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Exide’s Q2 results were healthy, with a beat on margin (up by 115bps QoQ to 11.8% vs Emkay: 11%) and PAT, driven by cost efforts. Continued recovery in core lead acid replacement demand, along with sustained cost management actions, would help drive ~8%/~15% EPS CAGR over FY23-26E (our forward estimates are unchanged). However, uncertainty around the lithium-ion space in terms of adoption rates (e.g., stagnating E-2W penetration levels) and competitive intensity (with large OEMs looking to in-source cells) continues. This, coupled with heavy capex requirements (Rs45bn for Exide’s phase-1 lithium plant, apart from the regular Rs5bn/year for the lead acid business vs the Rs10-12bn annual FCF from the core business), compel us to retain HOLD, with revised TP of Rs260/sh (13x FY26E PER, rolled over; previous TP: Rs230).

Exide Industries: Financial Snapshot (Standalone)

Gross-margin expansion drives operational beat

Revenue grew 10.4% YoY to Rs41.07bn (volume-led). EBITDA grew 17% YoY to Rs4.8bn and EBITDA margin expanded by 67bps YoY/115bps QoQ to 11.8% (Emkay est: 11.0%); this was on the back of gross-margin expansion of ~280bps QoQ. Margin rose YoY, despite lead prices being up 4% due to cost optimization efforts. Overall, adjusted PAT grew 16.6% YoY to Rs2.87bn (~7% above estimate). Exide invested Rs2.75bn in Exide Energy Solutions (EESL; manufacturing of Li-ion cells, modules and packs); total investment in EESL stands at Rs15.3bn, including the Rs4.4bn investment in Oct-23. Company has also taken Board approval to invest another ~Rs11bn in EESL, in one or more tranches in the future, thus taking the total potential equity investment to Rs30bn (approval for investments up to Rs19bn already taken).

Earning calls KTAs

1) OEM demand has picked up, replacement is seeing gradual uptick and will see better momentum going forward; industrial demand is healthy too. 2) Does not foresee decline in the lead acid business due to electrification; for Exide, the overall addressable market is seen growing due to lithium ion. 3) Has started discussions with potential 2W, 4W and telecom customers for lithium ion offtake; expects early-mover advantage to be crucial, as homologation with customers takes ~18months; Exide’s homologation process is under way. 4) Lithium ion cell production to initially commence by the end of next year, followed by a period of stabilization and eventual start of actual commercial scale; in lithium ion, Exide aims to eventually achieve margin levels similar to those of the current business. 5) While some OEM clients (especially 4Ws) may look to set up own battery capacities, Exide is confident that others and 2Ws/customers for stationary applications would look to outsource; Exide has a strong growth headroom (would set up a 12GWh capacity in two phases; overall lithium ion demand seen at ~150GWh). 6) Continues to target 14.5-15% EBITDA margin. 7) Capex for Phase 1 of the lithium-ion plant would be ~Rs45bn; core lead acid business would entail annual capex of ~Rs5bn. 7) Packs and modules’ order book is at ~Rs6-7bn, and growing; would be executed over 8-12 months.

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