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Gains on gross margins offset by higher other expense

Valuation and View  

EXID’s 2QFY23 results were weak with revenue/EBITDA/adj. PAT beat of 6?7% to our estimates. However, gross margins came in better at 30.5% (est 28.6%, +260bp QoQ/ ? 230bp YoY). This was led by by QoQ decline in lead prices as well as price increases. We believe with recent correction in lead price (~10% decline in 1HFY23) to positively impact margins ahead, however, partially be offset by INR depreciation on imported RM. Going forward we believe, decline in RM as well as non?RM cost should drive QoQ margins expansion.  Demand was positive both in auto (both OEM and replacement) and industrial vertical, which helped maintained strong revenues run?rate. 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 for which it has already laid foundation in Sep’22.

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 14.3x/12.4x/10.3x of FY23/24/25 EPS (v/s 10?year LPA of 21.6x). We estimate Revenue/EBITDA/PAT CAGR of 12.3%/18.6%/19% over FY22? 25E and tweak FY23/24 estimates to factor in for mix. Maintain BUY with TP of Rs201 (11x Sep?24 EPS + 50% holdco discount to HDFC Life stake).

Result Highlights – Weak overall, gross margins expanded QoQ though  

* Revenues declined 4.6% QoQ/ 13% YoY at Rs37.2b (est at Rs39.8b). This was led by growth in auto and industrial verticals across channels.  

* Led by ease in RM inflation and price hikes, gross margins expanded 260bp QoQ at 30.5% (v/s 1QFY23 all time low gross margins at 27.9%). However, this was partially offset by higher other expense at Rs5b (est Rs4.8b).  

* Consequently, EBITDA declined 7% QoQ at Rs4.1b (est Rs4.4b). However, margins came?in line at 11.1% (?120bp QoQ).

* Adj PAT grew 9% YoY at Rs2.5b (est at Rs2.6b).

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