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Emka
Sec
torReport
Emkay Global Financial Services Ltd. 1
Batteries
Strong fundamentals; Initiate with BUY
September 25, 2012
Amara Raja (BUY, TP: Rs250)
Price Performance
(%) 1M 3M 6M 12M
Absolute 11 41 48 103
Rel. to Nifty 6 28 37 76
Source:Bloomberg
Relative price chart
90
117
144
171
198
225
Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12
Rs
-10
8
26
44
62
80%
Amara Raja Batteries (LHS) Rel to Nifty (RHS)
Source: Bloomberg
Exide Industries (BUY, TP: Rs175)
Price Performance
(%) 1M 3M 6M 12M
Absolute 6 6 -2 9
Rel. to Nifty 1 -4 -9 -6
Source:Bloomberg
Relative price chart
100
110
120
130
140
150
Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12
Rs
-30
-22
-14
-6
2
10%
Exide Industri es (LHS) Rel to Ni fty ( RHS ) Source: Bloomberg
Kaushal Maroo
+91-22-66121252
Siddhartha Bera
+91-22-66242494
n Quasi consumption play with >15% revenue CAGR potential
and better growth visibility than OEMs
n Exide and Amara Raja between them own ~90% of organized
market; to benefit from revival in replacement demand
n High revenue visibility from battery replacement cycle, strong
20%+ ROEs and low capital intensity makes both stocks re-
rating candidates
n BUY EXID with a TP of Rs 175; BUY AMRJ with a TP of Rs 250
Batteries: Defensive plays; strong fundamentals
In the current scenario of bleak domestic automobile sales, the battery sector provides a
good investment alternative. We expect the battery sector to benefit from the strong 22%
auto sales CAGR between FY09-FY12. The typical three year battery life means that
replacement demand is likely to pick up after a weak phase. We believe that Exide andAmara Raja are well placed to capitalize on this 20%+ growth opportunity, now that the
capacity expansion is on-stream. UPS/inverter sales continue to post double-digit growth
and we expect the weak demand from the low-margin OEMs to be more than offset by
replacement/industrial sales.
We like the sector because of 1) its low capital intensity (asset turnovers > 3x) and
resultant strong return ratios (20%+ ROEs), 2) barriers to entry in the form of strong OEM
tie-ups and a vast retail distribution network for both Exide and Amara Raja - 90% OEM
market share and >40k/18k retail touch-points respectively 3) high revenue visibility (OEM
tie ups & three year replacement cycle) and 4) quasi-duopoly (virtually a two-player
market) / quasi-consumption (given large portion of sales is retail sales) nature. We initiate
coverage on the sector with a structural positive stance and expect the companies to
report healthy 18-20% revenue growth and sustainable margins in the next 3 years.
Exide Industries: Turning around
Exides capacity commissioning which got delayed is now on-stream adding capacity of
2.0 mn for 2 wheelers and 1.4 mn for 4wheelers. Resolution of capacity constraints, in our
view, favorably places Exide to capitalize on the uptick in replacement demand in
FY13/14. We expect the company to report margin improvement of 200 bps over the next
two years driven by higher replacement sales and higher capacity at its in-house smelters,
which are a source of cheaper lead. We expect EBITDA margins to stabilize at ~17%.
We initiate coverage on Exide with a one-year target price of Rs 175 and a BUY
recommendation. We have valued its battery business at 16xFY14E earnings and have
added Rs 9/share for its stake in the ING Vysya Life Insurance business. We expect the
company to report earnings CAGR of 31% in FY12-FY15 and act as a counter cyclical
stock when OEMs are facing pressure of demand slowdown.
Amara Raja Batteries: Consistent performer
Amara Raja is, in our view, amongst the most exciting small cap companies with a superb
track record of revenue growth, market share gain and profitability. The company has
grown its revenues/profits at a CAGR of 31%/36% respectively in the last five years. We
believe that the AMARON brand has gained significant brand equity/presence and would
continue to see strong revenue growth and sustainable profits within the battery space.
Amara Raja has increasingly been focusing on automotive capacity addition a structural
positive in our view, and has set up an enviable network of 18,000 retail touch points.
We initiate coverage on Amara Raja with a BUY recommendation and a target price of Rs250. We expect the company to clock 18%/19% revenue/earnings growth CAGR over
FY12-FY15 with strong ROE of >25%. We believe that the stock is a re-rating candidate
given its consistent track record, quasi consumption nature of business, enviable return
profile and strong earnings growth trajectory.
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Emkay Research September 25, 2012 2
Why batteries sector?
n Quasi duopoly 90% of market between Exide and Amara Raja ; Strong OEM tie-ups and vast distribution
network difficult to replicate
Exhibit 1: EXID/AMRJ have size and relationship advantage with OEMs
72% 71%
26%
0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
4W 2WExide AMRJ
OEM
Source: Company, Emkay Research
Exhibit 2: Organized replacement too, is a quasi duopoly between them
55%
34%
0%
10%
20%
30%
40%
50%
60%
Exide* AMRJ4 Wheeler
Replacement
Source: Annual Report, Emkay Research
Note: * -Estimates
Exhibit 3: Amara Raja has done an incredible job of raising distribution
18,000
274
-
5,000
10,000
15,000
20,000
Amaron Dealer Amaron Franchise
Source: Annual Report, Emkay Research
Exhibit 4: Exide already boasts of an FMCG-like retail reach
Other touch
points, 10,000
"Humsafar"
touchpoint,
14,000
EXID Dealers,
16,000
Retail Touchpoints
Source: Annual Report, Emkay Research
n Share of unorganized market on the decline
Exhibit 5: While 2w/PVs are largely catered by organized market, the price sensitivecommercial vehicles users still greatly use the unorganized market batteries
65%
40%
0%
10%
20%
30%
40%
50%
60%
70%
FY00 FY12Unorganised
Source: Annual Report, Emkay Research
Apart from advantage of better
quality products, organized market
is set to grow as manufacturersbuy back used batteries from the
market (thereby cutting supply of
lead to unorganized market) and
introduce cheaper batteries with
lower (life) warranties
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n Pricing power: Pass-through clauses with OEMs and pricing power in retail assures margin sustainability
Exhibit 6: Margins resilient despite volatility in lead prices
5
10
1520
25
30
Q1FY07
Q3FY07
Q1FY08
Q3FY08
Q1FY09
Q3FY09
Q1FY10
Q3FY10
Q1FY11
Q3FY11
Q1FY12
Q3FY12
Q1FY13
1,000
1,500
2,0002,500
3,000
3,500
Lead (USD/Ton) Exide AMRJ
USD/Ton%
Source: Bloomberg, Company, Emkay Research
n Strong profitability, low capital intensity assures sustainable high return ratios
Exhibit 7: High gross fixed asset turnover levels
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E
AMRJ EXID
GFA Turnover (x)
Source: Emkay Research
Exhibit 8: EBITDA margins to improve over FY12 levels
14
.515
.1 16
.5
15
.7
19
.6
14
.6
15
.0
15
.5
16
.0
16
.5
16
.6
16
.7
16
.2
23
.4
19
.4
13
.41
6.0
17
.0
10
12
14
16
18
20
22
24
26
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E
AMRJ EXID
Source: Emkay Research
Exhibit 9: 20%+ ROEs are sustainable in our view
10
15
20
25
30
35
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E
AMRJ EXID
ROE
Source: Emkay Research
Exhibit 10: ROIC trend
20
30
40
50
60
70
80
90
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E
AMRJ EXID
ROIC
Source: Emkay Research
Both companies sustained
margins even at lead prices of
>3k/ton; disappointments in the
past have been either due to
high cost inventory (EXID) or
shift in product mix (AMRJ)
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Exhibit 11: Strong free cash flow generation: Should further improve once capex programs in FY13 are through
Rs mn FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E
Exide
Operating CF 2,234 1,877 1,783 5,047 5,238 3,978 5,102 5,078 7,643
Capex -358 -1,084 -1,627 -1,739 -1,076 -2,752 -1,996 -2,700 -2,000
FCF 1,876 793 155 3,309 4,163 1,226 3,106 2,378 5,643
% of EBITDA 82 25 3 60 47 14 45 25 46Amara Raja
Operating CF 266 -376 -296 2,239 2,143 861 2,963 3,199 3,476
Capex -244 -700 -570 -1,291 -685 -519 -873 -1,600 -1,600
FCF 22 -1,075 -867 949 1,458 343 2,089 1,599 1,876
% of EBITDA 4 -117 -47 46 51 13 59 36 35
Source: Emkay Research
n Secular growth: commendable growth track record
Exhibit 12: Healthy revenue growth trend
0
20
40
60
80100
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E
EXID AMRJ
% YoY
Source: Company, Emkay Research
Companies saw double-digit
revenue growth even in the
toughest environment in FY09
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Why BUY now?
n Replacement cycle to kick-in during FY13/14; Industry shift towards electric-start 2w provides new opportunities
Exhibit 13: Overall auto industry growth (All vehicle segments combined)
13% 14%
-4%
1%
27% 26%
13%
-10%
0%
10%
20%
30%
FY06 FY07 FY08 FY09 FY10 FY11 FY12
% YoYPo or growth led to current
scenario of weakreplacement demand
Strong growth to aid replacement
demand from FY12-15
Source: Emkay Research
Exhibit 14: Till FY08, industry was primarily dominated by kick-startmotorcycles
Electric Start
2-Wheeler
10%
Kick-Start 2-
Wheeler
90% Source: Emkay Research
Exhibit 15: Higher share of Electric-start bikes to fuel replacementdemand in coming years
Electric Start
2-Wheeler
60%
Kick-Start 2-
Wheeler
40%
Source: Emkay Research
n Capacity expansion on-stream now; companies preparing themselves for next leg of demand upswing
Exhibit 16: Companies still in capacity expansion mode in FY13
Mn Units FY10 FY11 FY12 FY13-14E
Amara Raja
4W 4.2 4.2 5.6 6.0
2W 1.8 3.6 4.8 6.0
UPS 1.8 1.8 2.0 3.0
Total 7.8 9.6 12.4 15.0
Exide Industries
4W 8.4 10.6 12.0 12.0
2W 10.0 18.0 20.0 20.0
Inverters 0.04 0.2
Industrial 5.8 5.8 5.8 5.8
Total 24.2 34.4 37.8 38.0
Source: Emkay Research
Typical 3 year life of a battery
would mean that the strong
25%+ industry growth in
FY10/11 will translate into
strong replacement demand in
FY13/14
Since FY10, both EXID &
AMRJ have increased capacity
by more than 50%
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n International lead prices have cooled off; High lead inventory might keep lead prices under check
Exhibit 17: Strong inventory build-up indicating lead prices to remain subdued
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
Jul-05
Jan-0
6
Jul-06
Jan-0
7
Jul-07
Jan-0
8
Jul-08
Jan-0
9
Jul-09
Jan-1
0
Jul-10
Jan-1
1
Jul-11
Jan-1
2
Jul-12
0
50
100
150
200250
300350
400
450
Inventory USD/ton
USD/ton '000 tons
Source: Bloomberg, Emkay Research
n Good proxy to automotive sector; Replacement stories better investment plays, given weak auto demand
Exhibit 18: EXID/AMRJ to see significantly better revenues than OEMs
0
20
40
60
80
100
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14EAuto OEM's EXID AMRJ
% YoY
Source: Emkay ResearchNote: Auto OEMs considered were HMCL, BJAUT, TVSL, TTMT (S), MM, MSIL, EIM, AL
n Expectations from companies low, despite a potential high growth period ahead
Exhibit 19: Upgrades a result of consecutive quarters of earnings beat
10
1214
16
18
20
Oct-11
Nov-1
1
Dec-1
1
Jan-1
2
Feb-1
2
Mar-12
Apr-12
May-1
2
Jun-1
2
Jul-12
Aug-1
2
FY13 FY14
AMRJ
Source: Emkay Research
Exhibit 20: Expectations very low; chances of beating estimates high
7
89
10
11
12
Oct-11
Nov-1
1
Dec-1
1
Jan-1
2
Feb-1
2
Mar-12
Apr-12
May-1
2
Jun-1
2
Jul-12
Aug-1
2
FY13 FY14
EXID
Source: Emkay Research
Although most benefit of lower
lead prices have been offset byrupee depreciation, risks to
margins are reduced due to
benign lead prices
We expect both the battery
players to report higher revenue
earnings growth than the
automotive OEMs (to see
subdued financial performance
in the next few quarters)
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A case for stock re-rating?
We believe that battery sector companies Exide and Amara Raja are similar in nature to
the consumption-driven companies like biscuits, paints and consumer electricals where the
consumer stickiness to well known brands is high but relatively lesser when compared to
segment like personal products. Building brand equity and distribution network is the key to
getting the business right, where we believe both Exide and Amara Raja have done a
remarkable job.
However, when it comes to valuations, we believe the stocks are still cheap (especially
Amara Raja) not giving due credit to the consumption-like nature of business. Both
companies report >20% ROEs and >3x gross asset turns, similar to the consumer names
but still trade relatively cheaper. Even on PEG ratios, the battery stocks look cheaper and
in our view deserve re-rating.
Exhibit 21: Stock P/E at historical average despite consistent delivery
0
2
4
6
810
12
14
16
Apr-04
Oct-04
Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
AMRJ
+1 SD
-1 SD
Source: Emkay Research
Exhibit 22: Post a wash out year in FY12, expectations are fairly low
0
5
10
15
20
25
30
Apr-04
Oct-04
Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
EXID
+1 SD
-1 SD
Source: Emkay Research
Exhibit 23: Despite high return ratios, EXID/AMRJ look cheap on P/BV basis
Berger PaintsVIP
HavellAsian Paints
Akzo Nobel
Kansai Nerolac
Britannia
Bajaj Electrical
Exide
Amara Raja
-
5
10
15
20
25
30
35
40
45
- 2 4 6 8 10 12
P/BV vs ROE
Source: Company, Emkay Research, Bloomberg
Exhibit 24: Valuations look cheap even when analyzed based on earnings growth rate
PEG
-
0.5
1.0
1.5
2.0
2.5
Asian
Paints
Berger
Paints
Akzo
Nobel
Kansai
Nerolac
Britannia Havell Bajaj
Electrical
EXID AMRJ
Source: Company, Emkay Research, Bloomberg
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Exhibit 25: P/BV and ROE trend for select consumer and battery stocks
P/B ROE
FY11 FY12 FY13 FY14 FY11 FY12 FY13 FY14
Asian Paints 17.1 13.9 11.1 9.1 44 39 37 36
Berger Paints 7.2 6.4 5.2 4.3 24 23 23 24
Akzo Nobel 3.0 2.7 2.8 2.6 14 15 15 17
Kansai Nerolac 5.5 4.7 4.0 3.5 23 22 21 22
Britannia 12.2 11.3 9.7 7.2 33 42 42 43
VIP - 4.1 3.7 3.1 44 34 27 26
Havell 12.7 7.7 5.8 4.4 49 44 38 34
Bajaj Electrical 3.0 2.6 2.3 2.0 26 19 20 21
Exide 4.4 4.0 3.4 2.9 24 16 20 22
Amara Raja 5.6 4.4 3.5 2.7 25 29 29 28
Source: Company, Emkay Research, Bloomberg
Exhibit 26: Valuation ratios of select consumer and battery stocks
P/E EV/EBITDA
FY11 FY12 FY13 FY14 FY11 FY12 FY13 FY14
Asian Paints 43.4 39.5 32.5 27.1 27.4 25.1 20.8 17.4
Berger Paints 32.8 27.8 23.5 19.6 21.4 17.7 14.3 12.0
Akzo Nobel 21.7 18.5 20.3 17.3 18.7 22.5 16.4 13.3
Kansai Nerolac 23.2 22.7 20.1 16.9 16.4 13.9 12.3 10.3
Britannia 41.7 29.0 25.4 19.6 27.7 19.4 17.3 13.6
VIP - 13.6 15.2 12.8 9.2 9.4 7.7
Havell 29.1 20.3 16.9 14.3 17.3 12.5 11.2 9.8
Bajaj Electrical 12.5 14.1 12.4 9.9 9.4 9.5 8.5 6.9
Exide 20.2 26.3 18.4 14.0 12.3 15.6 10.9 8.0
Amara Raja 24.5 16.9 13.2 10.8 14.3 9.8 8.1 6.7
Source: Company, Emkay Research, Bloomberg
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Your success is our success
Emka
9
Initiating
Coverage
Emkay Global Financial Services Ltd. 9
Financial Snapshot (Standalone) (Rs mn)
YE- Net EBITDA EPS EPS RoE EV/
Mar Sales (Core) (%) APAT (Rs) % chg (%) P/E EBITDA P/BV
FY12A 23,674 3,540 15.0 2,151 12.6 45.2 29.3 16.9 9.8 4.4
FY13E 28,618 4,426 15.5 2,755 16.1 28.1 29.4 13.2 8.1 3.5
FY14E 33,408 5,349 16.0 3,375 19.8 22.5 28.3 10.8 6.7 2.7
FY15E 38,405 6,137 16.0 3,898 22.8 15.5 26.1 9.3 5.8 2.2
Amara Raja
Consistent performer
September 25, 2012
Rating
Buy
CMP
Rs212
Target Price
Rs250
EPS Chg FY13E/FY14E (%) NA
Target Price change (%) NA
Nifty 5,670
Sensex 18,673
Price Performance
(%) 1M 3M 6M 12M
Absolute 11 41 48 103
Rel. to Nifty 6 28 37 76
Source:Bloomberg
Relative price chart
90
117
144
171
198
225
Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12
Rs
-10
8
26
44
62
80%
Amara Raja Batteries (LHS) Rel to Nifty (RHS) Source: Bloomberg
Stock Details
Sector Auto AncillariesBloomberg AMRJ IB
Equity Capital (Rs mn) 171
Face Value(Rs) 1
No of shares o/s (mn) 171
52 Week H/L 216/ 90
Market Cap (Rs bn/USD mn) 36/ 679
Daily Avg Volume (No of sh) 185,613
Daily Avg Turnover (US$mn) 1.3
Shareholding Pattern (%)Jun12 Mar12 Dec11
Promoters 52.1 52.1 52.1
FII/NRI 6.4 6.2 6.3
Institutions 19.4 19.7 19.6
Private Corp 3.0 2.7 3.0
Public 19.1 19.4 19.1
Source: Bloomberg
Kaushal Maroo
+91-22-66121252
Siddhartha Bera
+91-22-66242494
n Capacity expansion to help increase revenue share of the
more stable automotive segment to ~60% in FY14
n
Expect healthy growth momentum with a 18%/22%revenue/profit CAGR in FY12-FY15
n Quasi consumption play and consistent track record warrant
stock re-rating
n Initiate with a BUY rating and a target price of Rs 250, based
on 12.5xFY14E EPS
Superb track record
Amara Raja is, in our view, amongst the most exciting small cap companies with a
superb track record of revenue growth, market share gain and profitability. The company
has grown its revenues/profits at a CAGR of 31%/36% respectively in the last five years
and held ground even when industry leader resorted to price cuts to gain market share.We believe that the AMARON brand has gained significant brand equity/presence and
would continue to see strong revenue growth and sustainable profits within the battery
space.
Increasing focus on automotive segment a structural positive
Amara Raja has increasingly been focusing on automotive capacity addition adding 1.8
mn 4w and 2.4 mn 2w units in the last two years. As a result, automotive revenue share
is likely to increase from 50% in FY10 to 60% in FY14. Having improved its market share
to 26% in 4 wheeler OEMs, the company is now eyeing the 2 wheeler OEM segment,
wherein it was not present until now. Higher OEM share augurs well for the company as
it is likely to help improve replacement market share as well. The company has set up an
enviable network of >18,000 retail touch points, a tall task by any order.
Historically, Amara Raja had been very strong in the telecom tower space which saw
poor demand and high competitive pricing in FY11-12, thereby impacting profitability of
the company. However, the segment is now looking up in terms of profitability as well.
Nonetheless, due to relatively competitive nature of the industrial segment, we believe
that the revenue mix shift towards the automotive segment is structurally positive.
Initiate with BUY; TP at Rs 250
We initiate coverage on Amara Raja with a BUY recommendation and a target price of
Rs 250. We expect the company to clock 18%/22% revenue/earnings growth CAGR over
FY12-FY15 with strong ROE of >25%. Despite aggressive marketing from Exide, which
could help it gain market share, we believe that the battery sector as a whole provides
significant growth opportunities for both the players in the quasi-duopoly.
We believe that the stock is a re-rating candidate given its consistent track record, quasi
consumption nature of business, enviable returns profile and strong earnings growth
trajectory. We value AMRJ at a 20% valuation discount to Exide Industries at 12.5x
FY14E EPS. BUY for an upside potential of 18%.
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Company Profile Amara Raja
Amara Raja is the second largest automotive battery manufacturer and the largest supplier
of Industrial storage battery in India. It entered the automotive battery segment only in
2000-01 post its JV with Johnson Controls Inc (JCI, USA) when it introduced AMARON
batteries based on Zero maintenance technology for the first time in India. From 2007-08, it
entered two-wheeler replacement segment with launch of Amaron Pro bike brand. It plans
to enter the two wheeler OEM segment from FY13 onwards.
The industrial battery product portfolio offers capacities ranging from 4.5 Ah to 5,000 Ah.
ARBL is the market leader in the telecom and UPS battery business with ~42% and ~32%
market share respectively.
Company is investing significantly to expand capacities in both automotive and UPS
segment. It has increased its capex guidance to Rs 2.3 bn in FY13 (from Rs 1.9 bn).
Currently, it has only one manufacturing plant in Andhra Pradesh. It is actively looking for a
second strategic manufacturing location to facilitate all future expansions.
Johnson Controls, the global leader in lead-acid automotive batteries and advanced
batteries for Start-Stop, hybrid and electric vehicles, holds a 26% stake in Amara Raja and
provides technical support to the company
Exhibit 1: Overall revenue mix
OEM
19%
Replaceme
nt
34%
Industrial
47%
Source: Emkay Research
Exhibit 2: Industrial revenue mix
Railw ay &
Other
17%
UPS
38%
Telecom
45%
Source: Emkay Research
Exhibit 3: Production Capacities
mn units FY10 FY11 FY12 FY13-14E
4 Wheeler 4.2 4.2 5.6 6.0
2 Wheeler 1.8 3.6 4.8 6.0
UPS 1.8 1.8 2.0 3.0
Source: Company, Emkay Research
A significant portion (~60%) of its lead requirement is met through imports from Korea and
Australia while ~20% is obtained from Hindustan Zinc and balance from other local
sources. Though it has pass through contracts with its customers, adverse forex movementimpacts margins in the short term.
Key competitive strength of Amara Raja is its pan-India distribution and service network
which has increased exponentially to 18,000 Amaron retailers, 274 Amaron Franchisees,
900+ PowerZone retailers and 100 AQuA dealers.
Amara Rajas management comprises of Mr Ramachandra Galla (Chairman) and Mr
Jayadev Galla (MD) who have been with the company since its inception.
Revenues doubled to Rs 20 bn
in past 4 years, targets Rs 40
bn in another 4 years
Automot ive Brands: PC- Pro,
Flo, Go, Black and Fresh; CV -
Hi-way; Tractors Harvest; 2W
- Pro Bike Rider
Industr ial Brands:Volt, Power
Stack, Quanta, Power Sleek
Next 3 years capex to be higher
than in the past
Only internal accruals would be
used to fund capex
Client Profi le
Auto-motive
Major TW, PV, CV
and Tractor OEMs
Telecom
Indus Towers, Viom Networks,
ATC, Bharti Infratel, Airtel,
Vodafone, Aircel, BSNL
Power
NTPC/NHPC, Power Grid,
Raichur/Chennai Thermal
Power Station
Motive
Power
APC, Siemens, Alstom,
Crompton Greaves
UPS
APC, Numeric, DB Power,
APLab, Electronics &
Controls
Others Indian Railways
Market Share (%)
4W OEM 26
4W Replacement (organised) 34
2W Replacement (organised) 24
UPS 32
Telecom 46
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Emkay Research September 25, 2012 11
Key Financials (Standalone)
Income Statement
Y/E Mar (Rsmn) FY12A FY13E FY14E FY15E
Net Sales 23,674 28,618 33,408 38,405
Growth (%) 34.4 20.9 16.7 15.0
Expenditure 20,134 24,192 28,059 32,268Raw Materials 15,955 18,927 21,878 25,240
Employee Cost 1,003 1,202 1,403 1,575
Other Exp 3,176 4,064 4,777 5,454
EBITDA 3,540 4,426 5,349 6,137
Growth (%) 37.5 25.0 20.9 14.7
EBITDA marg in (%) 15.0 15.5 16.0 16.0
Depreciation 465 547 655 772
EBIT 3,075 3,879 4,695 5,365
EBIT mar gin (%) 13.0 13.6 14.1 14.0
Other Income 152 221 323 427
Interest expenses 41 18 18 18
PBT 3,186 4,082 5,000 5,774Tax 1,036 1,327 1,625 1,877
Effective tax rate (%) 32.5 32.5 32.5 32.5
Adjusted PAT 2,151 2,755 3,375 3,898
Growth (%) 45.2 28.1 22.5 15.5
Net Marg in (%) 9.1 9.6 10.1 10.1
(Profit)/loss from JVs/Ass/MI 0 0 0 0
Adj. PAT After JVs/Ass/MI 2,151 2,755 3,375 3,898
E/O items 0 0 0 0
Reported PAT 2,151 2,755 3,375 3,898
PAT after MI 2,151 2,755 3,375 3,898
Growth (%) 45.2 28.1 22.5 15.5
Balance Sheet
Y/E Mar (Rsmn) FY12A FY13E FY14E FY15E
Equity share capital 171 171 171 171
Reserves & surplus 8,064 10,342 13,132 16,354
Net worth 8,235 10,512 13,303 16,525Minority Interest 0 0 0 0
Secured Loans 56 100 100 100
Unsecured Loans 785 785 785 785
Loan Funds 841 885 885 885
Net deferred tax liability 220 220 220 220
Total Liabilities 9,295 11,617 14,407 17,630
Gross Block 6,212 7,812 9,412 10,912
Less: Depreciation 2,667 3,214 3,868 4,641
Net block 3,546 4,599 5,544 6,272
Capital work in progress 315 315 315 315
Investment 161 2,661 4,161 5,661
Current Assets 9,493 9,462 10,594 12,410Inventories 2,666 3,111 3,417 3,942
Sundry debtors 3,197 3,607 4,027 4,630
Cash & bank balance 2,292 1,243 1,424 1,853
Loans & advances 1,306 1,501 1,727 1,986
Other current assets 33 0 0 0
Current lia & Prov 4,220 5,420 6,207 7,028
Current liabilities 2,013 2,823 3,204 3,683
Provisions 2,207 2,597 3,003 3,346
Net current assets 5,274 4,042 4,387 5,382
Misc. exp 0 0 0 0
Total Assets 9,295 11,617 14,407 17,630
Cash Flow
Y/E Mar (Rsmn) FY12A FY13E FY14E FY15E
PBT (Ex-Other income) 3,035 3,861 4,677 5,347
Depreciation 465 547 655 772
Interest Provided 41 18 18 18
Other Non-Cash items 0 0 0 0
Chg in working cap 461 182 -164 -565
Tax paid -1,036 -1,327 -1,625 -1,877
Operating Cashflow 2,963 3,281 3,560 3,696
Capital expenditure -765 -1,600 -1,600 -1,500
Free Cash Flow 2,198 1,681 1,960 2,196
Other income 152 221 323 427Investments 0 -2,500 -1,500 -1,500
Investing Cashflow -696 -3,879 -2,777 -2,573
Equity Capital Raised 0 0 0 0
Loans Taken / (Repaid) -60 44 0 0
Interest Paid -41 -18 -18 -18
Dividend paid (incl tax) -375 -477 -585 -675
Income from investments 0 0 0 0
Others -29 0 0 0
Financing Cashflow -505 -451 -602 -693
Net chg in cash 1,762 -1,049 181 430
Opening cash position 451 2,292 1,243 1,424
Closing cash position 2,213 1,243 1,424 1,853
Key Ratios
Y/E Mar FY12A FY13E FY14E FY15E
Profitability (%)
EBITDA Margin 15.0 15.5 16.0 16.0
Net Margin 9.1 9.6 10.1 10.1
ROCE 38.3 39.2 38.6 36.2
ROE 29.3 29.4 28.3 26.1
RoIC 46.9 55.7 59.0 58.6
Per Share Data (Rs)
EPS 12.6 16.1 19.8 22.8
CEPS 15.3 19.3 23.6 27.3
BVPS 48.2 61.5 77.9 96.7DPS 1.9 2.4 3.0 3.4
Valuations (x)
PER 16.9 13.2 10.8 9.3
P/CEPS 13.9 11.0 9.0 7.8
P/BV 4.4 3.5 2.7 2.2
EV / Sales 1.5 1.3 1.1 0.9
EV / EBITDA 9.8 8.1 6.7 5.8
Dividend Yield (%) 0.9 1.1 1.4 1.6
Gearing Ratio (x)
Net Debt/ Equity -0.2 0.0 0.0 -0.1
Net Debt/EBIDTA -0.4 -0.1 -0.1 -0.2
Working Cap Cycle (days) 46.0 35.7 32.4 33.5
7/27/2019 Batteries Sector Report-250912
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Your success is our success
Emka
12
Initiating
Coverage
Emkay Global Financial Services Ltd. 12
Financial Snapshot (Standalone) (Rs mn)
YE- Net EBITDA EPS EPS RoE EV/
Mar Sales (Core) (%) APAT (Rs) % chg (%) P/E EBITDA P/BV
FY12A 51,070 6,839 13.4 4,612 5.4 -23.4 15.9 26.3 15.6 4.0
FY13E 60,000 9,581 16.0 6,575 7.7 42.6 19.9 18.4 10.9 3.4
FY14E 72,690 12,350 17.0 8,658 10.2 31.7 22.2 14.0 8.0 2.9
FY15E 86,943 14,808 17.0 10,445 12.3 20.6 22.5 11.6 6.2 2.4
Exide Industries
Turning around
September 25, 2012
Rating
Buy
CMP
Rs143
Target Price
Rs175
EPS Chg FY13E/FY14E (%) NA
Target Price change (%) NA
Nifty 5,670
Sensex 18,673
Price Performance
(%) 1M 3M 6M 12M
Absolute 6 6 -2 9
Rel. to Nifty 1 -4 -9 -6
Source:Bloomberg
Relative price chart
100
110
120
130
140
150
Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12
Rs
-30
-22
-14
-6
2
10%
Exide Industri es (LHS) Rel to Ni fty ( RHS ) Source: Bloomberg
Stock Details
Sector Auto AncillariesBloomberg EXID IB
Equity Capital (Rs mn) 850
Face Value(Rs) 1
No of shares o/s (mn) 850
52 Week H/L 152/ 99
Market Cap (Rs bn/USD mn) 121/ 2,270
Daily Avg Volume (No of sh) 1,150,649
Daily Avg Turnover (US$mn) 2.9
Shareholding Pattern (%)Jun12 Mar12 Dec11
Promoters 46.0 46.0 46.0
FII/NRI 18.1 18.1 18.8
Institutions 13.3 13.4 13.5
Private Corp 12.0 11.9 10.6
Public 10.7 10.7 11.2
Source: Bloomberg
Kaushal Maroo
+91-22-66121252
Siddhartha Bera
+91-22-66242494
n Capacity expansion to help capitalize on replacement
demand recovery. See revenue CAGR of 19% in FY12-15E
n
Improving product mix to lead to ~200 bps margin expansionover the next two years
n Expectations are low pedigree strong
n Initiate with a TP of Rs 175 based on 16xFY14E EPS; BUY
Murphys Law at play in FY12
FY12 was a bad year for Exide with the company facing multiple issues, most important
being, capacity constraints and a resultant shift in product mix towards the lower margin
OEM segment. Loss of market share owing to capacity constraints warranted a price cut,
further impacting margins. Moreover, poor inverters demand owing to a relatively
pleasant summer, lead to accumulation of high cost lead inventory which needed to be
liquidated. We believe that the worst of these are behind us and business has startedlooking up and should deliver better-than-anticipated results on more than one
parameter.
Replacement demand to kick in; expect market share gains
Exides capacity commissioning, which got delayed, is now on stream adding further
capacity of 2.0 mn for 2 wheelers and 1.4 mn for 4 wheelers. Resolution of capacity
constraints, in our view, will position Exide favorably to capitalize on the uptick in the
replacement demand in FY13/14, which we expect on the back of the strong 26% growth
seen in FY10/11 and a three year replacement cycle. Also, the company is likely to
regain some of its lost market share in the replacement market with the capacity addition
and aggressive marketing initiatives undertaken. We expect Exide to report FY12-15E
revenue CAGR of 19% as against our OEM universe revenue CAGR of 13%.
Product mix improvement to drive margins
With stronger growth coming from the high margin replacement segment (owing to both,
a cyclical recovery and market share gains) as against low-single-digit margins in the
OEM business, we expect Exides margin profile to improve over the next couple of
years. Replacement demand for 2wheelers is also in a structural growth phase given
increased usage of electric-start two-wheelers. In-house smelters give Exide a
competitive edge, providing it with a source for cheaper and stable supply of lead, the
key raw material. We expect the company to report margin improvement of 200 bps over
the next two years and stabilize at ~17%.
Initiate with a TP of Rs 175; BUYWe initiate coverage on Exide with a one-year target price of Rs 175 and a BUY
recommendation. Our target price is based on 16xFY14E earnings for the core business
and Rs 9/share for its stake in ING Vysya Life Insurance business. We expect the
company to report earnings CAGR of 31% in FY12-FY15 and act as a counter cyclical
stock when OEMs are facing demand slowdown pressures.
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Exide Industries Initiating Coverage
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Company Profile- Exide Industries
Exide manufactures lead-acid storage batteries from 2.5Ah to 20,400 Ah in the automotive,
industrial and submarine segments. It is the market leader in the automotive lead storage
battery industry in India and the second largest player in Industrial lead storage battery. It
has forayed into manufacture and marketing of home usage inverters from Jan12. Exide
has a strong brand franchise with the widest network of dealers and distributors in India.
The company operates seven manufacturing plants across India with a total manufacturing
capacity of 33 mn automotive batteries (FY12).
The company has seven subsidiaries aiding in manufacturing and marketing of products in
India and foreign markets. This includes two lead smelters that recycle lead and constitute
>50% of its overall lead consumption. It also has a 50% stake in ING Vyasa Life Insurance,
whose book value of investments stands at Rs 7.4 bn (FY12).
Exhibit 1: Overall Revenue mix
Industrial
36%
Replaceme
nt
39%
OEM
25%
Source: Company, Emkay Research
Exhibit 2: Industrial segment mix
Export
5%
Inverter
30%
Infrastruct
ure
35%
UPS
30%
Source: Company, Emkay Research
Exhibit 3: Production Capacities
mn units 2009 2010 2011 2012E
4 wheeler 7.5 8.4 10.6 12.0
2 wheeler 9.3 10.0 18.0 20.0
Industrial 5.8 5.8 5.8 5.8Total 22.7 24.2 34.4 37.8
Source: Company, Emkay Research
Exhibit 4: Subsidiaries/ JV Profile
Rs mn Business % Stake Investment Sales PAT Dividend
Indian
Chloride International Limited Non conventional energy 100 2 36 1
Chloride Power Systems High end chargers for industrial use 100 29 733 32 15
Chloride Metals Ltd Manufacture and supply of recycled lead 100 347 4,400 85 54
Chloride Alloys India Ltd Manufacture and supply of recycled lead 100 744 8,501 81 140Foreign
Espex Batteries Limited, UKSupply of industrial batteries in UK and its
neighboring areas51 8 460 17
Associated Battery Manufacturers (Ceylon) LtdManufacture of Lead acid automotive and
motorcycle batteries61.5 73 802 57 45
Chloride Batteries S.E. Asia Pte Ltd.
Production and distribution of industrial battery
chargers, rectifiers and parts thereof and the
distribution of industrial and automotive batteries
100 104 1,345 48 54
Associate
ING Vysya Life insurance company 50 7,444
Source: Company
Captive lead consumption isexpected to reach >60% in the
next 2 years
Automot ive brands: Exide,
SF, Sonic, Standard Furukawa
Industr ial brands: Exide,
Index, SF, CEIL, Power Safe
The smelters provide Exide with
recycled lead that is at least 8-
10% cheaper than market rate
Client Profi le
AutomotiveMajor TW, PV, CV
and Tractor OEMs
Telecom
Motorota, BSNL,Tata Comm.,
Lucent, Alcatel, Siemens,
Nokia, Ericsson
AutomationABB, APC, Emerson,
Voltas, L&T
Power NTPC, BHEL
Others Indian Railways, Godrej
Market Share (%)
4W OEM 72
2W OEM 714W Replacement (Total) 30
2W Replacement (Total) 23
UPS/ Inverter 35
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Exide Industries Initiating Coverage
Emkay Research September 25, 2012 14
Key Financials (Standalone)
Income Statement
Y/E Mar (Rsmn) FY12A FY13E FY14E FY15E
Net Sales 51,070 60,000 72,690 86,943
Growth (%) 12.1 17.5 21.1 19.6
Expenditure 44,232 50,419 60,341 72,135Raw Materials 34,330 38,848 46,815 56,132
Employee Cost 2,862 3,291 3,785 4,353
Other Exp 7,040 8,280 9,741 11,650
EBITDA 6,839 9,581 12,350 14,808
Growth (%) -22.4 40.1 28.9 19.9
EBITDA marg in (%) 13.4 16.0 17.0 17.0
Depreciation 1,007 1,109 1,224 1,326
EBIT 5,832 8,472 11,126 13,482
EBIT mar gin (%) 11.4 14.1 15.3 15.5
Other Income 673 838 1,117 1,279
Interest expenses 53 49 49 49
PBT 6,452 9,261 12,194 14,712Tax 1,840 2,686 3,536 4,266
Effective tax rate (%) 28.5 29.0 29.0 29.0
Adjusted PAT 4,612 6,575 8,658 10,445
Growth (%) -23.4 42.6 31.7 20.6
Net Marg in (%) 9.0 11.0 11.9 12.0
(Profit)/loss from JVs/Ass/MI 0 0 0 0
Adj. PAT After JVs/Ass/MI 4,612 6,575 8,658 10,445
E/O items 0 0 0 0
Reported PAT 4,612 6,575 8,658 10,445
PAT after MI 4,612 6,575 8,658 10,445
Growth (%) -23.4 42.6 31.7 20.6
Balance Sheet
Y/E Mar (Rsmn) FY12A FY13E FY14E FY15E
Equity share capital 850 850 850 850
Reserves & surplus 29,723 34,826 41,520 49,806
Net worth 30,573 35,676 42,370 50,656Minority Interest 0 0 0 0
Secured Loans 0 700 700 700
Unsecured Loans 0 0 0 0
Loan Funds 0 700 700 700
Net deferred tax liability 825 825 825 825
Total Liabilities 31,398 37,201 43,895 52,181
Gross Block 17,766 20,466 22,466 24,466
Less: Depreciation 8,100 9,209 10,433 11,759
Net block 9,666 11,257 12,033 12,707
Capital work in progress 266 266 266 266
Investment 15,546 19,046 23,546 26,546
Current Assets 15,466 17,781 20,910 26,991Inventories 9,681 11,708 13,467 15,379
Sundry debtors 4,023 4,438 4,979 5,479
Cash & bank balance 577 315 1,011 4,569
Loans & advances 1,185 1,320 1,454 1,565
Other current assets 0 0 0 0
Current lia & Prov 9,546 11,149 12,861 14,330
Current liabilities 7,899 8,515 9,620 10,765
Provisions 1,646 2,634 3,241 3,565
Net current assets 5,920 6,632 8,050 12,661
Misc. exp 0 0 0 0
Total Assets 31,398 37,201 43,896 52,181
Cash Flow
Y/E Mar (Rsmn) FY12A FY13E FY14E FY15E
PBT (Ex-Other income) 5,779 8,423 11,077 13,433
Depreciation 1,007 1,109 1,224 1,326
Interest Provided 53 49 49 49
Other Non-Cash items 0 0 0 0
Chg in working cap -18 -974 -722 -1,053
Tax paid -1,840 -2,686 -3,536 -4,266
Operating Cashflow 5,102 5,921 8,091 9,489
Capital expenditure -1,761 -2,700 -2,000 -2,000
Free Cash Flow 3,341 3,221 6,091 7,489
Other income 673 838 1,117 1,279Investments -1,767 -3,500 -4,500 -3,000
Investing Cashflow -3,230 -5,362 -5,383 -3,721
Equity Capital Raised 0 0 0 0
Loans Taken / (Repaid) -22 700 0 0
Interest Paid -53 -49 -49 -49
Dividend paid (incl tax) -1,404 -1,473 -1,964 -2,160
Income from investments 0 0 0 0
Others 36 0 0 0
Financing Cashflow -1,443 -822 -2,013 -2,209
Net chg in cash 429 -262 696 3,559
Opening cash position 148 577 315 1,011
Closing cash position 577 314 1,011 4,569
Key Ratios
Y/E Mar FY12A FY13E FY14E FY15E
Profitability (%)
EBITDA Margin 13.4 16.0 17.0 17.0
Net Margin 9.0 11.0 11.9 12.0
ROCE 21.9 27.1 30.2 30.7
ROE 15.9 19.9 22.2 22.5
RoIC 40.9 52.0 60.7 67.6
Per Share Data (Rs)
EPS 5.4 7.7 10.2 12.3
CEPS 6.6 9.0 11.6 13.8
BVPS 36.0 42.0 49.8 59.6DPS 1.5 1.5 2.0 2.2
Valuations (x)
PER 26.3 18.4 14.0 11.6
P/CEPS 21.6 15.8 12.3 10.3
P/BV 4.0 3.4 2.9 2.4
EV / Sales 2.1 1.7 1.4 1.1
EV / EBITDA 15.6 10.9 8.0 6.2
Dividend Yield (%) 1.1 1.1 1.4 1.5
Gearing Ratio (x)
Net Debt/ Equity -0.5 -0.5 -0.5 -0.6
Net Debt/EBIDTA -2.2 -1.8 -1.8 -2.0
Working Cap Cycle (days) 38.2 38.4 35.3 34.0
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E k R h S t b 25 2012 15
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