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Charge it up, Li-On cell manufacturing-structurally positive …

About the stock: Exide Industries (EIL) is a part of the duopolistic organised Indian lead acid battery market with a presence across automotive & industrial applications. It also has dual presence in Li-On battery space through assembly operations (1.5 GwH, Nexcharge) & Li-On Cell manufacturing venture in technical collaboration with SVOLT (6 GwH, commissioning in CY25E)

• Segment mix: automotive sales - 70% & industrial application - 30%.

• Geography mix: India – 92% & International – 8%

Investment Thesis

• Good EV proxy play, first movers’ advantage to prevail: EIL was the early one to take tangible steps in the new age Li-On battery business by first venturing into a JV with Leclanché SA for setting up of EV battery assembly operations in India. The company now owns 100% ownership in this venture with assembly capacity of 1.5 GWH and present order book of ? 600-700 crore as of FY23 end thereby surpassing the initial gestation period of testing, validation and at the same time building important relationships with EV-OEM’s. With assembly operations in place and awareness of cell being core i.e., ~70% of battery costs, EIL has ventured into quite essential manufacturing of Li-On cells in technical collaboration with SVOLT with total capex outlay of ~?6,000 crore for a 12 GWH capacity with 1st phase of 6 GWH slated to be operational in CY25E at a capex outlay of ~?4,000 crore (~?715 crore incurred till FY23). With margins in cell manufacturing to be at par with base business and capital efficiency to the core we believe it to be structurally positive for the company ushering a new stream of profitable growth with longevity. It will also help EIL maintain its industry leadership in the automotive battery space.

• Steady state Lead Acid battery base business to prevail: EIL is the industry leader in the Lead Acid battery space which finds application in both automotive as well as industrial space (including sunrise sectors like renewables, data centre, etc.). With healthy OEM sales in FY22-24E, steady rise in EV penetration and export opportunity (China+1 trend), we expect this base business to grow at steady state in near to medium term. EIL continues to be capital efficient in this domain with RoIC’s>20%. Going forward, we have built 9.7% sales CAGR over FY23-25E. With stable raw material prices, we expect margins to stabilize ~11-12% mark over FY23-25E.

Rating and Target Price

• We assign BUY rating to Exide Industries amidst its firm commitment to new age LiOn battery space (cell manufacturing plant + battery assembly operations); steady state lead acid battery business & healthy B/S to fund upcoming capex requirements (cushioned through stake in HDFC Life worth ~? 5,750 crore)

• We value EIL at SOTP-based target price of ? 335 (?214 for base business at 17x FY25E EPS, ?121 for investments, stake in subsidiary and CWIP of Li-On Cell plant).

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