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 Exide Industries* Amara Raja

EXID IN AMRJ IN

Rec Mkt cap (US$bn) O/P 3.03 I/L 0.33

Price (Rs) 163 178

PT (Rs) 201 172

EPS (Rs) EPS CAGR FY11E FY12E FY10-13E 8.2 9.9 26.0 15.3 21.4 11.0

PE (x) FY11E FY12E 19.9 16.4 11.7 8.3

EV/EBITDA (x) FY11E FY12E 12.0 9.0 6.2 4.4

Note: OP = OUTPERFORM, UP = UNDERPERFORM, IL = IN-LINE; Prices as at 9 Dec 2010, *Standalone figures Source: Company, Bloomberg, Standard Chartered Research estimates

Amit Kasat

Aniket Mhatre

Neha Kothari

[email protected] +91 22 6751 5816

[email protected] +91 22 6787 2505

[email protected] +91 22 6787 2405

All rights reserved. Standard Chartered Bank 2010 IMPORTANT DISCLOSURES CAN BE FOUND IN THE DISCLOSURES APPENDIX. http://research.standardchartered.com THIS REPORT MAY NOT BE DISTRIBUTED INTO THE UNITED STATES

Sector research – India Battery Sector | 9 December 2010

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

2

Sector research – India Battery Sector | 9 December 2010

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 FY1013E. 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 FY1013 (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 INLINE and price target of Rs172. Risks – Lead price fluctuations and battery imports are the key risks. Fig 1 – Battery sector valuation matrix

Amara Raja Exide Ind*

Mkt cap

Price

PT

Up/down

BB code

Rec

(US$bn)

(Rs)

(Rs)

(%)

FY10

FY11E

FY12E

FY10-13E

AMRJ IN

I/L

0.33

178

172

-3.4

18.6

15.3

21.4

11

EXID IN

O/P

3.03

163

201

23.3

6.2

8.2

9.9

26

PE(x) Amara Raja Exide Ind*

EPS (Rs)

EV/EBITDA(x)

CAGR (%)

P/BV(x)

FY10

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

9.6

11.7

8.3

5.3

6.2

4.4

2.8

2.3

1.9

26.5

19.9

16.4

14.5

12.0

9.0

6.2

4.8

3.9

ROE(%)

RoCE(%)

Div Yield(%)

FY10

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

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

3

Sector research – India Battery Sector | 9 December 2010

Investment argument and valuation We believe strong demand from the domestic automobile sector (17% CAGR over FY1013E) 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 Auto battery sales likely to post an 18% CAGR over FY10-13

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 100 18% CAGR

20% CAGR in auto OE battery sales 80 Rs bn

+ 16% CAGR in replacement battery sales

60 40 20

FY13E

FY10

0

Source: ,Companies, Standard Chartered Research estimates

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

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.

4

Sector research – India Battery Sector | 9 December 2010

Fig 3 – 15% CAGR in industrial battery sales over FY10-13E 18% CAGR in UPS battery sales

60 15% CAGR

50

+ Rs bn

40

15% CAGR in railways battery sales

30 20

+

10

5% CAGR in telecom battery sales

FY13E

FY10

0

Source: Companies, Standard Chartered Research estimates

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 24

22.9

3,000

2,200 18 15

15.9

15.5

14.7

16.2

1,800 1,400 1,000

Battery Industry EBITDA margin (LHS) Source: Bloomberg, Companies

5

Avg lead price (RHS)

FY10

FY09

FY08

FY07

FY06

12

US$/tonne

2,600

21 %

Exide and Amara Raja command ~80% market share

Sector research – India Battery Sector | 9 December 2010

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 Year end: Mar

ROE

PE

EV/EBITDA

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 30 Motherson Sumi

25 ROE (FY12E)

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

Margin FY11E

Exide

Amara Raja 20

Bharat Forge

15

Bosch India

Johnson Controls GS Yuasa Corp

10 5 0 0.0

0.5

1.0

1.5

2.0

2.5 PB (FY12E)

Source: Bloomberg, Standard Chartered Research estimates

6

3.0

3.5

4.0

4.5

5.0

Sector research – India Battery Sector | 9 December 2010

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 80

70

60

50

%

40 40 15

20

FY13E

FY11E

FY10

FY09

0

Source: Company

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 30

35

25

30

%

20

15

%

25

20

15

10

10

FY11E

FY10

FY09

FY08

0 FY07

0 FY06

5 FY05

5

Exide RoE (LHS)

Amara Raja RoE (RHS)

Source: Company, Standard Chartered Research estimates

Fig 10 – Exide: Discount to Sensex

Fig 9 – Exide: 1-yr forward PE & avg PE 30

60

25

40

20

20

Average PE15x %

15

Average PE 15x

Source: Standard Chartered Research estimates, Company

7

Source: Standard Chartered Research estimates, Capitaline

Dec-10

Aug-10

Apr-10

Dec-09

Apr-09

Aug-09

Aug-08

Dec-08

Apr-08

Dec-10

Aug-10

Apr-10

Aug-09

Dec-09

Apr-09

Dec-08

Apr-08

Aug-08

-40

Aug-07

0 Dec-07

-20

Apr-07

5

Aug-07

10

Dec-07

0

Apr-07

PE (x)

Exide Rating: Outperform Price target: Rs201

Sector research – India Battery Sector | 9 December 2010

Fig 11 – Amara: 1-yr forward PE & avg. PE

Fig 12 – Amara Raja: Discount to Sensex 100

14 12

80 Average PE 8x

8

60 %

PE (x)

10 6

40

Dec-10

Dec-10

Apr-10

Aug-10

Dec-09

Apr-09

Aug-09

Dec-08

Apr-08

Aug-08

Oct-10

Source: Standard Chartered Research estimates, Company

Dec-07

Apr-07

Dec-10

Apr-10

Aug-10

Dec-09

Apr-09

Aug-09

Dec-08

Apr-07

Apr-08

0

Aug-08

0 Dec-07

20

Aug-07

2

Aug-07

4

Source: Standard Chartered Research estimates, Capitaline

Fig 13 – Amara Raja: Discount to Exide 100 80

%

60 40 20

Aug-10

Jun-10

Apr-10

Feb-10

Dec-09

Oct-09

Aug-09

Jun-09

Apr-09

Feb-09

Dec-08

Oct-08

Aug-08

Jun-08

Apr-08

Feb-08

Dec-07

Oct-07

Aug-07

Apr-07

Jun-07

0

Source: Standard Chartered Research, Companies

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.

Amara Raja Rating: In-Line Price target: Rs172

Fig 14 – Battery sector valuation matrix

Amara Raja Exide Ind*

Mkt cap

Price

PT

Up/down

BB code

Rec

(US$bn)

(Rs)

(Rs)

(%)

FY10

FY11E

FY12E

FY10-13E

AMRJ IN

I/L

0.33

178

172

-3.4

18.6

15.3

21.4

11

EXID IN

O/P

3.03

163

201

23.3

6.2

8.2

9.9

26

PE(x) Amara Raja Exide Ind*

EPS (Rs)

EV/EBITDA(x)

CAGR (%)

P/BV(x)

FY10

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

9.6

11.7

8.3

5.3

6.2

4.4

2.3

2.3

1.9

26.5

19.9

16.4

14.5

12.0

9.0

6.2

4.8

3.9

ROE(%)

RoCE(%)

Div Yield(%)

FY10

FY11E

FY12E

FY10

FY11E

FY12E

FY10

FY11E

FY12E

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

8

Sector research – India Battery Sector | 9 December 2010

Fig 15 – Target valuation multiple Companies

Price target (Rs)

PT P/E (x) (FY12E)

PT EV/EBITDA (x) FY12E

Amara Raja

172

8

4.2

Exide Ind*

201

18

11.0

View Valued at historic one year forward multiple of 8x (also, at a 55% discount to Exide's target multiple) 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.

9

Sector research – India Battery Sector | 9 December 2010

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

12

10

0

Auto OEM demand (LHS)

FY13E

0 FY12E

5 FY11E

5

Growth yoy (RHS)

20

20

18

20

15 10

10

0

0 FY13E

15

15 10

%

15

Rs bn

30

20

FY10

Mn units

25

24

20

30

28

%

40

FY12E

30 26

FY11E

25

FY10

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

Auto OEM battery demand (LHS) Growth yoy (RHS)

Source: SIAM, Standard Chartered Research estimates

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 70

64.0 55.0

60 50 Rs bn

47.2 40.6

40 30 20 10 FY13E

FY11E

FY12E

0 FY10

Battery usage to increase substantially

Source: Company, Standard Chartered Research estimates

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.

10

Sector research – India Battery Sector | 9 December 2010

Fig 18 – Auto battery sales likely to post 18% CAGR over FY10-13E 100

25 20

20

17

16

16

60

15 %

Rs bn

80

40

10 `

0 FY11E

Total auto battery sales (LHS) Source: Company, Standard Chartered Research estimates

11

Growth yoy (RHS)

FY13E

0 FY12E

5

FY10

20

Sector research – India Battery Sector | 9 December 2010

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 (200712), 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 (200712) 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 60.0

15.6 15

50.0

15

15

40.0

15.2

%

14.8

30.0 14.4

14

20.0

0.0

13.6 FY11E Industrial Segment (LHS)

Source: Company, Standard Chartered Research estimates

12

FY13E

14.0 FY10

10.0 FY12E

Rs bn

We estimate overall industrial battery sales to post a 15.4% CAGR over FY10-13.

Growth yoy (RHS)

Sector research – India Battery Sector | 9 December 2010

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 3,000

4,000

2,500

2,403

2,229

2,238

2,000 1,500

1,551

1,334

2,000

1,000

US$/tonne

Rs/unit

3,000

1,000 500 FY10

FY09

FY08

FY07

FY06

-

Average realisation (LHS)

Average lead prices (RHS)

Source: Company, Standard Chartered Research estimates

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 24

16,000 22.9

22

12,000

%

20 8,000 18 16.2

4,000

Industry EBITDA (LHS) Source: Companies, Standard Chartered Research estimates

13

FY09

FY08

14 FY07

FY06

0

16

15.9

15.5

14.7

Industry EBITDA margin (RHS)

FY10

Rsm

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

Sector research – India Battery Sector | 9 December 2010

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 Lead Storage Battery Industry

Automotive Battery

Original

Industrial Battery

Replacement

Telecom

UPS/Inverter

Equipment

Power & Railway

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 16

15,000 14% CAGR

14

15.2% CAGR

12 Mn units

'000

12,000 9,000 6,000

10 8 6 4

3,000

2 -

Source: SIAM

FY10

FY09

FY08

FY10

FY09

FY08

FY07

FY06

FY05

FY04

0

Source: Companies

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.

14

Sector research – India Battery Sector | 9 December 2010

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 Others, 2%

Polypropelene / Polyethelyne , 18%

Lead and lead alloys, 80%

Source: Company, Standard Chartered Research

15

Sector research – India Battery Sector | 9 December 2010

16

Sector research – India Battery Sector | 9 December 2010

Company Section

17

Sector research – India Battery Sector | 9 December 2010

India | Automobiles & Parts

EQUITY RESEARCH

9 December 2010

Exide Industries Top pick in the sector; initiate with OUTPERFORM 

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

Price target

Rs163

Rs201

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

Bloomberg code

EXID IN

EXID.BO



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

Market cap

12 month range

Rs137,020m (US$3,030m)

Rs105 - 178



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

EPS est. change



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 financials Year end: March Sales (Rs m) EBIT (Rs m) EBITDA (Rs m) Pretax profit (Rs m) Earnings (Rs m) adjusted Diluted EPS (Rs ) adjusted Diluted EPS growth (%) adj. DPS (Rs ) DPS growth (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Div payout (%) Book value/share (Rs ) Net gearing (%) ROE (%) ROCE (%) FCF (Rs m) EV/Sales (x) EV/EBITDA (x) PBR (x) PER (x) Dividend yield (%)

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 a superb 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.

-

-

2010 37,940 7,903 8,709 8,106 5,229 6.2 63.0 1.0 60.8 23.0 20.8 13.8 15.7 26.1 3.9 23.6 33.9 4,330 3.3 14.5 6.2 26.5 0.6

-

2011E 47,923 9,575 10,304 10,449 6,970 8.2 33.3 1.1 14.0 21.5 20.0 14.5 13.4 33.6 -0.8 24.4 33.2 3,528 2.6 12.0 4.8 19.9 0.7

-

2012E 59,902 12,556 13,319 12,722 8,447 9.9 21.2 1.3 13.6 22.2 21.0 14.1 12.6 42.3 -6.0 23.5 34.1 5,001 2.0 9.0 3.9 16.4 0.8

2013E 71,943 15,344 16,234 15,524 10,308 12.1 22.0 1.3 0.0 22.6 21.3 14.3 10.3 53.2 -13.2 22.8 33.4 6,855 1.6 7.0 3.1 13.4 0.8

Source: Company, Standard Chartered Research estimates

Share price performance 180 170 160 150 140 130 120 110 100 Dec‐09

Mar‐10 Exide Industries Ltd

Share price (%) Ordinary shares Relative to Index Relative to Sector Major shareholder Free float Average turnover (US$) Source: Company, Bloomberg

18

Reuters code

Jun‐10

Sep‐10

BSE SENSEX 30 INDEX (rebased)

-1 mth -4 4 -

-3 mth -12 mth 2 41 0 25 Promoter (46.0%) 54% 4,865,231

Sector research – India Battery Sector | 9 December 2010

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

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 80

OEM 40%

75% 55%

%

60

35%

40 20

Market share

Replace

PV

2W

0

Replace 60%

Source: Company

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. Brand awareness seen as key initiative in long-term benefits

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.

19

Sector research – India Battery Sector | 9 December 2010

Fig 2 – Robust 28% CAGR in automotive battery revenue over FY10-13E 70,000 60,000

60

50,000

40

35 28

30,000

30 21

20,000

15

10,000

FY13E

0 FY12E

FY10

FY09

FY08

Automobile revenues (LHS)

20 10

5

0

%

50

40,000

FY11E

Rsm

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

70 62

yoy growth (RHS)

Source: Company, , Standard Chartered Research estimates

Industrial battery segment diversifies sector specific risk Inverter/UPS segment the highest contributor (65%) in industrial battery segment

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 Exports 6%

Infrastructure & Others 13%

Telecom 16%

UPS / inverters 65%

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

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.

20

Sector research – India Battery Sector | 9 December 2010

Fig 4 – 19% CAGR in industrial battery revenue over FY10-13 40,000

40 36 30 22

20,000

18

10,000

19

18

20

%

Rsm

30,000

10

11

0

Industrial segment revenues (LHS)

FY13E

FY12E

FY11E

FY10

FY09

FY08

0

yoy growth (RHS)

Source: Company, Standard Chartered Research estimates

Rise in captive sourcing to boost margin Increase in captive sources of lead results in reduced reliance on imported lead

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 100 35

60

15

%

80

35

40

40 20

35

50

50 25

15

Imported

Captive

FY11E

FY10

FY09

0

Domestic

Source: Company, Standard Chartered Research estimates

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

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.

21

Sector research – India Battery Sector | 9 December 2010

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 4,000

23

18 2,000

16

16

16

15

%

20

3,000 US$/tonne

24

12

1,000

8

Avg Lead Price (LHS)

FY10

FY09

FY08

FY07

FY06

0

EBITDA (RHS)

Source: Company, Standard Chartered Research estimates

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 80

70

60

50

%

40 40 20

15

FY13E

FY11E

FY10

FY09

0

Source: Company, Standard Chartered Research estimates

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.

22

Sector research – India Battery Sector | 9 December 2010

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

Source: Company, Standard Chartered Research estimates

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

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

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

1,750

1,750

Industrial battery capacity (m Ahrs) Source: Company, Standard Chartered Research estimates

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. 23

Sector research – India Battery Sector | 9 December 2010

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

1,750m Ahrs

900m Ahrs

Industrial (VRLA) Leadership position (%) OEM

75

20

Replacement

65

28

Telecom

NA

35

UPS

NA

28

OEM

16

13

Replacement

45

34

Exports

2

4

UPS + Inverter

25

16

Telecom

6

28

6 Shin Kobe Electric Machinery, Furukawa Battery Co. Ltd, 38,500 retail outlets Yes, Captive lead sourcing to increase to 70% (from 40% in FY10) by FY13E 19.1%

5

Revenue mix (%)

Infrastructure Tie ups Distribution network Backward integration Avg (FY08-10) operating margin

Johnson Controls Inc. 18,000 retail outlets No, earnings are relatively volatile 16.2%

Source: Companies, , Standard Chartered Research

Fig 11 – Exide: One-year forward PE 30 25 PE (x)

20

Average PE 15x

15 10 5

Exide PE Source: Standard Chartered Research estimates, Bloomberg

24

Average PE

Nov-10

Aug-10

May-10

Feb-10

Nov-09

Aug-09

May-09

Feb-09

Nov-08

Aug-08

May-08

Feb-08

Nov-07

Aug-07

May-07

Feb-07

Nov-06

Aug-06

May-06

Feb-06

0 Nov-05

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

Sector research – India Battery Sector | 9 December 2010

Fig 12 – Amara Raja has always traded at a 50% discount to Exide 100 80

%

60 40 20

Dec-10

Oct-10

Aug-10

Jun-10

Apr-10

Feb-10

Dec-09

Oct-09

Aug-09

Jun-09

Apr-09

Feb-09

Dec-08

Oct-08

Aug-08

Jun-08

Apr-08

Feb-08

Dec-07

Oct-07

Aug-07

Jun-07

Apr-07

0

Source: Standard Chartered Research estimates, Company

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 rerated. 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 Total per share value

8 201

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.

25

Sector research – India Battery Sector | 9 December 2010

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

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 FY1013E. 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 60

90,000 52

75,000

45 30

45,000 26

30,000

25

19

20 15

12

15,000

%

Rsm

60,000

0

Net sales (LHS)

FY13E

FY12E

FY11E

FY10

FY09

FY08

0

Growth yoy (RHS)

Source: Standard Chartered Research estimates, Company

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 25

16,000

23

12,000

21

8,000

19

4,000

17

0

15

EBITDA (LHS) Source: Standard Chartered Research estimates, Company

26

EBITDA (RHS)

FY13E

FY12E

FY11E

FY10

FY09

%

20,000

FY08

Rsm

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

Sector research – India Battery Sector | 9 December 2010

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 12,000

16

15

10,000

14

14

14

14 12

6,000

%

8,000 Rsm

4,000 10 9

8 FY13E

FY11E

PAT (LHS)

FY12E

8

FY09

0

FY10

2,000 FY08

EBITDA CAGR expected at 23% over FY10-13E

PAT (RHS)

Source: Standard Chartered Research estimates, Company

Fig 18 – Standalone Quarterly Performance (Rs m) Year end: Mar Net Sales

FY10

FY11

FY10

1Q

2Q

3Q

4Q

1Q

2Q

FY11E

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

2,048

2,424

2,053

2,176

2,632

2,629

8,912

11,179

Gross profit Less: depreciation PBT

188

222

189

208

194

201

807

730

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 (%) Adj. PAT (before extraordinary) Change (%)

36.1

32.5

34.3

32.7

33.6

25.8

33.7

30.0

1,188

1,487

1,224

1,324

1,619

1,801

5,229

6,970

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

48.9

92.3

132.4

97.2

35.1

42.2

88.9

36.2

Change (%)

Source: Company, Standard Chartered Research estimates

27

Sector research – India Battery Sector | 9 December 2010

Fig 19 – Standalone Income statement (Rsm) Year end: Mar Net sales Change (%) Expenditure EBITDA

FY08

FY09

FY10

FY11E

FY12E

FY13E

28,449

33,929

37,940

47,923

59,902

71,943

52.1

19.3

11.8

26.3

25.0

20.1

24,044

27,939

29,231

37,618

46,584

55,709

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

3,806

5,311

7,903

9,575

12,556

15,344

419

479

139

63

63

63

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

33

35

34

30

34

34

2,308

3,207

5,229

6,970

8,447

10,308

48.3

39.0

63.0

33.3

21.2

22.0

8.1

9.5

13.8

14.5

14.1

14.3

2,503

2,843

5,371

7,317

8,447

10,308

61.2

13.6

88.9

36.2

15.5

22.0

FY09

FY10

FY11E

FY12E

FY13E

EBIT Interest & finance charges Other income

Effective rate (%) Adj. PAT (bef. extra) Change (%) % of Net sales Rep. PAT Change (%)

Source: Company, Standard Chartered Research estimates

Fig 20 – Standalone Balance Sheet (Rsm) Year end: Mar

FY08

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

3,498

3,172

900

900

900

900

479

412

590

590

590

590

14,241

16,087

23,688

30,069

37,454

46,699

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

Loans Deferred tax liability Capital employed Application of funds

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

17

337

29

1,122

3,061

6,853

Cash & bank balances 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

125

465

561

561

561

561

1,054

1,059

985

1,580

1,708

1,708

Other liabilities Provisions Net current assets Application of funds

3,040

2,552

3,190

4,801

7,948

13,083

14,241

16,087

23,688

30,069

37,454

46,699

Source: Company, Standard Chartered Research estimates

28

Sector research – India Battery Sector | 9 December 2010

Fig 21 – Standalone Ratios Year end: Mar

FY08

FY09

FY10

FY11E

FY12E

FY13E

2.7

3.8

6.2

8.2

9.9

12.1 13.2

Basic (Rs) Standalone diluted EPS Cash EPS

3.6

4.9

7.1

9.1

10.8

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 Payout (incl. div. tax) %

0.4

0.6

1.0

1.1

1.3

1.3

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

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

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

33.3

24.9

24.5

24.5

24.5

24.5

EV/sales

Profitability ratios (%)

Turnover ratios Debtors (Days) 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

2.0

2.1

1.6

1.6

1.6

1.5

0.34

0.25

0.04

0.03

0.03

0.02

Asset turnover (x) Leverage ratio Debt/equity (x)

Source: Company, Standard Chartered Research estimates

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

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

Depreciation & amortisation

Other items CF from oper. activity Extra-ordinary items CF after EO items

0

0

0

0

0

0

1,810

5,221

5,207

7,528

8,001

9,855

292

-543

221

0

0

0

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

1,376

-123

5,144

0

0

0

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

952

-1,344

2,034

-935

-1,063

-1,063

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

Issue of shares Inc/(dec) in debt

CF from fin. activity Inc/(dec) in cash

Source: Company, Standard Chartered Research estimates

29

Sector research – India Battery Sector | 9 December 2010

Fig 23 – Consolidated Income statement (Rsm) Year end: Mar Net sales Change (%)

Fig 24 – Consolidated Balance sheet (Rsm)

FY10

FY11E

FY12E

FY13E

Year end: Mar

39,789

52,453

64,419

76,647

Sources of Funds Share capital

FY10

FY11E

FY12E

FY13E

17

32

23

19

850

850

850

850

Expenditure

30,217

41,789

50,698

59,963

Reserves

18,315

24,556

31,993

40,483

Raw material

Net worth

19,165

25,406

32,843

41,333

1,741

2,241

1,741

741

Minority interest

366

556

746

936

Deferred tax liability

603

603

603

603

21,876

28,806

35,933

43,613 26,802

22,651

31,629

38,201

45,452

Change (%)

6

40

21

19

% of Net sales

1

1

1

1

9,572

10,665

13,721

16,685

Change (%)

65.9

11.4

28.7

21.6

Capital employed

% of Net sales

24.1

20.3

21.3

21.8

Application of funds

EBITDA

Depreciation EBIT Int. & finance charges Other income

675

777

893

1,027

Gross fixed assets

14,873

19,802

23,302

8,897

9,888

12,828

15,657

Less: depreciation

6,935

7,712

8,605

9,632

161

87

88

89

Net fixed assets

7,938

12,091

14,697

17,170

82

420

229

243

8,817

10,221

12,969

15,811

226

518

0

0

3,009

3,373

4,280

5,217

Effective rate (%)

34.1

33.0

33.0

33.0

Profit before MI

6,035

7,366

8,689

10,594

-684

-684

-684

-684

PBT Non-recurring income Tax

Share of associates Minority interest

Loans

Investments

8,768

10,268

12,268

14,768

12,107

15,952

20,082

25,155

Inventory

7,969

9,341

11,472

13,650

Sundry debtors

2,981

3,929

4,826

5,742

301

1,825

2,929

4,908

Curr. assets, & adv.

Cash & bank balances Loans & advances

856

856

856

856

Current liab. & prov.

7,366

9,504

11,115

13,481

Sundry creditors

4,933

6,503

7,986

9,502

Other liabilities

1,314

1,314

1,314

1,314

Provisions

1,119

1,687

1,815

2,665

4,741

6,448

8,967

11,674

21,876

28,806

35,933

43,613

190

190

190

190

Profit after MI

5,162

6,492

7,816

9,720

Adj. PAT

5,657

6,501

8,689

10,594

Change (%)

92.2

14.9

33.7

21.9

Net current assets

% of Net sales

14.2

12.4

13.5

13.8

Application of funds

Fig 25 – Consolidated Ratios Year end: Mar

FY10

Fig 26 – Consolidated Cash Flow (Rsm) FY11E

FY12E

FY13E

Basic (Rs)

Year end: Mar

FY10

FY11E

FY12E

FY13E

OP/(loss) before tax

8,897

9,888

12,828

15,657

675

777

893

1,027

EPS

6.7

7.6

10.2

12.5

Depre & amortisation

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

1.0

1.1

1.3

2.3

5,632

7,718

8,444

11,172

14.5

14.4

12.2

18.1

DPS Payout (Incl. Div. Tax) % Valuation (x)

CF from oper. activity Extra-ordinary items CF after EO items

226

518

0

0

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

Inc/(dec) in debt

-1,869

500

-500

-1,000

Profitability ratios (%) 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

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

Closing balance

301

1,825

2,929

4,908

Turnover ratios

CF from fin. activity

Leverage ratio Debt/equity (x)

0.1

0.1

0.1

0.0

Source: Company, Standard Chartered Research estimates

30

Sector research – India Battery Sector | 9 December 2010

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 Public 22% Promoters 46% Domestic Institutional Investors 17%

FIIs 15% Source: BSE

Fig 28 – Management He is a CA and a CS with a total experience of 41 years including T V Ramanathan

MD & CEO

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

P K Kataky

Director - Automotive experience. He has been associated with the battery division

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

31

Sector research – India Battery Sector | 9 December 2010

India | Automobiles & Parts

EQUITY RESEARCH

9 December 2010

Amara Raja Batteries Fairly valued, initiate with IN-LINE

 



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

Price target

Rs178

Rs172

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

Bloomberg code

AMRJ IN

AMAR.BO

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

Market cap

12 month range

Rs14,903m (US$330m)

Rs148 - 223

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.

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 a much 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.

EPS est. change

-

Year end: March Sales (Rs m) EBIT (Rs m) EBITDA (Rs m) Pretax profit (Rs m) Earnings (Rs m) adjusted Diluted EPS (Rs ) adjusted Diluted EPS growth (%) adj. DPS (Rs ) DPS growth (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Div payout (%) Book value/share (Rs ) Net gearing (%) ROE (%) ROCE (%) FCF (Rs m) EV/Sales (x) EV/EBITDA (x) PBR (x) PER (x) Dividend yield (%)

-

2010 14,652 2,444 2,873 2,546 1,590 18.6 67.8 3.4 262.8 19.6 16.7 10.8 18.2 63.7 5.3 30.7 38.0 1,855 1.0 5.3 2.8 9.6 1.9

-

2011E 17,046 1,946 2,422 1,953 1,305 15.3 -17.9 2.3 -32.5 14.2 11.4 7.7 15.0 76.6 -1.0 19.9 26.2 531 0.9 6.2 2.3 11.7 1.3

-

2012E 22,373 2,713 3,269 2,733 1,831 21.4 40.3 4.3 87.1 14.6 12.1 8.2 20.0 93.8 -9.6 22.9 31.9 1,037 0.6 4.4 1.9 8.3 2.4

2013E 26,501 3,246 3,859 3,283 2,167 25.4 18.3 6.3 47.9 14.6 12.2 8.2 25.0 112.8 -22.3 22.5 33.0 1,877 0.5 3.3 1.6 7.0 3.6

Source: Company, Standard Chartered Research estimates

Share price performance 230 220 210 200 190 180 170 160 150 140 Dec‐09

Mar‐10

Amara Raja Batteries

Share price (%) Ordinary shares Relative to Index Relative to Sector Major shareholder Free float Average turnover (US$) Source: Company, Bloomberg

32

Reuters code

Jun‐10

Sep‐10

BSE SENSEX 30 INDEX (rebased)

-1 mth -9 -1 -

-3 mth -12 mth -17 6 -18 -6 Promoter (52.1%) 48% 1,148,201

Sector research – India Battery Sector | 9 December 2010

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 Amara Raja earns 28% of revenue from telecom

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 telecom sector impacted

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 25 23.6

23.4

22 19

18.8

%

18.0

16

14.6

13.9

14.5

13

Q2 FY11

Q1 FY11

Q4 FY10

Q3 FY10

Q2 FY10

Q1 FY10

Q4 FY09

10

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

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%.

33

Sector research – India Battery Sector | 9 December 2010

Fig 2 – Margins likely to stabilise at lower levels 22 19.6

20

%

18 16 14.6

14.6

14.6

14.2

14.3

14

FY13E

FY12E

FY11E

FY10

FY09

FY08

12

Source: Company, Standard Chartered Research estimates

Capex plans to shift product mix favorably Capex plans likely to shift product mix towards automobile batteries

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 Two wheelers (m units)

FY10

FY11E

FY12E

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

900

700

Capex (Rs m) 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 35

25,000

2,500

80 66

30

60

2,000

25

18 20 1,000

0

10

Net sales (LHS)

Growth yoy (RHS)

Source: Company, Standard Chartered Research estimates

34

-20

0

PAT (LHS)

FY12E

-40 FY09

FY13E

FY12E

FY11E

0 FY10

5

0 FY09

5,000

0 -18

500 FY11E

16

11

10,000

40

1,500

FY10

15,000

18 20 15

Rsm

22

41 %

20,000

Growth yoy (RHS)

%

31

FY13E

30,000

Rsm

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

Sector research – India Battery Sector | 9 December 2010

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 100

14 12

80

10 Average PE 8x

8

60 %

PE (x)

6

40

Dec-10

Apr-10

Aug-10

Dec-09

Apr-09

Aug-09

Dec-08

Apr-08

Aug-08

Aug-07

Apr-07

Dec-10

Apr-10

Source: Standard Chartered Research estimates, Company

Aug-10

Dec-09

Apr-09

Aug-09

Dec-08

Apr-08

0

Aug-08

0 Dec-07

20

Apr-07

2

Dec-07

4

Aug-07

At our price target, the stock is fairly valued

Source: Standard Chartered Research estimates, Capitaline

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.

35

Sector research – India Battery Sector | 9 December 2010

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

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 30,000 25,000

22% CAGR

Rsm

20,000 15,000 10,000 5,000 FY13E

FY12E

FY11E

FY10

FY09

0

Source: Company, Standard Chartered Research estimates

Margins could stabilise with shift in product mix towards auto

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%

4,000

15

3,000

EBIDTA (LHS)

Margin (RHS)

14

0

10

EBIDTA (LHS)

FY13E

12

FY12E

1,000

FY11E

0

2,000

16 14.2 14.6 14.6

14.6 14.3

FY10

1HFY11

5 2HFY10

400 1HFY10

10

2HFY09

800

18 %

20

20

19.6

FY09

14.2

5,000

%

1,200

16.6

15.5 15.2

1HF09

Rsm

1,600

25

FY08

23.5

Rsm

2,000

Margin(RHS)

Source: Company, Standard Chartered Research estimates

Earnings CAGR of 11% over FY10-13E

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.

36

Sector research – India Battery Sector | 9 December 2010

Fig 9 – Expect a slower 11% CAGR in earnings over FY10-13E 12

10.7 8.7

8.1

10 8

Rsm

2,000

8.1

7.6

7.2

6 1,000

%

3,000

4 2

0

PAT (LHS)

FY13E

FY12E

FY11E

FY10

FY09

FY08

0

PAT margin (RHS)

Source: Company, Standard Chartered Research estimates

Fig 10 – Quarterly Performance (Rs mn) FY10 Net sales Change (%)

FY11

1Q

2Q

3Q

4Q

1Q

2Q

FY10

FY11E

3,065

3,612

3,675

4,333

4,467

3,925

14,652

17,046

-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 2,422

EBITDA

717

851

692

634

620

568

2,873

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 2,429

Gross profit

694

835

692

634

625

580

2,976

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

185.4

154.9

93.6

30.8

-16.2

-34.0

67.8

-17.9

Change (%)

Source: Company, Standard Chartered Research estimates

37

Sector research – India Battery Sector | 9 December 2010

Fig 11 – Income statement (Rsm) Year end: Mar

FY08

FY09

FY10

FY11E

FY12E

FY13E

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

Net sales

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

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

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 18.3

EBIT

PBT

Change (%)

100.9

-14.7

107.5

-21.9

40.3

% 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

100.9

0.4

67.8

-17.9

40.3

18.3

FY09

FY10

FY11E

FY12E

FY13E

Change (%)

Source: Company, Standard Chartered Research estimates

Fig 12 – Balance Sheet (Rsm) Year end: Mar

FY08

Sources of funds Share capital Reserves

114

171

171

171

171

171

3,217

3,885

5,266

6,375

7,840

9,465 9,636

Net worth

3,331

4,056

5,437

6,546

8,011

Loans

3,163

2,859

912

813

412

112

170

183

216

216

216

216

6,663

7,097

6,566

7,575

8,639

9,964

Deferred tax liability Capital employed 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

511

703

625

878

1,181

2,266

1,248

870

1,087

1,087

1,087

1,087

8

-

-

-

-

-

2,021

1,843

3,190

3,397

4,078

4,650

808

937

1,376

1,635

2,145

2,541

Cash & bank balances Loans & advances Other current assets Current liab. & prov. Sundry creditors 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

Source: Company, Standard Chartered Research estimates

38

Sector research – India Battery Sector | 9 December 2010

Fig 13 – Ratios Year end: Mar

FY08

FY09

FY10

FY11E

FY12E

FY13E

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

100.9

-33.1

67.8

-17.9

40.3

18.3

58.5

47.5

63.7

76.6

93.8

112.8

0.8

0.9

3.4

2.3

4.3

6.3

5

8

18

15

20

25

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

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

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

0.9

0.7

0.2

0.1

0.1

0.0

Per share

EPS growth (%) Book value per share DPS (Includig dividend tax) Payout (Incl. Div. Tax) % Valuation (x) P/E

Profitability Ratios (%)

Turnover Ratios

Leverage Ratio Debt/Equity (x)

Source: Company, Standard Chartered Research estimates

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 Direct taxes paid (Inc)/Dec in working capital Other Items CF from Oper. activity Extra-ordinary items CF after EO items (Inc)/Dec in FA+CWIP (Pur)/Sale of invest. CF from Inv. activity Issue of shares

244

346

429

476

556

612

-482

-409

-842

-648

-902

-1,116

-1,512

730

218

-332

-618

-253

-9

-69

6

0

0

0

-427

2,138

2,239

1,431

1,737

2,477

0

-212

121

0

0

0

-427

1,926

2,360

1,431

1,737

2,477

-1,160

-1,009

-504

-900

-700

-600

0

-309

310

0

0

0

-1,160

-1,318

-194

-900

-700

-600

0

57

0

0

0

0

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

Inc/(Dec) in debt

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

Source: Company, Standard Chartered Research estimates

39

Sector research – India Battery Sector | 9 December 2010

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 Others 27% Promoter 52%

DII 18%

FII 3%

Source: BSE

Fig 16 – Management He is an electrical engineer with Masters degrees in Applied Ramachandra Galla

Promoter & Non-

Electronic and Systems Sciences. He had been the

Executive Chairman

Executive Chairman and MD of AMRJ from July 1998 to August 2003 before the current role. Has Bachelor’s degree in Political Science and Economics.

Jayadev Galla

Promoter & MD

He has been the MD of AMRJ since August 2003. Prior to that he was the ED of the company.

Source: Company

40

Sector research – India Battery Sector | 9 December 2010

41

Sector research – India Battery Sector | 9 December 2010

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 personal opinion(s) about the subject securities and issuers and/or other subject matter as appropriate; and No part of his or her compensation and other benefits was, is or will be directly related to the specific recommendations or views contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of 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

230 220 210 200 190 180 170 160 150 140 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

210 200 190 180 170 160 150 140 130 120 110 100 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

42

Sector research – India Battery Sector | 9 December 2010

Recommendation Distribution and Investment Banking Relationships

OUTPERFORM IN-LINE UNDERPERFORM

% of covered companies currently assigned this rating

% of companies assigned this rating with which SCB has provided investment banking services over the past 12 months

61.9% 28.3% 9.7%

15.2% 10.0% 6.5%

Research Recommendation Terminology OUTPERFORM (OP) IN-LINE (IL) UNDERPERFORM (UP)

Definitions The total return on the security is expected to outperform the relevant market index by 5% or more over the next 12 months 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 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.

43

Sector research – India Battery Sector | 9 December 2010

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44