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Current valuations factor in the anticipated demand recovery and development in li-ion business

-      Exide (EXID)’s 3QFY24 result was weak due to lower-than-expected revenue growth. Moreover, higher lead prices and lower volumes led to an EBITDA margin decline of 30bp YoY/ QoQ each. We expect the EBITDA margin to improve sequentially in 4QFY24 led by sequentially lower RM prices and better product mix.

-      We tweak our FY24E EPS by ~4% to factor in the weak operating performance, while we maintain our FY25E EPS. The current valuations of ~25x/20x FY24/25E EPS largely reflect the anticipated recoveries in both replacement and industrials demand, and development in its li-ion business. We, hence, downgrade the stock to Neutral with a TP of INR340 (based on 16x FY26E EPS + INR48/share for HDFC Life stake).

Higher RM prices lead to a 30bp YoY decline in EBITDA margin

-      EXID’s 3QFY24 revenue/EBITDA/Adj. PAT grew 13%/10%/8% YoY to INR38.4b/INR4.4b/INR2.4b (vs. est. INR40.9b/INR4.7b/INR2.7b). Its 9MFY24 revenue/EBITDA/Adj. PAT grew 9%/13%/11% YoY.

-      Revenue growth during the quarter was entirely driven by volume growth, while realizations remained the same. 3Q is a seasonally weak quarter as the UPS contribution (part of the industrial division) declines during the quarter. Gross margin contracted 80bp YoY to 31.5% (vs. est.30.6%) as lead prices grew 2% YoY.

-      This was partially offset by lower other expenses that resulted in a 30bp YoY decline in EBITDA margin to 11.5% (in line). EBITDA improved 10% YoY to INR4.4b (vs. est. INR4.7b).

-      Further, adj PAT grew 8% YoY to ~INR2.4b (vs. est. INR2.7b; similar to the BBG estimates).

Highlights from the press release

-      In the Automotive division, the past few months have seen an uptrend in demand in both OEM and Replacement markets. The uptick has been broad-based, with most of the end-user markets showing signs of demand recovery. In terms of end markets, the replacement demand is picking up on a low base of CY23. PVs look better placed while 2Ws would see a catch-up.

-      The Industrial division is benefiting from the large investments, which are driving the sectors such as BFSI, Renewables, Telecom, Infrastructure (Power, Railways, etc.) et al. This segment has been growing faster than the automotive division.

-      Exports growth has been decent in 3QFY24 over the last year’s low base.

-      The company is optimistic about margin improvement as the lead prices remain stable and operational efficiencies play out.

-      During the current quarter, EXID invested INR7.3b as equity in the wholly owned subsidiary, Exide Energy Solutions Limited (EESL). EXID's investment in EESL through the equity route stood at INR18.2b.

Valuation and view

-      Considering its market leadership, technological alliances, backward integration, favorable product mix, and strong balance sheet following the sale of the Insurance business, we find EXID to be a preferable choice due to its superior risk-reward potential. However, lithium chemistry poses a risk to the 2W/3W segments (~15% of revenue) and the Industrial segment (~26% of revenue).

-      The current valuations of ~25x/20x FY24/25E EPS largely reflect the anticipated recoveries in both replacement and industrials demand, and development in its li-ion business. We, hence, downgrade the stock to Neutral with a TP of INR340 (based on 16x FY26E EPS + INR48/share for HDFC Life stake).

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