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Mixed – strong revenue beat, miss on margins

Valuation and View – Margins to expand QoQ   

EXID’s 1QFY23 results were better with revenue/EBITDA/adj. PAT beat of 19%/4%/12% to our estimates. However, EBITDA margins contracted for the 3rd consecutive quarter QoQ by ~30bp to multi quarter low at 9.9%. This was led by continuous pressure on gross margins which came in at ~27.9% (partly led by RM inflation and inferior product mix). We believe with recent correction in lead price (~3.5% decline in 1QFY23)to positively impact margins, however partially be offset by INR depreciation. Going forward we believe, decline in RM as well as non?RM cost should drive QoQ margins expansion.  EXID is setting up a greenfield cell manufacturing where it targets ~12GW of cell manufacturing capacity with overall capex of Rs60b over 8?10 years (with first phase capex targeted at Rs25?30b), in a tie?up with Svolt Energy.

Over the mid?long term, EXID’s successful execution on EV battery manufacturing foray such as 1) lithium?ion battery cell manufacturing through collaboration with SVOLT and 2) Nexcharge  ? fully automated lithium?ion battery packs and modules manufacturing plant, would act as key growth drivers for future technologies. While EXID’s LAB business is expected to grow 7?8% CAGR over 3?5 years, significant EV battery foray is key trigger for the stock. EXID is trading at 14.7/11.4x of FY23/24 EPS (v/s 10?year LPA of 21.6x). We estimate Revenue/EBITDA/PAT CAGR of 15%/19.5%/18.5% over FY22?24E and tweak FY23/24 estimates to factor in for higher RM and mix. Maintain BUY with TP of Rs187 (11x Mar?24 EPS + 50% holdco discount to HDFC Life stake)

Result Highlights – Mixed bag; RM inflation offsets strong revenue beat

* Revenues grew 14% QoQ/ 57% YoY at Rs38.9b (our/cons est at Rs32.7b/Rs34.1b).

* Led by RM inflation, gross margins contracted 10bp QoQ at 27.9% (all time low, est at 29.5%)

* This has partially offset healthy topline growth resulting in EBITDA growth of 11% QoQ at Rs3.9b (our est/cons at Rs3.7b). However, margins were below est at 9.9% (?30bp QoQ, our/cons est at 11.4%/10.9%).

* Consequently, Adj PAT came in higher at Rs2.3b (+13% QoQ, est/cons at ~Rs2b) led by higher other income at Rs322m (est at Rs152m).

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