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Demand weakness hurts margins

OE and telecom demand remain weak, other segments grow

* Exide (EXID)’s 2QFY25 result was disappointing, as EBITDA margin stood at 11.3% (-50bp YoY; est. 11.8%) due to lower absorption of fixed overheads. While demand is likely to remain steady in the LAB segment, we expect margins to stabilize at current levels in H2.

* We cut our FY26E EPS by ~4.5% to factor in lower margins while broadly retaining our FY25E EPS. While the market appears to be upbeat on EXID’s lithium ion foray, we remain cautious of the returns from the same in the long run. Besides, the stock at ~32x/27x FY25/26E EPS appears fairly valued. Reiterate Neutral with a TP of INR435 (based on 22x Sep’26E EPS).

Margin remains under pressure

* EXID’s 2QFY25 revenue grew 4% YoY to INR42.7b (est. INR44.4b); EBITDA was flat YoY at INR4.8b (est. INR5.2b), while Adj. PAT grew ~4% YoY at INR2.97b (est. INR3b). 1HFY25 revenue/EBITDA/PAT grew ~5%/7%/9% YoY. We expect the same for 2HFY25 to grow ~12%/6%/9% YoY.

* The replacement market witnessed double-digit revenue growth. However, auto OEM demand remained muted due to excess channel inventory. Industrial UPS and Solar enjoyed strong demand momentum; however, the Home UPS segment remained soft.

* Gross margin expanded 40bp YoY (+80bp QoQ) to 31.5% (est. 30.3%), due to improved mix.

* However, higher other expenses hurt EBITDA margin, which stood at 11.3% (-50bp YoY vs. est. of 11.8%). It was affected mainly by lower absorption of fixed overheads.

* Higher other income led to an adj. PAT growth of 4% YoY. ? FCFF/CFO declined 62%/51% YoY.

* During the quarter, EXID invested INR2.5b in EESL-Li-ion, its cell manufacturing subsidiary (further INR1b invested in Oct’24), bringing the total investment to INR28.5b until now.

Highlights from the management interaction

* Outlook: 1) the 4W OEM production was weak in 1HFY25; however, it saw one of the best festival retails, leading to a reduction in inventory to 30 days. Management expects 4W demand to revive in 2HFY25; 2) the Telecom segment declined on a high base, but the base is likely to normalize in 4Q; and 3) management expects the Invertor segment’s demand to pick up from 4Q after a seasonally weak 3QFY25. Further, all the other segments that grew (auto replacement, solar segment, industrial UPS, and infra segment) in 2Q are likely to sustain their momentum in 2HFY25.

* Despite weak 2Q margins, management reiterated its EBITDA margin guidance of 13% for the near term and 14% over the medium term. This would be possible on the back of cost optimization efforts, exports, and improvement in capacity utilization.

* It has committed INR50b investment for phase 1 (6GWh-3GWh each for NMC and LFP), of which it has invested INR28.5b (INR5.5b invested in FY25YTD) in terms of equity so far. Bulk of the balance investments would happen in 2H, with some spillover possible for FY26E. EXID may need to take some bridge loans to fund part of this balance investment. Commercialization of its phase 1 capacity is likely in the middle of next year.

Valuation and view

* The lead acid battery business is experiencing healthy demand momentum across both auto replacement and industrial segments, and EXID is expected to emerge as the key beneficiary of the same given its market leadership in most segments.

* However, given the significant imminent risk to its core business, Exide has forayed into the manufacturing of lithium ion cells in partnership with S-Volt at a total investment of INR60b in two phases. While the market appears to be upbeat on EXID’s lithium ion foray, we remain cautious of the returns from the same. We, hence, reiterate our Neutral rating on the stock with a revised TP of INR435 (based on 22x Sep-26E EPS)

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