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Superior product mix and cost optimization

Exide Industries Limited (EIL) is a leader in storage battery business with a market share of 60% in India. Its segment includes automotive & industrial batteries and holds 86% market share in the 2W space.

* Q4FY21 revenue grew by 43%YoY primarily due to lower base and strong growth from the Aftermarket & UPS segment.

* As a result, EBITDA margin expanded by 90bps. Despite 20% increase in the lead price for the quarter stringent cost control measure led the PAT to grew by 45%YoY.

* While the economy is on the path of gradual recovery, newer costeffective brands of EIL at competitive price is continue to drive growth in the replacement market.

* Robust revival in the auto sales numbers due to cyclical change will continue to benefit the company, owing to its market leadership.

* We expect the ongoing headwinds is only for near term and expect strong growth from Q2 onwards. On a SOTP basis, we value EIL at 16x on FY23EPS and Insurance business at 0.9xEV (Embedded value) and maintain our buy rating at CMP.

Superior product mix and cost optimization

During Q4FY21, EIL posted a revenue growth of 43%YoY primarily driven by strong growth from the Aftermarket & UPS segment. It also delivered impressive growth in the OEM and Industrial segment. As a result, EBITDA margin expanded by 90bps. Despite 20% increase in the lead price for the quarter stringent cost control measure led the PAT to grew by 45%YoY. While the overall demand scenario is showing sign of pick up due to cyclicality in nature.

We expect the margin to show some resilience going forward due to cost optimization. However, we factor 80 bps lower margin from our early estimate due to lower supply of raw material and demand normalization in the After market segment. While considering the full potential to reach by FY22 we expect the revenue to grow by 16%YoY in FY22 on account of robust sales in OEM and Aftermarket volume.

Strong revival expected in auto volume numbers.

We expect the demand scenario for 2Ws is likely to fair well both in the domestic and export market. The segment registered strong double digit growth in Q4 on account of increased rural income due to strong agri. output and new product launches by OEMs. In addition the company is well poised to take advantage of the replacement market from the unorganized sectors.

With batteries being a product that needs to be continuously replaced, Exide is in prime position to drive home its advantage. EIL will be the direct beneficiary from any structural change in the auto demand owing to its leadership position (~60% market share) in the automotive battery and having 86% market share in two -wheelers. We factor positive growth for H2 owing to cyclical change for the industry, normal monsoon and easy finance availability.

Newer strategies to expand margin..

We expect margins to show some resilience at 13%-14% over FY21-23E. Expansion is justifiable on 1) market share gain from unorganised players 2) strong rebound in 2W/PV OEM sales 3) an uptick in the e-rickshaws and solar battery segment 4) strengthening distribution network by introducing subdistributor led model (cluster of small retailers)5) fair lead price & cost-saving initiatives.

EIL’s joint venture (JV ) with Switzerland’s Leclanche to manufacture lithium-ion batteries in Gujarat for electric vehicles is on the commencement stage. Meanwhile company has increased its stake from 80.15% to 82.71% in April 2021 for a total consideration of Rs40cr.

Valuations

We remain positive on the medium & long term outlook of EIL owing to higher acceptance of battery engineering and Exide’s foray into 3W manufacturing. On a SOTP basis,, we value EIL’s standalone business at 16x FY23EPS for Rs.188 and Insurance business at 0.9x FY21 EV (Embedded value) for Rs29/share and maintain our rating as Buy with a target price of Rs217.

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