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Significant EV foray is critical to stay on course

Valuation and View

EXIDE 3QFY22 result was operationally in line with margins at 11.7% (‐90bp QoQ). This has come on the back of operating leverage and cost control offsetting the impact of RM inflation, which has resulted in ~10 years low gross margins at 31%. While, OEM demand sentiments remained mix during the quarter, there was significant pickup in replacement and UPS batteries demand. Going forward, we believe steady growth in replacement segment (~65% of the industry) to continue coupled with recovery in OE volumes. However, we expect margins expansion to be negligible given lag impact of lead inflation.

Over the midterm, EXID’s intent to manufacture li‐ion batteries is positive, the capex for EV technologies is likely at Rs6.5‐7bn per GW (over and above regular LAB capex of Rs3‐ 4b per annum). However, the recent insurance stake divestment should ensure management’s sharpened focus on the core battery business in the wake of rising opportunities in EV batteries space. While EXID’s LAB business is expected to grow 8‐10% CAGR over 3‐5 years, significant EV battery foray is key trigger for the stock. EXID is trading at 15.1/11.7x of FY23/24 EPS (v/s 10‐year LPA of 21.6x). We estimate EBITDA/PAT CAGR of 15.2/18.3% over FY21‐24E. Our current estimates do not factor in any significant capex on foray in to EV battery manufacturing. Maintain ADD with TP of Rs191 (12x Sep‐23 EPS + 50% holdco discount to HDFC Life stake).

Result Highlights

* Revenues declined 3% QoQ/ (+14% YoY) at Rs31.9b (in line). During the quarter, i) volumes in the auto segment grew led by recovery in replacement market and ii) higher demand in industrial UPS led by pickup in commercial activities.

* Led by RM inflation, gross margins contracted 180bp QoQ/ (‐490bp YoY) at 31% (est at 32%).  

* This was offset by op leverage resulting in margins at 11.7% (‐90bp QoQ/270bp YoY, in line with our est). Consequently, EBITDA declined 10% QoQ/8% YoY at Rs3.7b (in line with our est, v/s bloom cons at Rs3.4b).

* However, Adj PAT at Rs2b (‐13% QoQ, est at Rs2.2b) came lower led by higher interest cost at Rs83m (est at Rs16m) and higher dep at Rs1b (est at Rs0.9b).

* EXID has applied for PLI and ACC schemes as it plans to set‐up multi GW li‐ion cell manufacturing plant in India.  

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