Retain ‘buy’ on Exide Industries with revised TP of Rs 220

We hosted top management of Exide Industries (Exide) for investor meetings. Takeaways, sales growth has picked up across the board from Q3FY21, and Exide has closed gap with competition; it is targeting a 200bps lead over market. While lead prices are headed up in the near term, Exide is targeting 150bps in EBITDA margin expansion to 15% over the next 1.5 years led by cost levers. Presence in lithium ion is fortified with 1.5GWh capacity on stream and an order bagged. In light of Exide’s improving OEM sales, margin focus, progress on lithium-ion JV (investment of INR1.9bn), and no further investments in the insurance arm, we are raising the valuation to 21x and rolling it over to June-22E, yielding revised TP of INR220. Retain ‘BUY’.

Exides’s sales grew slower than competition over the last three quarters owing to late operationalisation of its plants. They will fully recover in H2FY21 led by full operationalisation of all plants and an all-round pickup. Besides, the spate of initiatives such as market mapping, digitalisation, and transformation of the sales structure should, according to management, help it outgrow the market by 200bps.

With its EBITDA margin lagging competition by 300bps, Exide targets to bridge the gap by at least 150bps without compromising capital allocation. A transforming supply chain, power cost reduction through solar, higher automation at factories and warranty management would help Exide improve EBITDA margin to 15%+ in 1.5–2 years, up from 13–14% in the last four years. Capex in FY21 will be merely INR3bn.

With in-built flexibility on all types of lines at its lithium ion plant, the prismatic line has been commissioned and the first bulk order (INR180mn) has been received from an electric 3W OE. The cylindrical line will be ready soon and prototypes for electric 2W have begun. Management expects INR10bn in sales on ramp-up over four years.

The company’s present endeavours are likely to bear fruit over the next two–three years, setting the stage for Exide to outperform market growth. We estimate a revenue CAGR of 11% from FY21–23E. Efforts on margin improvement should result in higher EBITDA margin, thereby leading to cash accretion, with limited spends on capex (FY21 to be INR3bn). Replacement volumes in FY22 are likely to be in line with the peak of FY20, while investments in the Li-ion JV should begin to yield dividends.

All in all, we are raising FY22E EPS by 5% and estimate an EPS CAGR of 12% from FY21–23E. Maintain ‘BUY’ with a revised SoTP-based TP of INR220 (earlier: INR202), valuing the standalone business at 21x Jun 22 EPS (10% discount versus 15% earlier to AMRJ’S target multiple) and the life insurance business at 1x embedded value.