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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.

* Amid challenging business environment, Exide posted a revenue growth of 16%YoY led by pend up demand from the Auto manufactures & strong aftermarket sales

* EBITDA was above estimates, at Rs.403cr (23% YoY) with margin of 14.4% (+90bps YoY) led by cost optimisation.

* While the economy is opening up, newer cost-effective brands of EIL at competitive price is continue to drive growth in the replacement market.

* EILs, cost control initiatives and technological up-gradation has paid for strong bottom line growth. Revival in the auto sales numbers will continue to benefit, due to its market leadership.

* We expect most of the negatives have been factored in the price and expect a revival by H2FY21. On a SOTP basis, we value EIL at 18x on FY23EPS and Insurance business at 1xEV (Embedded value) and upgrade our rating to Buy from Accumulate.

Aftermarket sales supported margin.

During Q3FY21, EIL posted a revenue growth of 16%YoY led by strong festive demand in the OEM space and robust aftermarket sales, both in the auto and home UPS. EBITDA Margin came at 14.4% (+90bps), above expectation largely due to product mix and cost control measures. While the overall demand scenario is showing sign of pick up due to reopening of the economy. The 4W replacement market is still not reached to the pre-covid level due to slow down in the ola/uber and tour & travel business. We expect the margin to show some resilience going forward due to fair raw material price at current level and cost optimization. While considering the full potential to reach by FY22 we expect the revenue to grow by 24%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 Q3 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 as unorganized players have been forced to shut shop due to pandemic. 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 lower base and easy finance availability.

Newer strategies to expand margin..

We expect margins to show some resilience at 14%-15% over FY21-23E. Expansion is justifiable once 1) a 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) and 5) fair lead price & costsaving 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.

Valuations

We remain positive on the 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 at 18x FY23EPS for Rs.234 and Insurance business at 1x FY20 EV (Embedded value) Rs30/share and upgrade our rating Buy with a target price of Rs264.

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