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Superior product mix and cost optimization

Exide Industries Limited (EIL) is a market leader in storage batteries in India, with a 60% market share. Its segment includes automotive & industrial batteries and it controls 86 percent of the 2W market

• Revenue increased by 57% YoY in Q1FY23, primarily to a lower base & strong growth from the Aftermarket, UPS and Solar segments.

• Despite an increase in the lead price for the quarter, stringent cost control measure has resulted the PAT to grew by 81% 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.

• A Rebound in the auto sales numbers due to its cyclical change will benefit the company, owing to its market dominance. • The company’s progress on the lithion ion battery is on track, by setting up a green field project. The 1st phase is expected to commence production by 2HFY25.

• We expect that the margin to improve hereon as the commodity price are easing (-4% QoQ) and demand in the core business remain strong. We rollover and value EIL at 15x on FY24E EPS

Superior product mix, offset further decline in margin..

During Q1FY23, EIL posted a revenue growth of 57% YoY, primarily driven by strong growth from the Aftermarket, UPS and Solar segment. It also delivered impressive growth in the OEM and Industrial segment. Despite 6% increase in the lead price for the quarter stringent cost control measure, has led the PAT to grew by 185% 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 and easing commodity price. However, we factor 310bps lower margin in FY23, from our early estimate due to 36% increase in the lead price during the (FY21-22). The lead price has declined by 13 percent from its peak for the first quarter and expected to correct further due to the anticipated slowdown in global growth. W expect the revenue to grow by 28% YoY in FY23 on account of robust sales in OEM and Aftermarket volume.

Revival expected in H2 auto volume numbers.

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 Q1 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 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 festival season, normal monsoon and easing supply concerns..

Green field capex for lithium ion battery cell.

Exide Industries through its subsidiary said its subsidiary Exide Energy “ Solutions Ltd (EESL) has executed a sales agreement in Bengaluru to set up a lithium ion battery cell manufacturing facility. The plant would be used to set up multi-gigawatt Li-ion battery cell manufacturing facility for the new age electric mobility and stationary application business in India. The company reiterated that the first phase of Li-ion cell manufacturing is expected to commence by 2HFY25.

Valuations

Exide has a stronger balance sheet after the divestment of its life insurance business to HDFC Life. The company will be able to maintain its cash position and fund the capex through internal accruals. We remain positive on a medium to long term basis owing to its concentration on the development of EV batteries and respite in the market price. On a 1 yr. fwd basis, EIL is currently trading at 13.5x (25% lower to its 3yr avg.)near to its all time low at 12x. We value EIL’s at 15x (I yr. avg.) FY24E EPS and recommend Buy rating with a target price of Rs.191 per share.

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