growth (%) 100.9 -33.1 67.8 -17.9 40.3 18.3

Book value per share 58.5 47.5 63.7 76.6 93.8 112.8

DPS (Includig dividend tax) 0.8 0.9 3.4 2.3 4.3 6.3

Payout (Incl. Div. Tax) % 5 8 18 15 20 25

Valuation (x)

P/E 10.7 16.1 9.6 11.7 8.3 7.0

Cash P/E 8.5 13.2 7.2 8.5 6.4 5.5

EV/EBITDA 8.0 9.0 5.3 6.2 4.4 3.3

EV/sales 1.2 1.3 1.0 0.9 0.6 0.5

Price to book value 3.0 3.7 2.8 2.3 1.9 1.6

Dividend yield (%) 0.5 0.5 1.9 1.3 2.4 3.6

Profitability Ratios (%)

RoE 28.3 19.8 30.7 19.9 22.9 22.5

RoCE 23.8 22.8 38.0 26.2 31.9 33.0

Turnover Ratios

Debtors (Days) 76 58 60 60 55 50

Inventory (Days) 77 52 67 58 59 59

Creditors (Days) 41 39 57 54 54 54

Working capital (Days) 112 70 71 65 60 55

Asset turnover (x) 1.6 1.9 2.2 2.3 2.6 2.7

Leverage Ratio

Debt/Equity (x) 0.9 0.7 0.2 0.1 0.1 0.0


Fig 14 – Cash flow statement (Rsm) Year end: Mar FY08 FY09 FY10 FY11E FY12E FY13E

OP/(Loss) before tax 1,333 1,541 2,427 1,935 2,701 3,234

Depreciation & amortisation 244 346 429 476 556 612

Direct taxes paid -482 -409 -842 -648 -902 -1,116

(Inc)/Dec in working capital -1,512 730 218 -332 -618 -253

Other Items -9 -69 6 0 0 0

CF from Oper. activity -427 2,138 2,239 1,431 1,737 2,477

Extra-ordinary items 0 -212 121 0 0 0

CF after EO items -427 1,926 2,360 1,431 1,737 2,477

(Inc)/Dec in FA+CWIP -1,160 -1,009 -504 -900 -700 -600

(Pur)/Sale of invest. 0 -309 310 0 0 0

CF from Inv. activity -1,160 -1,318 -194 -900 -700 -600

Issue of shares 0 57 0 0 0 0

Inc/(Dec) in debt 1,756 -304 -1,946 -100 -400 -300

Interest rec./(paid) 127 -102 -18 7 20 37

Dividends paid -40 -68 -248 -196 -366 -542

CF from Fin. activity 1,842 -417 -2,213 -289 -746 -805

Inc/(Dec) in cash 255 191 -47 242 291 1,072

Add: beginning balance 256 511 703 625 878 1,181

Closing balance 511 703 656 867 1,169 2,253



40

Company profile Over the past decade, Amara Raja, in a JV with Johnson Controls (each holding 26% in the company), has grown to become the second largest battery manufacturer in India. It has an installed capacity of 4.8m four-wheeler batteries, 1.8m for two wheelers, 1.8m for UPS batteries and 900m Ampere hrs of industrial batteries. Amara Raja markets these products under the brand name of Amaron with variants.

Amara Raja is a preferred supplier to most of the four-wheeler players including Ford, General Motors, Maruti, Hyundai and Daimler Chrysler for diverse platforms with a ~20% market share. Even in the organized replacement segment the company enjoys a ~28% market share.

The company is a preferred supplier to all major telecom infrastructure and service providers and is one of the largest battery suppliers to utilities. Under the brand Amaron, the variants for the industrial space are Power Stack (large VRLA) and Quanta (medium VRLA). Amara Raja ventured into small VRLA batteries in 4Q FY10.

Within the railways segment, Amara Raja powers over 50% of Tier-II and III AC coaches and over 40% of their signalling and telecom power supply.

The company has an integrated automotive battery manufacturing facility at Tirupati. The company has a strong distribution network of 200 wholesale franchisees and 18,000 retailers and 750 rural retailers (Power zone).

Fig 15 – Shareholding pattern

Others27%

DII18% FII

3%

Promoter52%

Source: BSE

Fig 16 – Management

Ramachandra Galla Promoter & Non-

Executive Chairman

He is an electrical engineer with Masters degrees in Applied

Electronic and Systems Sciences. He had been the

Executive Chairman and MD of AMRJ from July 1998 to

August 2003 before the current role.

Jayadev Galla Promoter & MD

Has Bachelor’s degree in Political Science and Economics.

He has been the MD of AMRJ since August 2003. Prior to

that he was the ED of the company.

Source: Company


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42

Disclosures appendix

Global disclaimer

The information and opinions in this report were prepared by Standard Chartered Bank (Hong Kong) Limited, Standard Chartered Bank Singapore Branch, Standard Chartered - STCI Capital Markets Limited and/or one or more of its affiliates (together with its group of companies, ”SCB”) and the research analyst(s) named in this report. SCB makes no representation or warranty of any kind, express, implied or statutory regarding this document or any information contained or referred to in the document. The research analysts responsible for the content of this research report certify that

The view expressed and attributed to the research analyst or Analysts in the research report accurately reflect their personalopinion(s) about the subject securities and issuers and/or other subject matter as appropriate; andNo part of his or her compensation and other benefits was, is or will be directly related to the specific recommendations or viewscontained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisalsof analysts.Our ratings are under constant review.

Additional information with respect to any securities referred to herein will be available upon request. THIS RESEARCH HAS NOT BEEN PRODUCED IN THE UNITED STATES AND MUST NOT BE SENT OR TAKEN OR TRANSMITTED INTO THE UNITED STATES OR DISTRIBUTED DIRECTLY OR INDIRECTLY IN THE UNITED STATES. Disclosures Appendix Where “disclosure date” appears below, this means the day prior to the report date. All share prices quoted are the closing price for the business day prior to the date of the report, unless otherwise stated. Company Amara Raja Batteries

As at the disclosure date, the following applies:

Amara Raja Batteries - current rating is: IN-LINE

140150160170180190200210220230

Nov 09 Dec 09 Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10

Source: FactSet prices / SCB ratings and price targets

Company Exide Industries Ltd

As at the disclosure date, the following applies:

Exide Industries Ltd - current rating is: OUTPERFORM

100110120130140150160170180190200210

Nov 09 Dec 09 Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10

Source: FactSet prices / SCB ratings and price targets


43

Recommendation Distribution and Investment Banking Relationships

% of covered companies currently assignedthis rating

% of companies assigned this rating with whichSCB has provided investment banking services overthe past 12 months

OUTPERFORM 61.9% 15.2%

IN-LINE 28.3% 10.0%

UNDERPERFORM 9.7% 6.5% Research Recommendation

Terminology Definitions

OUTPERFORM (OP) The total return on the security is expected to outperform the relevant market index by 5% or more over the next 12 months

IN-LINE (IL) The total return on the security is not expected to outperform or underperform the relevant market index by 5% or more over the next 12 months

UNDERPERFORM (UP) The total return on the security is expected to underperform the relevant market index by 5% or more over the next 12 months

SCB uses an investment horizon of 12 months for its price targets.


44

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The contents of this document may not be suitable for all investors as it has not been prepared with regard to the specific investment objectives or financial situation of any particular person. Any investments discussed may not be suitable for all investors. Users of this document should seek professional advice regarding the appropriateness of investing in any securities, financial instruments or investment strategies referred to in this document and should understand that statements regarding future prospects may not be realised. Opinions, forecasts, assumptions, estimates, derived valuations and target price(s) contained in this document are as of the date indicated and are subject to change at any time without prior notice. The value and income of any of the securities or financial instruments mentioned in this document can fall as well as rise and an investor may get back less than invested. Future returns are not guaranteed, and a loss of original capital may be incurred. 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