Exide Share Price: Earnings to grow by 17%, Sharekhan says mobility driving replacement demand

Exide Share Price: This is a debt-free company and generates strong cash flows of around Rs 400 cr per year. Sharekhan expects Exide Industries' earnings to grow by 17% in FY2022E and 11.3% in FY2023E, driven by 11.7% CAGR (FY2021-23) in revenue and 40 bps expansion in EBITDA margin.

Interactions with battery dealers reveal strong recovery in two-wheelers replacement demand, while four-wheelers replacement demand and industrial demand are catching up strongly. Dealers are facing supply issues for two-wheeler batteries in particular due to sudden rise in demand. We are of view that higher than-expected demand from OEMs and shortage of certain imported components has led to supply issues. Sharekhan sees strong recovery in automotive battery demand at OEM, as well as replacement. Higher mobility on the road has increased battery demand in replacement markets. Further, Sharekhan expects Exide Industries to benefit from rising replacement demand and strong recovery in OEM sales. Overall improving replacement to OEM mix will drive revenue and margin improvements for the company.

Exide is the largest battery manufacturer in the lead acid battery markets, commanding market share close to 55% in the organised market. Having a strong brand equity and extensive distribution network, we expect Exide to grow strongly in the battery industry. Exide is working on several cost-control measures to improve profitability, such as increasing backward integration, diversifying supplier base, enhancing automation, increasing share of renewable power, and enhancing digital initiatives. Exide is also upgrading technology and working on import substitution of raw materials to enable cost reduction.

Exide is witnessing recovery in automotive and industrial demand. The outlook remains positive with strong recovery expected from FY2022, driven by normalisation of economic activities. Operating profit margin (OPM) would expand because of operating leverage and cost-control measures. Sharekhan have retained our earnings estimates, however, we have increased target P/Core earnings multiple, given improved business outlook. Sharekhan have valued Exide battery (core) business by assigning P/Core earnings multiple of 17.7x on FY2023E, a 10% discount to its 10-year P/Core EPS multiples, and insurance business at 1x its embedded value to arrive at the price target of Rs. 229. The stock is attractively valued at P/Core EPS multiple of 14.5x and EV/EBITDA multiple of 8.8x its FY2023 estimates. We retain our Buy rating on the stock with an upward revised PT of Rs. 229.

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Key Risks:

A strong second wave of COVID-19 can lead to a slowdown in mobility, affecting demand and the company’s earnings. Moreover, pricing pressures from automotive OEM customers can impact profitability.