Battery Sector StanC Dec2010

India | Automobiles & Parts EQUITY RESEARCH
9 December 2010
India Battery Sector

Charged up for growth
 We estimate India’s battery sector would post a 17% CAGR over FY10-13E driven by 18% CAGR in auto segment sales
and 15% CAGR in industrial segment sales over the same period.
 We expect strong auto sector demand – from both the OEM and the replacement segments – to result in 18% CAGR in
auto battery sales over FY10-13E.
 Industrial battery sales, too, are likely to grow strongly driven by the demand outlook for UPS and railway/power
application batteries.
 Given the duopoly in the industry, we do not expect price wars to break out any time soon. The resultant pricing power
and cushion against input prices deserve a premium valuation, especially for the vertically integrated player (Exide).
 We initiate coverage on Exide with an OUTPERFORM rating and price target of Rs201 and on Amara Raja with IN-LINE
and price target of Rs172.
BB code Rec Mkt cap Price PT EPS (Rs) EPS CAGR PE (x) EV/EBITDA (x)
(US$bn) (Rs) (Rs) FY11E FY12E FY10-13E FY11E FY12E FY11E FY12E
Exide Industries* EXID IN O/P 3.03 163 201 8.2 9.9 26.0 19.9 16.4 12.0 9.0
Amara Raja AMRJ IN I/L 0.33 178 172 15.3 21.4 11.0 11.7 8.3 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

amit.kasat@sc.com aniket.mhatre@sc.com neha.kothari@sc.com
+91 22 6751 5816 +91 22 6787 2505 +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
Investment summary
Battery industry to grow at 17% CAGR – We expect strong demand from both the auto OEM
and replacement segments to result in an 18% CAGR in automobile battery sales over FY10-
13E. We believe the slowdown in telecom-sector battery demand is likely to be offset by robust
demand for UPS batteries and for railway/power application batteries. We estimate overall
industrial battery sales to post a 15% CAGR over FY10-13E. Overall, we expect the battery
industry to post a strong 17% CAGR over FY10-13E.
Duopoly imparts pricing power, industry to continue to trade at a premium to peers –

Given the duopoly in the industry (the top two players command over 80% organized market
share), we do not expect any price wars in the immediate future. Moreover, given the top players’
pricing power, we expect them to be able to manage the volatility in lead prices without affecting
earnings. Led by relatively stable cash flows and high return ratios, the battery industry will
continue to trade at a premium to its peers, in our view.
Exide is our top pick – We expect Exide’s premium valuation over Amara Raja to rise given
Exide’s backward integration benefits and small exposure to the telecom sector, which results in
superior earnings growth (26% over FY10-13E) and robust return parameters. We initiate
coverage on Exide with an OUTPERFORM rating and SOTP-based 12-month price target of
Rs201. With no positive triggers for Amara Raja and slower earnings growth of 11% over FY10-
13 (earnings remain highly sensitive to lead prices; exposure to telecom may hinder potential
upside) and trading at 8.3x FY12E earnings, we believe the stock is fairly valued. Initiate with IN-
LINE and price target of Rs172.
Risks – Lead price fluctuations and battery imports are the key risks.
Fig 1 – Battery sector valuation matrix

Mkt cap Price PT Up/down EPS (Rs) CAGR (%)
BB code Rec (US$bn) (Rs) (Rs) (%) FY10 FY11E FY12E FY10-13E
Amara Raja AMRJ IN I/L 0.33 178 172 -3.4 18.6 15.3 21.4 11
Exide Ind* EXID IN O/P 3.03 163 201 23.3 6.2 8.2 9.9 26
PE(x) EV/EBITDA(x) P/BV(x)
FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E
Amara Raja 9.6 11.7 8.3 5.3 6.2 4.4 2.8 2.3 1.9
Exide Ind* 26.5 19.9 16.4 14.5 12.0 9.0 6.2 4.8 3.9
ROE(%) RoCE(%) Div Yield(%)
Amara Raja 30.7 19.9 22.9 38.0 26.2 31.9 1.9 1.3 2.4
Exide Ind* 23.6 24.4 23.5 33.9 33.2 34.1 0.6 0.7 0.8
*Standalone figures
Source: Companies, Standard Chartered Research estimates
3
Investment argument and valuation

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

Auto battery sales We expect the domestic battery industry to maintain strong sales growth. We expect growth to be
likely to post an 18% driven by 1) the robust outlook for the auto OEM segment (auto battery sales from this segment
CAGR over FY10-13
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
20% CAGR in auto OE battery sales 18% CAGR
80
60
+
Rs bn
40
16% CAGR in replacement battery sales

20
0
FY10
FY13E
Source: ,Companies, Standard Chartered Research estimates
Industrial battery sales likely to grow at 15% CAGR

UPS/inverter battery Computerisation of banking networks and government departments, creation of high-powered
segment likely to grow data centres in IT and financial services industries, increasing penetration of PCs and continued
at 18% CAGR, and power shortages are likely to drive demand for UPS/inverters. We expect the UPS/inverter
railway battery at 15%
over FY10-13 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
Fig 3 – 15% CAGR in industrial battery sales over FY10-13E

18% CAGR in UPS battery sales 60
50 15% CAGR
+ 40
Rs bn
15% CAGR in railways battery sales
30
20
+
10
5% CAGR in telecom battery sales
0
FY10
FY13E
Overall, we expect India’s battery industry to post a 17% CAGR over FY10-13E.
Duopoly imparts pricing power

Exide and Amara Given that the top two battery manufacturers command ~80% market share, we believe they
Raja command ~80% have significant pricing power. In addition, given that batteries are critical components of any
market share 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
2,600
21
US$/tonne
2,200
%
18
15.9 16.2 1,800
15.5
14.7
15
1,400
12 1,000
FY06
FY07
FY08
FY09
FY10
Battery Industry EBITDA margin (LHS) Avg lead price (RHS)
Source: Bloomberg, Companies
5
Valuation
Led by sustained demand for batteries and price escalation clauses protecting their earnings
from raw material volatility, the battery industry has traditionally experienced very high return
ratios. This is especially true for vertically integrated players like Exide, which results in further
insulation against input prices and the key reason for its superior earnings growth and return
parameters vs. Amara Raja.
In addition, leading auto ancillary suppliers (including Bharat Forge, Bosch, Motherson Sumi and
Exide) with substantial pricing power enjoy relatively stable margins, high return ratios and hence
trade at a relative premium to their industry peers.
Fig 5 – Relative valuation: Auto component players

BB code Margin ROE PE EV/EBITDA
Year end: Mar FY11E FY12E FY11E FY12E FY11E FY12E FY11E FY12E
Exide EXID IN 21.5 22.2 24.4 23.5 19.9 16.4 12.0 9.0
Players with Amara Raja AMRJ IN 14.2 14.6 19.9 22.9 11.7 8.3 6.2 4.4
substantial pricing Amtek Auto*^ AMTK IN na na 9.9 11.8 7.3 5.6 na Na
power enjoy relatively
Apollo Tyres APTY IN 10.4 13.0 16.6 20.2 8.8 5.9 6.0 4.4
stable margins and
high return ratios 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
25 Motherson Sumi
Amara Raja Exide
ROE (FY12E)
20
Bharat Forge Bosch India
15 Johnson Controls
10 GS Yuasa Corp
0
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0
PB (FY12E)
Source: Bloomberg, Standard Chartered Research estimates
6
Exide: Premium valuations justified

Exide We value Exide’s core business at Rs179 (at 18x FY12E earnings; 20% premium to its average
Rating: Outperform one-year forward multiple of 15x) and its stake in ING at Rs14 and subsidiaries at Rs8, to arrive
Price target: Rs201
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
20 15
0
FY09
FY10
FY11E
FY13E
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
25
20
20
%
%
15
15
10
10
5 5
0 0
FY05
FY06
FY07
FY08
FY09
FY10
FY11E
Exide RoE (LHS) Amara Raja RoE (RHS)

Source: Company, Standard Chartered Research estimates
Fig 9 – Exide: 1-yr forward PE & avg PE Fig 10 – Exide: Discount to Sensex
30 60
25 40
20
Average PE15x 20
PE (x)
15 Average PE 15x
0
10
5 -20
0 -40
Apr-07
Aug-07
Apr-08
Aug-08
Apr-09
Aug-09
Apr-10
Aug-10
Apr-07
Aug-07
Apr-08
Aug-08
Apr-09
Aug-09
Apr-10
Aug-10
Dec-07
Dec-08
Dec-09
Dec-10
Dec-07
Dec-08
Dec-09
Dec-10
Source: Standard Chartered Research estimates, Company Source: Standard Chartered Research estimates, Capitaline
7
Fig 11 – Amara: 1-yr forward PE & avg. PE Fig 12 – Amara Raja: Discount to Sensex
14 100
12
80
10
Average PE 8x 60
PE (x)
8
%
6
40
4
2 20
0 0
Aug-07
Aug-08
Aug-09
Aug-10
Apr-07
Dec-07
Apr-08
Dec-08
Apr-09
Dec-09
Apr-10
Dec-10
Apr-07
Aug-07
Apr-08
Aug-08
Apr-09
Aug-09
Apr-10
Aug-10
Dec-07
Dec-08
Dec-09
Dec-10
Fig 13 – Amara Raja: Discount to Exide

100
80
60
%
40
20
Jun-10
Aug-10
Jun-07
Aug-07
Jun-08
Aug-08
Jun-09
Aug-09
Apr-10
Apr-07
Apr-08
Apr-09
Dec-09
Feb-10
Oct-10
Dec-10
Oct-07
Dec-07
Feb-08
Oct-08
Dec-08
Feb-09
Oct-09
Source: Standard Chartered Research, Companies
Amara Raja: Fairly valued

Amara Raja Amara Raja’s revenue growth is likely to remain robust, but its earnings are highly sensitive to
Rating: In-Line lead prices given the lack of backward integration. In addition, significant exposure to telecom
Price target: Rs172 may limit upside potential given slowdown in the sector. Nevertheless, with return ratios in excess
of 20%, we believe the stock deserves to trade at least at its average multiple of 8x (which is also
a 55% discount to Exide’s target multiple). We initiate coverage on Amara Raja with an IN-LINE
rating and price target of Rs172. While the imputed P/B of 2x at the target price appears
reasonable vs. RoE of 23%, we believe that the stock will not get re-rated easily given the high
volatility of earnings to lead prices.
Fig 14 – Battery sector valuation matrix

Mkt cap Price PT Up/down EPS (Rs) CAGR (%)
BB code Rec (US$bn) (Rs) (Rs) (%) FY10 FY11E FY12E FY10-13E
Amara Raja AMRJ IN I/L 0.33 178 172 -3.4 18.6 15.3 21.4 11
Exide Ind* EXID IN O/P 3.03 163 201 23.3 6.2 8.2 9.9 26
PE(x) EV/EBITDA(x) P/BV(x)
Amara Raja 9.6 11.7 8.3 5.3 6.2 4.4 2.3 2.3 1.9
Exide Ind* 26.5 19.9 16.4 14.5 12.0 9.0 6.2 4.8 3.9
ROE(%) RoCE(%) Div Yield(%)
Amara Raja 30.7 19.9 22.9 38.0 26.2 31.9 1.9 1.3 2.4
Exide Ind* 23.6 24.4 23.5 33.9 33.2 34.1 0.6 0.7 0.8
* Standalone figures ; Source: Companies, Standard Chartered Research estimates
8
Fig 15 – Target valuation multiple

Price target PT P/E (x) PT EV/EBITDA (x)
Companies View
(Rs) (FY12E) FY12E
Valued at historic one year forward multiple
Amara Raja 172 8 4.2 of 8x (also, at a 55% discount to Exide's
target multiple)
Exide Ind* 201 18 11.0 Standalone business valued at 18xFY12E.
20% premium to its historic one-year forward
multiple; expect a re-rating in the stock on
account of margin expansion led by
backward integration initiatives.
Stake in ING valued at Rs14.
Subsidiaries share at Rs8 per share.
*Standalone figures; Source: Standard Chartered Research estimates
Risks
Raw material cost volatility may impact earnings
Lead prices, around 80% of total cost, has been very volatile off late. Volatility in lead prices
remains a key risk to our estimates. Volatile crude oil prices in the international market also affect
the price of PPCP, used to manufacture battery containers.
Large unorganized market may restrict potential upside

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

Imports from China and some ASEAN countries are a threat to existing players primarily because
of product pricing. This price differential, though, has come down significantly owing to the
cancellation of VAT export refund in China for all lead battery manufacturers.
9
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

Domestic auto sector We expect the domestic auto sector sales to post a 17% CAGR over FY10-13 given strong GDP
sales likely to post a growth and rising disposable incomes. This, in turn, is likely to drive OEM battery demand.
17% CAGR over
FY10-13
Fig 16 – Domestic automobile demand to drive OEM battery sales
25 30 40 30
26 28
20 24 25
30
20 20 20
18
Mn units
Rs bn
15
20
%
15
%
15 15
10 12 10
10 10
5 5
0 0
FY10
FY11E
FY12E
FY13E
0 0
FY10
FY11E
FY12E
FY13E
Auto OEM battery demand (LHS)

Auto OEM demand (LHS) Growth yoy (RHS) Growth yoy (RHS)
Source: SIAM, Standard Chartered Research estimates
Battery usage to Furthermore, the strong growth witnessed by the automobile industry over the past five years
increase substantially (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
60 55.0
50 47.2
40.6
40
Rs bn
30
20
10
0
FY10
FY11E
FY12E
FY13E
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
Fig 18 – Auto battery sales likely to post 18% CAGR over FY10-13E
100 25
20
80 20
16 17
Rs bn 60 16 15
%
40 10
`
20 5
0 0
FY10
FY11E
FY12E
FY13E
Total auto battery sales (LHS) Growth yoy (RHS)
11
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.
We estimate overall The industrial battery market is largely influenced by demand from the UPS, railway, power and
industrial battery sales telecom segments. In the telecom sector, the batteries support switching and transmission
to post a 15.4% networks, whereas the Indian Railways use batteries for train lighting, coach air conditioning and
CAGR over FY10-13.
signalling. In the power sector, the batteries support generation, transmission and distribution
networks. The UPS batteries support IT and ITeS operations; they form part of UPS systems,
which provide backup power and regulate power supply to critical equipment during voltage
fluctuations. Small VRLA batteries find application in small UPS and emergency lamps.
We highlight below a few factors that will continue to drive demand in the industrial battery
segment.
 Addition of high-powered data centres in telecom, IT, BFIS and government sectors,
continued growth in ATMs at 18% CAGR and massive government-funded projects such as
Accelerated Power Development and Reform Program (APDRP), National e-Governance Plan.
 According to Gartner, India's IT end-user spending is likely to grow at a 14.8% CAGR (2007-
12), generating US$110bn in business in 2012; e-Governance is a US$9bn business
opportunity.
 To address the continued demand-supply gap in power, the government has revised the
incremental power capacity target from 78,577MW to 92,700MW during the 11th Plan (2007-
12) with the objective of raising per capita consumption to 1,000kWh by 2012.
 The large-scale computerisation of banking networks and government departments, creation

of high-powered data centres in IT and financial services industry, increasing penetration of
PCs and power shortages are likely to drive a sustained demand for UPS/inverters. We
expect the UPS/inverter battery segment in the country to grow at a 18% CAGR over FY10-13.
 Further, the robust modernisation and expansion plans of the Indian railways are likely to drive
battery demand for railway applications, going forward. We expect the railways-led battery
demand to grow at a 15% CAGR over FY10-13. We expect battery demand from telecom
operations to grow at a slower 5% CAGR over FY10-13E. Therefore UPS, railways and power
sectors are likely to offset the slowdown in the telecom space.
Thus, we expect overall industrial demand for batteries to post a 15% CAGR over FY10-13.
Fig 19 – Industrial battery sales to grow at 15% CAGR over FY10-13E

60.0 15.6
15
50.0 15 15.2
15
40.0
14.8
Rs bn
30.0
14.4
20.0 14
10.0 14.0
0.0 13.6
FY10
FY11E
FY12E
FY13E
Industrial Segment (LHS) Growth yoy (RHS)

12
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.
Exide is market leader Top two players command above 80% market share
in automotive The Indian battery industry is a duopoly with Exide and Amara Raja controlling ~80% of the
segment while AMRJ organised market. Exide is the market leader in the automotive segment, commanding over 70%
enjoys leadership in market share. Amara Raja enjoys leadership in the industrial segment with 35% market share in
industrial segment
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$1,500/tonne. To protect themselves
from such volatile lead prices, most battery manufacturers have a lead price escalation clause
agreement with OEMs wherein they are able to pass on the increase in raw material price, albeit
with a lag of a quarter.
Fig 20 – Avg realizations have moved in line with lead price fluctuations
3,000 4,000
2,403
2,500 2,229 2,238
3,000
2,000
US$/tonne
1,551
Rs/unit
1,500 1,334 2,000
1,000
1,000
500
- -
FY06
FY07
FY08
FY09
FY10
Average realisation (LHS) Average lead prices (RHS)

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
16,000 24
22.9
22
12,000
20
Rsm
8,000
18
4,000 16.2
16
15.5 15.9
14.7
0 14
FY06
FY07
FY08
FY09
FY10
Industry EBITDA (LHS) Industry EBITDA margin (RHS)

13
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 Industrial Battery
Original Replacement Telecom UPS/Inverter Power &

Equipment 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
15,000 16
14% CAGR
14
12,000 15.2% CAGR
12
10
Mn units
9,000
'000
8
6,000 6
4
3,000
2
- 0
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY08
FY09
FY10
Source: SIAM 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
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
16
Company Section
17

9 December 2010
Exide Industries
Top pick in the sector; initiate with OUTPERFORM (initiating coverage)
OUTPERFORM PRICE (as at 09 December 10) Price target
Rs163 Rs201
 We initiate coverage with an OUTPERFORM rating and Bloomberg code Reuters code
price target of Rs201. EXID IN EXID.BO
 A preferred supplier for most Indian auto OEMs, we Market cap 12 month range
expect Exide to track India’s strong auto sales growth. Rs137,020m (US$3,030m) Rs105 - 178
 We estimate 26% earnings CAGR over FY10-13E driven EPS est. change - - - -
by strong battery demand and margin expansion.
 We value the core business at 18x FY12E earnings, Standalone financials
yielding Rs179, insurance at Rs14 and subsidiaries at Year end: March 2010 2011E 2012E 2013E
Rs8, to arrive at our price target of Rs201. Sales (Rs m) 37,940 47,923 59,902 71,943
EBIT (Rs m) 7,903 9,575 12,556 15,344
EBITDA (Rs m) 8,709 10,304 13,319 16,234
Preferred supplier status with OEMs – Given it is a preferred
Pretax profit (Rs m) 8,106 10,449 12,722 15,524
supplier for most auto OEMs in India, we expect Exide’s auto Earnings (Rs m) adjusted 5,229 6,970 8,447 10,308
battery segment to track India’s strong auto sales growth. We Diluted EPS (Rs ) adjusted 6.2 8.2 9.9 12.1
Diluted EPS growth (%) adj. 63.0 33.3 21.2 22.0
estimate the segment’s revenue CAGR at 28% over FY10-13E. DPS (Rs ) 1.0 1.1 1.3 1.3
DPS growth (%) 60.8 14.0 13.6 0.0
Industrial battery segment growing well – Rising demand for EBITDA margin (%) 23.0 21.5 22.2 22.6
EBIT margin (%) 20.8 20.0 21.0 21.3
UPS/inverters and strong railway demand are likely to result in Net margin (%) 13.8 14.5 14.1 14.3
19% revenue CAGR over FY10-13E for the industrial segment, Div payout (%) 15.7 13.4 12.6 10.3
Book value/share (Rs ) 26.1 33.6 42.3 53.2
in our view. We expect such strong growth to also mitigate Net gearing (%) 3.9 -0.8 -6.0 -13.2
sector specific risk. ROE (%) 23.6 24.4 23.5 22.8
ROCE (%) 33.9 33.2 34.1 33.4
FCF (Rs m) 4,330 3,528 5,001 6,855
Rise in captive sourcing to boost margin – The company EV/Sales (x) 3.3 2.6 2.0 1.6
expects to increase captive sourcing of lead from own smelters EV/EBITDA (x) 14.5 12.0 9.0 7.0
PBR (x) 6.2 4.8 3.9 3.1
to about 70% by FY13E from 45% currently. We estimate this 26.5 19.9 16.4 13.4
PER (x)
move is likely to lead to a 100bps increase in EBITDA margin Dividend yield (%) 0.6 0.7 0.8 0.8
over FY11-13E. Source: Company, Standard Chartered Research estimates
Share price performance

Wide distribution reach – Exide has a strong and
180
geographically diverse sales and distribution force. It also has a 170
160
superb after-sales service program. Both are clear competitive 150
140
advantages. 130
120
110
100
Valuation: Price target of Rs201 – Robust earnings growth
Dec‐09 Mar‐10 Jun‐10 Sep‐10
and better return ratios could lead to a re-rating, in our view. We
value the core business at 18x FY12E earnings, yielding Exide Industries Ltd BSE SENSEX 30 INDEX (rebased)
Rs179, and the insurance business at Rs14 and subsidiaries at
Rs8. Our price target of Rs201 provides 23% upside potential.
Share price (%) -1 mth -3 mth -12 mth
Ordinary shares -4 2 41
Relative to Index 4 0 25
Relative to Sector - - -
Major shareholder Promoter (46.0%)
Free float 54%
Average turnover (US$) 4,865,231
Source: Company, Bloomberg
18
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 The auto segment contributes 62% of Exide’s total revenue, of which 40% is from OEMs and the
sales is to OEMs; rest from the high-margin replacement market. Being a preferred supplier to OEMs and a major
60% in the
player in the replacement market, we expect Exide to track India’s strong auto sales growth. Most
replacement market
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 75%
OEM 55%
60
40%
35%
%
40
20
Replace 0
PV
Replace
2W
60%
Market share
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 Led by strong brand equity, wide distribution network and excellent after-sales service, Exide is a
seen as key initiative market leader in the organised aftermarket segment and, hence, is able to garner a premium in
in long-term benefits
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
Fig 2 – Robust 28% CAGR in automotive battery revenue over FY10-13E

70,000 70
60,000 62 60
Automotive revenue
CAGR likely to be 50,000 50
28% over FY10-13 Rsm 40,000 35 40
%
30,000 28 30
20,000 21 20
15
10,000 10
5
0 0
FY08
FY09
FY10
FY11E
FY12E
FY13E
Automobile revenues (LHS) yoy growth (RHS)
Source: Company, , Standard Chartered Research estimates
Industrial battery segment diversifies sector specific risk

Inverter/UPS segment The industrial battery segment represents ~37.3% of Exide’s net sales, which also mitigates
the highest contributor sector specific risk. Within the industrial segment, almost 65% is contributed by the inverter/UPS
(65%) in industrial segment and 16% by telecom. The higher contribution from the inverter/UPS segment has two
battery segment
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
Infrastructure & 6%
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 Exide gets only 6% of revenue (16% of industrial revenues) from the telecom segment. Hence,
revenue limited to despite the slowdown in telecom in FY10 (due to the effect of tower sharing arrangements as
about 6% of total also the slowdown in capex by major players), Exide posted overall growth of 10% in the
revenue 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
Fig 4 – 19% CAGR in industrial battery revenue over FY10-13

40,000 40
36
30,000 30
Rsm
22 18 19
%
20,000 18 20
10,000 11 10
0 0
FY08
FY09
FY10
FY11E
FY12E
FY13E
Industrial segment revenues (LHS) yoy growth (RHS)
Rise in captive sourcing to boost margin

Increase in captive To reduce earnings’ sensitivity to fluctuations in raw material prices (primarily lead), the company
sources of lead has embarked upon a three-pronged strategy:
results in reduced
reliance on imported
lead  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
80 35 35 35
60 15
%
40
40 50
50
20
25
15
0
FY09
FY10
FY11E
Imported Captive Domestic

Buyback of exhausted Since the acquisition of the two smelters, Exide has been improving its exhausted-battery
batteries to reduce collection efforts. It purchases exhausted batteries in the open market at recycling collection
unorganised players’
points located at its branch offices and other recycling stations, and from dealers and institutional
supply of used
batteries 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
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 24
23
3,000 20
US$/tonne
18
%
2,000 16 16 16
15
1,000 12
0 8
FY06
FY07
FY08
FY09
FY10
Avg Lead Price (LHS) EBITDA (RHS)
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
0
FY09
FY10
FY11E
FY13E
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
Fig 8 – Benefits from increased captive sourcing

Year end: Mar FY10 FY11E FY12E FY13E
Captive lead consumption (%) 40 50 60 70
Imports (%) 25 15 10 5
Domestic procurement (%) 35 35 30 25
Incremental benefit from captive sourcing (Rsm) 1,157 238 295 352
EBITDA (Rsm) 8,709 10,304 13,319 16,234
Incremental benefit as a % of EBITDA 13.3 2.3 2.2 2.2
Incremental yoy swing in margin (bps) 300 50 50 50
Wide distribution reach

Set-up of Hubs and Exide has established an extensive automotive sales and distribution network that includes a
Spokes model for dedicated in-house sales force for OEMs and approximately 38,500 retail outlets for aftermarket
reorganising sales that include 12,500 dealers spread across 202 cities in India. The company distributes its
marketing and
distribution; to add industrial products through a network of 187 in-house sales staff who primarily sell to OEMs and
250 more locations institutional clients as well as 1,000 authorized dealers who sell to retail customers. Exide has
started its Bat Mobile service, which offers free road-side assistance to both customers and non-
customers alike thereby helping build brand awareness and loyalty.
Exide recently re-organised its marketing and distribution set up by setting up Hubs and Spokes,
which are monitored by Regional Controlling Centres. Through this model, the company is
present in 206 locations (and it is likely to increase the presence in 250 more towns and cities in
FY11), which has enabled Exide to further increase its distribution network to reach customers in
B class and C class cities. The Humsafar module has also helped improve its presence across
the country wherein their batteries are sold through various motor garages, thereby reaching the
customers doorstep.
In order to strengthen its foothold in rural markets, Exide has started a CRM initiative called
Project Kisaan. The company has also tied up with companies like Indian Oil Corparation, HPCL,
Toyota Kirloskar for distribution of Exide batteries through their retail outlets.
We believe, Exide’s strong and geographically diverse sales and distribution force coupled with
its superior aftersales service program gives it a clear competitive advantage in the market.
Capex of Rs4bn to address capacity constraints, boost earnings

Plans to expand two- In order to address the growing demand in both the automobile and industrial segments, Exide
wheeler battery has embarked upon a capex of about Rs4bn in FY11 across its six plants as well as the new
capacity by 60% and facility in Ahmednagar. The company plans to expand its two-wheeler battery capacity by 60%
four-wheeler battery
capacity by 28% and the four-wheeler battery capacity by 28%. The company is increasing its motorcycle battery
capacity to 15.4m units (earlier 9.6m units) by setting up a new two-wheeler facility at its once
abandoned plant at Ahmednagar at an investment of Rs800m. The company is also planning to
increase its four wheeler battery capacity to 10.2m units in FY11 from 8m units earlier. The capex
would partly be funded through the Rs5.3bn raised via QIP in Mar 2010 and partly through
internal accruals.
Fig 9 – Capex of Rs4bn to expand automobile capacity

FY10 FY11E
Four wheeler battery capacity (m units) 8.0 10.2
Two wheeler battery capacity (m units) 9.6 15.4
Industrial battery capacity (m Ahrs) 1,750 1,750
The capacity additions over FY11E would help avoid any further capacity constraints thereby
recovering its lost market share as well as boosting overall earnings, going forward.
23
Valuation
Exide has traditionally We like Exide for its leadership, strong distribution network and robust growth potential with
traded at a 50% limited exposure to the telecom space. Its backward integration initiatives have relatively shielded
premium to Amara the company’s earnings from lead price volatility. Given its pricing power and with its captive lead
Raja; justified given its
leadership, strong sources lending relative stability to earnings, Exide has traditionally traded at a 50% premium to
distribution and Amara Raja. We highlight below the key factors that justify Exide’s premium over Amara Raja.
superior return ratios,
in our view Fig 10 – Exide Vs Amara Raja: Key differentiating factors
Exide Amara Raja
Installed capacity
Automotive 8m 4.2m
Motorcycle 9.6m 1.8m
Industrial (VRLA) 1,750m Ahrs 900m Ahrs
Leadership position (%)
OEM 75 20
Replacement 65 28
Telecom NA 35
UPS NA 28
Revenue mix (%)
OEM 16 13
Replacement 45 34
Exports 2 4
UPS + Inverter 25 16
Telecom 6 28
Infrastructure 6 5
Shin Kobe Electric Machinery, Furukawa
Tie ups Johnson Controls Inc.
Battery Co. Ltd,
Distribution network 38,500 retail outlets 18,000 retail outlets
Yes, Captive lead sourcing to increase to No, earnings are relatively
Backward integration
70% (from 40% in FY10) by FY13E volatile
Avg (FY08-10) operating margin 19.1% 16.2%
Source: Companies, , Standard Chartered Research
Fig 11 – Exide: One-year forward PE

30
25
20
PE (x)
Average PE 15x
15
10
5
0
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
May-06
Aug-06
May-07
Aug-07
May-08
Aug-08
May-09
Aug-09
May-10
Aug-10
Feb-06
Feb-07
Feb-08
Feb-09
Feb-10
Exide PE Average PE
Source: Standard Chartered Research estimates, Bloomberg
24
Fig 12 – Amara Raja has always traded at a 50% discount to Exide

100
80
60
%
40
20
0
Apr-07
Jun-07
Aug-07
Apr-08
Jun-08
Aug-08
Apr-09
Jun-09
Aug-09
Apr-10
Jun-10
Aug-10
Oct-07
Dec-07
Feb-08
Oct-08
Dec-08
Feb-09
Oct-09
Dec-09
Feb-10
Oct-10
Dec-10
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 re-
rated. We value Exide’s core business at Rs179 (at 18x FY12E; a 20% premium to its historic
one year forward multiple), its stake in ING at Rs14 per share, and the other subsidiaries at Rs8
per share valuing Exide at Rs201 per share, which provides a 23% upside from current levels. At
our imputed target price, the stock would trade at 20x consolidated earnings which, given its
return ratios in excess of 35%, looks reasonable.
Fig 13 – ING Vysya: Basis of valuation

( Rs m)
Embedded value 8,726
Goodwill 16,054
Appraisal value 24,780
Less: additional capital required 1,000
Estimated value of ING Vysya 23,780
Value per share of Exide @50% stake 14
Source: Standard Chartered Research estimates
Fig 14 – Exide: Sum of parts valuation

FY12E
Exide Standalone valued @ 18xFY12E 179
ING Vysya Life per share value of Exide 14
Value of subsidiaries @10x FY12 earnings 8
Total per share value 201
Source: Standard Chartered Research estimates
Risks
Input Cost pressures
Increasing lead prices in the international markets continue to be a cause of concern for the
Indian battery industry. Volatile crude oil prices in the international market also affect the price of
PPCP, which is used for manufacturing battery containers. Increases in crude oil prices also
increase transportation costs for raw materials and finished goods.
Imports
Relatively inexpensive imports from China and some ASEAN countries have been a key concern
for the industry. Thailand, in particular, is seeking to expand the scope of its free trade agreement
with India to include batteries. While Chinese batteries have been flooding certain Indian markets
for quite some time, the price differential has come down over the last few years.
25
Financials
Expect 24% revenue CAGR over FY10-13E driven by auto segment
24% CAGR in overall We expect Exide’s automobile segment to post a robust 28% revenue CAGR led by string
revenues, driven by demand from both OEM and replacement segments. Strong demand from the UPS as well as
28% CAGR in auto railways segments is expected to drive 19% revenue CAGR in the industrial segment over FY10-
segment and 19%
CAGR in replacement 13E. Overall, we expect Exide to post strong 24% revenue CAGR over FY10-13E.
segment
Fig 15 –Exide likely to post 24% revenue CAGR over FY10-13E
90,000 60
75,000 52
45
60,000
Rsm
%
45,000 30
26
30,000 19 25 20
15
15,000 12
0 0
FY08
FY09
FY10
FY11E
FY12E
FY13E
Net sales (LHS) Growth yoy (RHS)
Ramp up of smelters to boost margins over FY10-13E

Ramp-up in smelters Exide currently gets 45% of its lead requirement from its own smelters; it intends to raise this to
to 70% lead 70% by FY13E. Reducing its dependence on lead imports could decrease earnings volatility –
requirement in FY13E from both lead price and currency fluctuations. Our estimates factor in a 100bps margin
could boost margins
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
20,000 25
16,000 23
12,000 21
Rsm
%
8,000 19
4,000 17
0 15
FY08
FY09
FY10
FY11E
FY12E
FY13E
EBITDA (LHS) EBITDA (RHS)
26
Strong topline growth, margin expansion to drive earnings CAGR

EBITDA CAGR A strong 24% revenue CAGR coupled with a 100bps margin expansion is likely to lead to a 23%
expected at 23% over EBITDA CAGR over FY10-13E, in our view. We estimate earnings to post a 26% CAGR over
FY10-13E FY10-13E.
Fig 17 – Expect 26% PAT CAGR over FY10-13E

12,000 16
15
10,000 14 14
14 14
8,000
Rsm
%
6,000 12
4,000
10
2,000 9
8
0 8
FY08
FY09
FY10
FY11E
FY12E
FY13E
PAT (LHS) PAT (RHS)
Fig 18 – Standalone Quarterly Performance (Rs m)

Year end: Mar FY10 FY11 FY10 FY11E
1Q 2Q 3Q 4Q 1Q 2Q
Net Sales 9,035 9,507 9,129 10,303 11,521 11,272 37,974 47,923
Change (%) -0.3 5.6 15.9 29.1 27.5 18.6 11.9 26.2
(Inc.)/dec in stock 681 -261 -902 -11 -15 -490 0 0
Net raw materials 4,586 5,496 6,193 6,201 6,927 7,176 21,932 28,754
RM/sales % 58.3 55.1 58.0 60.1 60.0 59.3 57.8 60.0
Total cost 6,950 7,056 7,058 8,158 8,937 8,817 29,231 37,618
EBITDA 2,084 2,451 2,072 2,145 2,583 2,455 8,743 10,304
As a % of sales 23.1 25.8 22.7 20.8 22.4 21.8 23.0 21.5
Change (%) 31.4 56.7 56.6 45.3 24.0 0.2 45.9 17.9
Non-operating income 9 11 10 57 62 191 88 420
Extraordinary income 51 20 116 30 49 469 226 518
Interest 45 39 29 26 13 17 139 63
Gross profit 2,048 2,424 2,053 2,176 2,632 2,629 8,912 11,179
Less: depreciation 188 222 189 208 194 201 807 730
PBT 1,860 2,202 1,864 1,968 2,437 2,428 8,106 10,449
Tax 672 716 640 644 818 627 2,735 3,132
Effective tax rate (%) 36.1 32.5 34.3 32.7 33.6 25.8 33.7 30.0
Adj. PAT
1,188 1,487 1,224 1,324 1,619 1,801 5,229 6,970
(before extraordinary)
Change (%) 35.0 78.1 76.3 65.7 36.3 21.1 63.0 33.3
Rep. PAT 1,224 1,497 1,305 1,345 1,653 2,129 5,371 7,317
Change (%) 48.9 92.3 132.4 97.2 35.1 42.2 88.9 36.2
27
Fig 19 – Standalone Income statement (Rsm)

Year end: Mar FY08 FY09 FY10 FY11E FY12E FY13E
Net sales 28,449 33,929 37,940 47,923 59,902 71,943
Change (%) 52.1 19.3 11.8 26.3 25.0 20.1
Expenditure 24,044 27,939 29,231 37,618 46,584 55,709
EBITDA 4,405 5,990 8,709 10,304 13,319 16,234
Change (%) 43.1 36.0 45.4 18.3 29.3 21.9
% of Net sales 15.5 17.7 23.0 21.5 22.2 22.6
Depreciation 599 679 807 730 762 890
EBIT 3,806 5,311 7,903 9,575 12,556 15,344
Interest & finance charges 419 479 139 63 63 63
Other income 65 65 121 420 229 243
Non-recurring expense 48 543 5 0 0 0
Non-recurring income 340 0 226 518 0 0
PBT 3,743 4,353 8,106 10,449 12,722 15,524
Tax 1,240 1,510 2,735 3,132 4,275 5,216
Effective rate (%) 33 35 34 30 34 34
Adj. PAT (bef. extra) 2,308 3,207 5,229 6,970 8,447 10,308
Change (%) 48.3 39.0 63.0 33.3 21.2 22.0
% of Net sales 8.1 9.5 13.8 14.5 14.1 14.3
Rep. PAT 2,503 2,843 5,371 7,317 8,447 10,308
Change (%) 61.2 13.6 88.9 36.2 15.5 22.0
Fig 20 – Standalone Balance Sheet (Rsm)

Sources of Funds
Share capital 800 800 850 850 850 850
Reserves 9,464 11,704 21,348 27,729 35,114 44,359
Net worth 10,264 12,504 22,198 28,579 35,964 45,209
Loans 3,498 3,172 900 900 900 900
Deferred tax liability 479 412 590 590 590 590
Capital employed 14,241 16,087 23,688 30,069 37,454 46,699
Application of funds
Gross fixed assets 10,975 12,567 13,365 17,365 20,742 23,742
Less: depreciation 5,424 5,887 6,598 7,328 8,090 8,979
Net fixed assets 5,551 6,680 6,767 10,037 12,652 14,763
Capital WIP 467 173 378 378 0 0
Investments 5,183 6,682 13,354 14,854 16,854 18,854
Current assets & advances 8,765 7,419 9,118 12,478 17,136 23,662
Inventory 5,707 4,385 6,068 7,664 9,580 11,506
Sundry debtors 2,592 2,310 2,546 3,216 4,019 4,827
Cash & bank balances 17 337 29 1,122 3,061 6,853
Loans & advances 448 387 476 476 476 476
Current liab. & prov. 5,725 4,866 5,929 7,677 9,188 10,579
Sundry creditors 4,545 3,343 4,382 5,535 6,919 8,310
Other liabilities 125 465 561 561 561 561
Provisions 1,054 1,059 985 1,580 1,708 1,708
Net current assets 3,040 2,552 3,190 4,801 7,948 13,083
Application of funds 14,241 16,087 23,688 30,069 37,454 46,699
28
Fig 21 – Standalone Ratios

Basic (Rs)
Standalone diluted EPS 2.7 3.8 6.2 8.2 9.9 12.1
Cash EPS 3.6 4.9 7.1 9.1 10.8 13.2
EPS growth (%) 48.3 39.0 63.0 33.3 21.2 22.0
Book value per share 12.8 15.6 26.1 33.6 42.3 53.2
DPS 0.4 0.6 1.0 1.1 1.3 1.3
Payout (incl. div. tax) % 13.9 15.0 15.7 13.4 12.6 10.3
Valuation (x)
P/E 60.0 43.2 26.5 19.9 16.4 13.4
Cash P/E 44.9 33.5 23.0 18.0 15.0 12.4
EV/EBITDA 29.2 21.1 14.5 12.0 9.0 7.0
EV/sales 4.5 3.7 3.3 2.6 2.0 1.6
Price to book value 12.7 10.4 6.2 4.8 3.9 3.1
Dividend yield (%) 0.2 0.4 0.6 0.7 0.8 0.8
Profitability ratios (%)
RoE 22.5 25.7 23.6 24.4 23.5 22.8
RoCE 27.2 33.4 33.9 33.2 34.1 33.4
Turnover ratios
Debtors (Days) 33.3 24.9 24.5 24.5 24.5 24.5
Inventory (Days) 86.6 57.3 75.8 74.4 75.1 75.4
Creditors (Days) 88.1 55.6 72.9 70.3 71.1 71.5
Working capital (Days) 31.8 26.6 27.3 28.6 28.5 28.4
Asset turnover (x) 2.0 2.1 1.6 1.6 1.6 1.5
Leverage ratio
Debt/equity (x) 0.34 0.25 0.04 0.03 0.03 0.02
Fig 22 – Standalone Cash flow statement (Rsm)

OP/(loss) before tax 3,806 5,311 7,903 10,449 12,722 15,524
Depreciation & amortisation 599 679 807 730 762 890
Direct taxes paid -1,208 -1,577 -2,557 -3,132 -4,275 -5,216
(Inc)/dec in working capital -1,388 808 -945 -518 -1,209 -1,343
Other items 0 0 0 0 0 0
CF from oper. activity 1,810 5,221 5,207 7,528 8,001 9,855
Extra-ordinary items 292 -543 221 0 0 0
CF after EO items 2,102 4,678 5,428 7,528 8,001 9,855
(Inc)/DEC in FA+CWIP -1,648 -1,515 -1,098 -4,000 -3,000 -3,000
(Pur)/sale of invest. -1,403 -1,499 -6,672 -1,500 -2,000 -2,000
CF from inv. activity -3,051 -3,014 -7,770 -5,500 -5,000 -5,000
Issue of shares 1,376 -123 5,144 0 0 0
Inc/(dec) in debt 251 -326 -2,272 0 0 0
Interest rec./(paid) -355 -414 -18 0 0 0
Dividends paid -320 -480 -820 -935 -1,063 -1,063
CF from fin. activity 952 -1,344 2,034 -935 -1,063 -1,063
Inc/(dec) in cash 3 320 -308 1,093 1,939 3,792
Add: beginning balance 14 17 337 29 1,122 3,061
Closing balance 17 337 29 1,122 3,061 6,853
29
Fig 23 – Consolidated Income statement (Rsm) Fig 24 – Consolidated Balance sheet (Rsm)
Year end: Mar FY10 FY11E FY12E FY13E Year end: Mar FY10 FY11E FY12E FY13E
Net sales 39,789 52,453 64,419 76,647 Sources of Funds
Change (%) 17 32 23 19 Share capital 850 850 850 850
Expenditure 30,217 41,789 50,698 59,963 Reserves 18,315 24,556 31,993 40,483
Raw material 22,651 31,629 38,201 45,452 Net worth 19,165 25,406 32,843 41,333
Change (%) 6 40 21 19 Loans 1,741 2,241 1,741 741
% of Net sales 1 1 1 1 Minority interest 366 556 746 936
EBITDA 9,572 10,665 13,721 16,685 Deferred tax liability 603 603 603 603
Change (%) 65.9 11.4 28.7 21.6 Capital employed 21,876 28,806 35,933 43,613
% of Net sales 24.1 20.3 21.3 21.8 Application of funds
Depreciation 675 777 893 1,027 Gross fixed assets 14,873 19,802 23,302 26,802
EBIT 8,897 9,888 12,828 15,657 Less: depreciation 6,935 7,712 8,605 9,632
Int. & finance charges 161 87 88 89 Net fixed assets 7,938 12,091 14,697 17,170
Other income 82 420 229 243 Investments 8,768 10,268 12,268 14,768
PBT 8,817 10,221 12,969 15,811 Curr. assets, & adv. 12,107 15,952 20,082 25,155
Non-recurring income 226 518 0 0 Inventory 7,969 9,341 11,472 13,650
Tax 3,009 3,373 4,280 5,217 Sundry debtors 2,981 3,929 4,826 5,742
Effective rate (%) 34.1 33.0 33.0 33.0 Cash & bank balances 301 1,825 2,929 4,908
Profit before MI 6,035 7,366 8,689 10,594 Loans & advances 856 856 856 856
Share of associates -684 -684 -684 -684 Current liab. & prov. 7,366 9,504 11,115 13,481
Minority interest 190 190 190 190 Sundry creditors 4,933 6,503 7,986 9,502
Profit after MI 5,162 6,492 7,816 9,720 Other liabilities 1,314 1,314 1,314 1,314
Adj. PAT 5,657 6,501 8,689 10,594 Provisions 1,119 1,687 1,815 2,665
Change (%) 92.2 14.9 33.7 21.9 Net current assets 4,741 6,448 8,967 11,674
% of Net sales 14.2 12.4 13.5 13.8 Application of funds 21,876 28,806 35,933 43,613
Fig 25 – Consolidated Ratios Fig 26 – Consolidated Cash Flow (Rsm)

Year end: Mar FY10 FY11E FY12E FY13E Year end: Mar FY10 FY11E FY12E FY13E
Basic (Rs) OP/(loss) before tax 8,897 9,888 12,828 15,657
EPS 6.7 7.6 10.2 12.5 Depre & amortisation 675 777 893 1,027
Cash EPS 7.4 8.6 11.3 13.7 Direct taxes paid -2,837 -3,373 -4,280 -5,217
EPS growth (%) 92.2 14.9 33.7 21.9 (Inc)/dec in WC -1,373 -183 -1,416 -728
Book value per share 22.5 29.9 38.6 48.6 Other items 188 190 190 190
DPS 1.0 1.1 1.3 2.3 CF from oper. activity 5,632 7,718 8,444 11,172
Payout (Incl. Div. Tax) % 14.5 14.4 12.2 18.1 Extra-ordinary items 226 518 0 0
Valuation (x) CF after EO items 5,858 8,236 8,444 11,172
P/E 24.5 21.3 15.9 13.1 (Inc)/dec in FA+CWIP -1,108 -4,500 -3,500 -3,500
EV/EBITDA 13.7 12.1 9.1 7.2 (Pur)/sale of invest. -6,009 -1,500 -2,000 -2,500
Price to book value 7.2 5.5 4.2 3.4 CF from inv. activity -7,117 -6,000 -5,500 -6,000
Dividend yield (%) 0.6 0.7 0.8 1.4 Issue of shares 4,021 -190 -190 -191
Profitability ratios (%) Inc/(dec) in debt -1,869 500 -500 -1,000
RoE 29.5 25.6 26.5 25.6 Interest rec./(paid) -161 -87 -88 -89
RoCE 41.0 35.8 36.3 36.5 Dividends paid -820 -935 -1,063 -1,913
Turnover ratios CF from fin. activity 1,171 -712 -1,841 -3,193
Debtors (Days) 27.3 27.3 27.3 27.3 Inc/(dec) in cash -88 1,524 1,103 1,979
Creditors (Days) 79.5 75.0 76.3 76.3 Add: beginning bal. 390 301 1,825 2,929
Leverage ratio Closing balance 301 1,825 2,929 4,908
Debt/equity (x) 0.1 0.1 0.1 0.0
30
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.
He holds a BE degree and a PG Diploma in Business
Director - Industrial
G Chatterjee Administration. Mr. Chatterjee has spent over 2 decades and has
division
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
Director - Automotive experience. He has been associated with the battery
P K Kataky
division manufacturing industry for over two decades. Mr. Kataky has
been on the Company’s Board of Directors since March 2005
He is a CA and also a Cost Accountant. He joined the Company
Director - Finance &
A K Mukherjee in 1998. Mr. Mukherjee has been on the Company’s Board of
CFO
Directors since May 2007
Source: Company
31

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 Bloomberg code Reuters code
rating and price target of Rs172. AMRJ IN AMAR.BO
Market cap 12 month range
 Significant exposure to declining telecom demand and
Rs14,903m (US$330m) Rs148 - 223
rising lead prices are likely to slow earnings growth to 11%
over FY10-13E. EPS est. change - - - -
 At our price target of Rs172, Amara Raja would trade at 8x

FY12E earnings, in line with its 4-yr average one-year Year end: March 2010 2011E 2012E 2013E
forward multiple of 8x. Looks fairly valued. Sales (Rs m) 14,652 17,046 22,373 26,501
EBIT (Rs m) 2,444 1,946 2,713 3,246
EBITDA (Rs m) 2,873 2,422 3,269 3,859
Significant exposure to declining telecom demand – Given Pretax profit (Rs m) 2,546 1,953 2,733 3,283
the slowdown in the telecom industry, pricing pressure on Earnings (Rs m) adjusted 1,590 1,305 1,831 2,167
telecom batteries (28% of Amara Raja’s revenue) could impact Diluted EPS (Rs ) adjusted 18.6 15.3 21.4 25.4
Diluted EPS growth (%) adj. 67.8 -17.9 40.3 18.3
earnings, in our view. We estimate the 930bps yoy fall in margin DPS (Rs ) 3.4 2.3 4.3 6.3
in 1H FY11 to 14.2% is partly due to the telecom slowdown. DPS growth (%) 262.8 -32.5 87.1 47.9
EBITDA margin (%) 19.6 14.2 14.6 14.6
EBIT margin (%) 16.7 11.4 12.1 12.2
Impacted by rising lead prices – The lack of backward Net margin (%) 10.8 7.7 8.2 8.2
integration exposes Amara Raja’s earnings to lead price Div payout (%) 18.2 15.0 20.0 25.0
Book value/share (Rs ) 63.7 76.6 93.8 112.8
volatility. Over the past five quarters, higher lead prices have Net gearing (%) 5.3 -1.0 -9.6 -22.3
been one key reason for Amara Raja’s margin decline. ROE (%) 30.7 19.9 22.9 22.5
ROCE (%) 38.0 26.2 31.9 33.0
FCF (Rs m) 1,855 531 1,037 1,877
Expect slower 11% earnings CAGR over FY10-13 – Given its EV/Sales (x) 1.0 0.9 0.6 0.5
exposure to slowing telecom demand and lack of backward EV/EBITDA (x) 5.3 6.2 4.4 3.3
PBR (x) 2.8 2.3 1.9 1.6
integration, we estimate Amara Raja’s earnings would grow at a PER (x) 9.6 11.7 8.3 7.0
much slower 11% CAGR over FY10-13E (FY07-10 CAGR 35%) Dividend yield (%) 1.9 1.3 2.4 3.6
despite 22% revenue CAGR. Source: Company, Standard Chartered Research estimates
Share price performance

Capex plans to shift product mix favourably – The Rs1.6bn
230
capex earmarked over FY11-13E will shift Amara Raja’s 220
210
product mix in favour of the high-demand auto sector. 200
190
180
170
160
Valuation: Price target of Rs172 – At 8.3x FY12E earnings, 150
140
the stock is trading at its 4-yr average one-year forward multiple
Dec‐09 Mar‐10 Jun‐10 Sep‐10
(which is in line with its historic 50% discount to Exide) and
appears fairly valued. Initiate coverage with an IN-LINE rating Amara Raja Batteries BSE SENSEX 30 INDEX (rebased)
and price target of Rs172.
Share price (%) -1 mth -3 mth -12 mth
Ordinary shares -9 -17 6
Relative to Index -1 -18 -6
Relative to Sector - - -
Major shareholder Promoter (52.1%)
Free float 48%
Average turnover (US$) 1,148,201
Source: Company, Bloomberg
32
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 Almost 28% of Amara Raja’s earnings come from the telecom segment, where it is a preferred
28% of revenue from supplier to all major telecom infrastructure and service providers and enjoys 35% market share.
telecom
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 Vendors to the telecom sector have been impacted over the past few quarters because: 1) most
sector impacted 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
10
Q4 FY09
Q1 FY10
Q2 FY10
Q3 FY10
Q4 FY10
Q1 FY11
Q2 FY11
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 The lack of backward integration exposes Amara Raja’s earnings to volatile lead price
integration exposes movements. We expect margins in FY11 to be impacted by rising lead prices and slowdown in
Amara Raja’s telecoms (in 1H FY11 margin has contracted 930bps to 14.2%). Going forward, we expect
earnings to volatile
lead prices margins to remain at these levels, which is near its historic average of 14.6%.
33
Fig 2 – Margins likely to stabilise at lower levels

22
20 19.6
18
%
16
14.6 14.6 14.6
14.3 14.2
14
12
FY11E
FY12E
FY13E
FY08
FY09
FY10
Capex plans to shift product mix favorably

Capex plans likely to Amara Raja plans to expand its auto battery capacities for which it has earmarked Rs1.6bn –
shift product mix doubling two-wheeler battery capacity to 3.6m in FY11 and to 5m by FY12; raising four-wheeler
towards automobile capacity 20% to 6m by FY12. The capex is likely to be funded by internal accruals (see details
batteries
below).
Fig 3 – Amara Raja’s Rs1.6bn capex plans to expand 2W and 4W capacity
Installed capacity FY10 FY11E FY12E
Two wheelers (m units) 1.8 3.6 5
Four wheelers (m units) 4.2 5.1 6
UPS (m units) 1.8 1.8 1.8
Industrial (m Ampere hrs) 900 900 900
Capex (Rs m) 900 700
Source: Company
Amara Raja also plans to cap exposure to the low-margin OEM segment to about 25% of its
revenues. Post this capex plan, the product mix is likely to shift 60:40 in favour of the auto
segment, thereby reducing its dependence on the slow-moving telecom segment.
Expect slower 11% earnings CAGR over FY10-13

Earnings likely to With an established brand and a pan-India presence, Amara Raja is likely to benefit from the
grow at a slower 11% strong outlook for India’s battery market. We estimate Amara Raja to post 22% revenue CAGR
CAGR despite 22% over FY10-13E. Nevertheless, high exposure to telecom and lack of backward integration could
revenue CAGR
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

30,000 35 2,500 80
31 66
25,000 30 60
2,000
25 41
20,000 40
22 1,500
18 20
Rsm
Rsm
%
15,000 16 18 20
11 15 1,000
10,000 0 0
10
500 -18
5,000 5 -20
0 0 0 -40
FY09
FY10
FY11E
FY12E
FY13E
FY09
FY10
FY11E
FY12E
FY13E
Net sales (LHS) Growth yoy (RHS) PAT (LHS) Growth yoy (RHS)
34
Valuation
At our price target, the At 8x FY12E earnings, the stock is trading at its 4-yr average one-year forward multiple (which is
stock is fairly valued 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
14 100
12
80
10
Average PE 8x 60
PE (x)
%
6
40
4
2 20
0 0
Aug-07
Aug-08
Aug-09
Aug-10
Apr-07
Dec-07
Apr-08
Dec-08
Apr-09
Dec-09
Apr-10
Dec-10
Apr-07
Aug-07
Apr-08
Aug-08
Apr-09
Aug-09
Apr-10
Aug-10
Dec-07
Dec-08
Dec-09
Dec-10
Risks
Input cost pressures
Increasing lead prices in the international markets continue to be a cause of concern for the
Indian battery industry. Volatile crude oil prices in the international market also affect the price of
PPCP, which is used for manufacturing battery containers. Increases in crude oil prices also
increase transportation costs for raw materials and finished goods.
Rising threats from imports

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

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

The unorganized market (estimated at around Rs20-25bn) gives tough competition to the
organized players, especially in rural areas where the latter has limited reach. The growing
unorganised market poses a serious threat to the organised battery segment in India.
35
Financials
22% revenue CAGR expected over FY10-13
Steady volume from Volume growth in the auto battery segment/replacement category and strong potential in the
the auto segment, UPS/railways could offset the decline in telecom, in our view. Furthermore, its capex plans would
growth in replacement tilt the product mix towards autos and, hence, reduce Amara Raja’s overall exposure to telecom.
category, and strong
potential from UPS We estimate its revenue to post a 22% CAGR over FY10-13.
could offset
deceleration in Fig 7 – Revenue CAGR of 22% over FY10-13E
telecom 30,000
25,000 22% CAGR

20,000
Rsm
15,000
10,000
5,000
0
FY09
FY10
FY11E
FY12E
FY13E
Margins to stabilise
Margins could Amara Raja’s margin has declined 930bps yoy in 1H FY11 led by a slowdown in telecom and
stabilise with shift in rising lead prices. With its product mix set to shift in favour of auto batteries, we expect margins
product mix towards to stabilise at its historical average of about 14.6%, going forward.
auto
Fig 8 – Margins likely to stabilize at its historic average of about 14.6%
2,000 23.5 25 5,000 19.6 20
1,600 16.6 20 4,000 18

15.5
15.2 14.2
1,200 15 3,000 16
Rsm
Rsm
%
14.2 14.6 14.6
%
14.6 14.3
800 10 2,000 14
400 5 1,000 12
- 0
0 10
2HFY09
1HFY10
2HFY10
1HFY11
1HF09
FY08
FY09
FY10
FY11E
FY12E
FY13E
EBIDTA (LHS) Margin (RHS) EBIDTA (LHS) Margin(RHS)
Earnings to grow at a slower 11% CAGR over FY10-13E

Earnings CAGR of The robust revenue growth (22% CAGR over FY10-13E) is expected to be mellowed by margins
11% over FY10-13E 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
Fig 9 – Expect a slower 11% CAGR in earnings over FY10-13E

3,000 12
10.7
10
8.7 8.1
7.6 8.1
2,000 7.2 8
Rsm
%
6
1,000 4
2
0 0
FY08
FY09
FY10
FY11E
FY12E
FY13E
PAT (LHS) PAT margin (RHS)
Fig 10 – Quarterly Performance (Rs mn)

FY10 FY11
1Q 2Q 3Q 4Q 1Q 2Q FY10 FY11E
Net sales 3,065 3,612 3,675 4,333 4,467 3,925 14,652 17,046
Change (%) -2.9 6.4 10.3 30.1 45.7 8.7 11.2 16.3
(Inc.)/dec in stock 87 -115 -450 122 131 48 0 0
Net raw materials 1,642 2,139 2,666 2,742 2,846 2,457 8,821 11,097
RM/sales % 56.4 56.0 60.3 66.1 66.6 63.8 60.2 65.1
Total cost 2,348 2,760 2,982 3,699 3,847 3,356 11,779 14,624
EBITDA 717 851 692 634 620 568 2,873 2,422
As a % of sales 23.4 23.6 18.8 14.6 13.9 14.5 19.6 14.2
Change (%) 58.5 57.5 60.5 5.9 -13.5 -33.2 52.3 -15.7
Non-operating income 6 10 6 6 9 16 50 38
Extraordinary income 49 3 38 30 11 -2 121 0
Interest 30 26 6 6 4 4 68 31
Gross profit 694 835 692 634 625 580 2,976 2,429
Depreciation 102 107 117 104 103 105 429 476
PBT 592 729 576 530 523 475 2,546 1,953
Tax 200 251 204 184 173 157 876 648
Effective tax rate (%) 33.9 34.5 35.4 34.8 33.1 33.0 34.4 33.2
Reported PAT 391 477 372 346 350 318 1,670 1,305
Change (%) 69.9 71.5 57.5 13.5 -10.6 -33.4 107.5 -21.9
Adjusted PAT 426 479 399 367 357 316 1,590 1,305
Change (%) 185.4 154.9 93.6 30.8 -16.2 -34.0 67.8 -17.9
37
Fig 11 – Income statement (Rsm)

Net sales 10,833 13,177 14,652 17,046 22,373 26,501
Change (%) 81.8 21.6 11.2 16.3 31.3 18.5
Expenditure 9,256 11,291 11,779 14,624 19,104 22,642
EBITDA 1,577 1,886 2,873 2,422 3,269 3,859
Change (%) 93.5 19.6 52.3 -15.7 34.9 18.0
% of net sales 14.6 14.3 19.6 14.2 14.6 14.6
Depreciation 244 346 429 476 556 612
EBIT 1,333 1,541 2,444 1,946 2,713 3,246
Interest & finance charges 129 182 68 31 22 9
Other income 256 81 50 38 42 46
Non-recurring expense 0 212 0 0 0 0
Non-recurring income 0 0 121 0 0 0
PBT 1,459 1,227 2,546 1,953 2,733 3,283
Tax 516 422 876 648 902 1,116
Effective rate (%) 35.3 34.4 34.4 33.2 33.0 34.0
Rep. PAT 944 805 1,670 1,305 1,831 2,167
Change (%) 100.9 -14.7 107.5 -21.9 40.3 18.3
% of net sales 8.7 6.1 11.4 7.7 8.2 8.2
Adj. PAT 944 947 1,590 1,305 1,831 2,167
Change (%) 100.9 0.4 67.8 -17.9 40.3 18.3
Fig 12 – Balance Sheet (Rsm)

Sources of funds
Share capital 114 171 171 171 171 171
Reserves 3,217 3,885 5,266 6,375 7,840 9,465
Net worth 3,331 4,056 5,437 6,546 8,011 9,636
Loans 3,163 2,859 912 813 412 112
Deferred tax liability 170 183 216 216 216 216
Capital employed 6,663 7,097 6,566 7,575 8,639 9,964
Application of funds
Gross fixed assets 3,106 4,271 4,911 6,038 6,738 7,338
Less: depreciation 1,217 1,458 1,854 2,330 2,886 3,498
Net fixed assets 1,889 2,813 3,057 3,708 3,852 3,840
Capital WIP 657 396 227 - - -
Investments 162 471 161 161 161 161
Curr.assets, & adv. 5,976 5,260 6,311 7,103 8,705 10,613
Inventory 1,943 1,608 2,176 2,335 3,065 3,630
Sundry debtors 2,265 2,078 2,423 2,802 3,371 3,630
Cash & bank balances 511 703 625 878 1,181 2,266
Loans & advances 1,248 870 1,087 1,087 1,087 1,087
Other current assets 8 - - - - -
Current liab. & prov. 2,021 1,843 3,190 3,397 4,078 4,650
Sundry creditors 808 937 1,376 1,635 2,145 2,541
Other liabilities 219 201 280 280 280 280
Provisions 993 705 1,534 1,482 1,653 1,828
Net current assets 3,955 3,417 3,121 3,706 4,626 5,964
Application of funds 6,663 7,097 6,566 7,575 8,639 9,964
38
Fig 13 – Ratios
Per share
EPS 16.6 11.1 18.6 15.3 21.4 25.4
EPS fully diluted 11.0 11.1 18.6 15.3 21.4 25.4
Cash EPS 20.9 13.5 24.6 20.9 27.9 32.5
EPS growth (%) 100.9 -33.1 67.8 -17.9 40.3 18.3
Book value per share 58.5 47.5 63.7 76.6 93.8 112.8
DPS (Includig dividend tax) 0.8 0.9 3.4 2.3 4.3 6.3
Payout (Incl. Div. Tax) % 5 8 18 15 20 25
Valuation (x)
P/E 10.7 16.1 9.6 11.7 8.3 7.0
Cash P/E 8.5 13.2 7.2 8.5 6.4 5.5
EV/EBITDA 8.0 9.0 5.3 6.2 4.4 3.3
EV/sales 1.2 1.3 1.0 0.9 0.6 0.5
Price to book value 3.0 3.7 2.8 2.3 1.9 1.6
Dividend yield (%) 0.5 0.5 1.9 1.3 2.4 3.6
Profitability Ratios (%)
RoE 28.3 19.8 30.7 19.9 22.9 22.5
RoCE 23.8 22.8 38.0 26.2 31.9 33.0
Turnover Ratios
Debtors (Days) 76 58 60 60 55 50
Inventory (Days) 77 52 67 58 59 59
Creditors (Days) 41 39 57 54 54 54
Working capital (Days) 112 70 71 65 60 55
Asset turnover (x) 1.6 1.9 2.2 2.3 2.6 2.7
Leverage Ratio
Debt/Equity (x) 0.9 0.7 0.2 0.1 0.1 0.0
Fig 14 – Cash flow statement (Rsm)

OP/(Loss) before tax 1,333 1,541 2,427 1,935 2,701 3,234
Depreciation & amortisation 244 346 429 476 556 612
Direct taxes paid -482 -409 -842 -648 -902 -1,116
(Inc)/Dec in working capital -1,512 730 218 -332 -618 -253
Other Items -9 -69 6 0 0 0
CF from Oper. activity -427 2,138 2,239 1,431 1,737 2,477
Extra-ordinary items 0 -212 121 0 0 0
CF after EO items -427 1,926 2,360 1,431 1,737 2,477
(Inc)/Dec in FA+CWIP -1,160 -1,009 -504 -900 -700 -600
(Pur)/Sale of invest. 0 -309 310 0 0 0
CF from Inv. activity -1,160 -1,318 -194 -900 -700 -600
Issue of shares 0 57 0 0 0 0
Inc/(Dec) in debt 1,756 -304 -1,946 -100 -400 -300
Interest rec./(paid) 127 -102 -18 7 20 37
Dividends paid -40 -68 -248 -196 -366 -542
CF from Fin. activity 1,842 -417 -2,213 -289 -746 -805
Inc/(Dec) in cash 255 191 -47 242 291 1,072
Add: beginning balance 256 511 703 625 878 1,181
Closing balance 511 703 656 867 1,169 2,253
39
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
Promoter & Non- Electronic and Systems Sciences. He had been the
Ramachandra Galla
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
41
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,
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named in this report. SCB makes no representation or warranty of any kind, express, implied or statutory regarding this document or any information contained
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The research analysts responsible for the content of this research report certify that
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No part of his or her compensation and other benefits was, is or will be directly related to the specific recommendations or views
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Our ratings are under constant review.
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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
Recommendation Distribution and Investment Banking Relationships
% of covered companies currently assigned % of companies assigned this rating with which
this rating SCB has provided investment banking services over
the past 12 months
OUTPERFORM 61.9% 15.2%
IN-LINE 28.3% 10.0%
UNDERPERFORM 9.7% 6.5%
Research Recommendation
Terminology Definitions
The total return on the security is expected to outperform the relevant market index by 5% or more over the next 12
OUTPERFORM (OP)
months
The total return on the security is not expected to outperform or underperform the relevant market index by 5% or more
IN-LINE (IL)
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
UNDERPERFORM (UP)
months
SCB uses an investment horizon of 12 months for its price targets.
43
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India | Automobiles & Parts EQUITY RESEARCH

India Battery Sector

Amit Kasat Aniket Mhatre Neha Kothari

All rights reserved. Standard Chartered Bank 2010

Investment argument and valuation 4

Auto demand to drive battery sales 10

Promising outlook for industrial batteries 12

Duopoly imparts pricing power 13

Amara Raja Batteries 32

Duopoly imparts pricing power, industry to continue to trade at a premium to peers –

Fig 1 – Battery sector valuation matrix

Investment argument and valuation

Auto sector growth to drive battery sales

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

16% CAGR in replacement battery sales

Industrial battery sales likely to grow at 15% CAGR

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

Duopoly imparts pricing power

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

Battery Industry EBITDA margin (LHS) Avg lead price (RHS)

Source: Bloomberg, Companies

Fig 5 – Relative valuation: Auto component players

Fig 6 – Price/book vs RoE

Source: Bloomberg, Standard Chartered Research estimates

Exide: Premium valuations justified

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

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

Exide RoE (LHS) Amara Raja RoE (RHS)

Fig 13 – Amara Raja: Discount to Exide

Source: Standard Chartered Research, Companies

Amara Raja: Fairly valued

Fig 14 – Battery sector valuation matrix

Fig 15 – Target valuation multiple

Large unorganized market may restrict potential upside

Rising threats from imports

Auto demand to drive battery sales

Strong OEM auto sales

Auto OEM battery demand (LHS)

Source: SIAM, Standard Chartered Research estimates

Source: Company, Standard Chartered Research estimates

Source: Company, Standard Chartered Research estimates

Promising outlook for industrial batteries

 The large-scale computerisation of banking networks and government departments, creation

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

Industrial Segment (LHS) Growth yoy (RHS)

Duopoly imparts pricing power

Volatile lead prices

1,500 1,334 2,000

Average realisation (LHS) Average lead prices (RHS)

Industry EBITDA (LHS) Industry EBITDA margin (RHS)

Source: Companies, Standard Chartered Research estimates

Fig 22 – Industry structure

Automotive Battery Industrial Battery

Original Replacement Telecom UPS/Inverter Power &

Source: Standard Chartered Research

Automotive battery segment

Source: SIAM Source: Companies

Industrial battery segment

Industry cost structure: highly raw material intensive

Fig 25 – Lead constitutes bulk of raw material costs

Lead and lead alloys,

Source: Company, Standard Chartered Research

India | Automobiles & Parts EQUITY RESEARCH