Deteriorating power supply is good news for market leader Exide

What?s New? We spoke with a leading industrial UPS manufacturer to get a perspective on the UPS industry in India, which has implications for Exide?s industrial business (UPS batteries were around 35% of Exide’s FY12 industrial batteries segment). This segment?s growth rate of around 25% y-o-year significantly exceeded Exide’s industrial segment growth of 4% (in mAh?battery capacity) in FY12.

Outlook for UPS demand remains strong: The UPS market in India is estimated at around R25-30 billion and forecast to grow at 20-25% y-o-y driven by an acute power shortage, resulting in increased demand for independent power source, especially for industrial purposes. Per CIRA (Citi Investment Research & Analysis) estimates on the worsening power supply situation in India, power cuts to industries are at historic high levels and anecdotal evidence suggests that the power supply situation in India has deteriorated despite the significant capacity additions in the Plan-XI. We also expect healthy growth for the home inverter segment, though at a slower clip compared to UPS business, since uninterrupted power is still a luxury for domestic usage.

Growth drivers: Per our discussion, the key end user industries that are seeing strong growth are: IT/ITeS, pharma, FMCG, and oil & gas. With proliferation of data-centres, demand for higher capacity UPS systems (>200 kVA) has increased, though the middle segment (40-200 kVA) continues to account for the majority of the industry?s volume share.

Brand value is important while procuring batteries: While procuring batteries for UPS, brand is an important criterion?Exide, Amara Raja and GS Yuasa are the leading players. The choice of battery supplied is determined by the consumer. This augurs well for Exide, given its strong brand image and essentially B2C facing business.

Reiterate Buy: New Target Price R156. We increase our EPS estimates by 3-6%, as we increase volumes for the industrial business by 2/5% over FY13/FY14e (estimates). Given the strong demand, we marginally increase pricing too for the industrial segment by around 1%. New Target Price of R156 is based on a SOTP (sum-of-the-parts) valuation methodology. We value the base business at R147, retaining our18x multiple on Sept 2013e EPS.

Risks: Key downside risks that could prevent the stock from reaching our target price include: (i) Lower-than-expected auto volume growth due to an adverse macro environment; (ii) A higher-than-expected increase in lead prices, which could suppress margins; (iii) Higher than expected competitive intensity resulting in market share erosion; (iv) Price wars by an aggressive new comers in the industry or by incumbent competitors could force Exide to cut prices, resulting in margin erosion.