Citigroup
We downgrade Exide Industries to ?sell? from ?buy? following its acquisition of the remaining 50% stake in ING Vysya Life Insurance.
We cut our multiple ascribed to the core business to 14x from 18x, as we believe the unrelated diversification will result in stock de-rating from the current levels.
Our new target price of R118 (R149 earlier) values the core business at R105, based on 14x FY14e EPS. We value ING Vysya Life Insurance at R13, based on 1x its imputed book value of ~R110 crore as per the latest stake acquisition by Exide Industries.
Our revenue and Ebitda estimates remain unchanged, as there is no impact from the deal on the core business. Our EPS cuts of 2% (FY13e), 3% (FY14e), and 3% (FY15e) reflect a cut in our other income estimates, as interest/dividend income from mutual fund investments is expected to decline.
Exide?s strong balance sheet and healthy cash reserves (~R700 crore as at FY12) were key positives, especially as the core business has been faltering. Exide has announced it is to invest R550 crore to buy the remaining 50% stake in ING Vysya.
Given that this acquisition is completely unrelated, loss-making and could possibly require incremental funding, and unlikely to find a purchaser, we view it negatively and expect the stock to de-rate on the back of this event.
In our view, the investment in ING Vysya Life Insurance will create a drag on the balance sheet. After this investment, about 36% of Exide?s capital employed (R1,300 crore) will be invested in this business ? given its loss-making nature, it will be a drag on RoCE. Exide?s cash levels will decline ~80% to fund this business. Additionally, Exide might have to infuse funds to recapitalise the business.
If a buyer is not found for the business, Exide could have to continue to fund the insurance business over the interim. With more than 35% of the capital employed invested in this business, we expect Exide?s RoCE profile to deteriorate over the next two years. We, thus, view this unrelated acquisition negatively, especially in the context of the fact that Exide?s core business is under pressure and profitability has been marred by a combination of cost pressures and competitive intensity.
