Q4FY23 Review: Exide Industries: Challenges for volume growth and margins

9 May 2023 , 10:43 AM

Exide’s Q4 Ebitda missed our estimate by 17% due to weaker than-expected revenue and margins. Meanwhile, rise in price of lead is hurting margins. Analysts of IIFL Capital Services cut their FY24/FY25 EPS estimates by about 10%. They downgrade the stock from ADD to REDUCE with a TP of Rs182. Concerns around impact of electrification and terminal value of lead acid battery business are valid long-term concerns. In the near-term, core earnings growth may be lacklustre, further denting attractiveness of the sector. Large investments in building Li-ion capacity, and uncertainty on scale-up and profitability (revenue likely in FY26) may keep investors on the side-lines.

Q4 Ebitda 17% below estimate: 

Q4 revenue grew 4% YoY, but came in 5% below our estimate. Gross margin (GM) contracted 250bps QoQ to 29.8% due to uptick in lead price (up 10% QoQ in Q3FY23; a quarter-lag impact). Ebitda margin dropped 140bps QoQ to 10.4%. It missed our estimate by 160bps (GM-led). Absolute Ebitda missed estimate by 17% while PAT missed by 19%.

FY24 revenue growth to be subdued by low first-time replacement demand: 

Analysts of IIFL Capital Services expect Exide’s revenue growth to fall from 20% Cagr over FY21-23 to mid-single-digit in FY24. The sharp fall in vehicle retails in FY21 is likely to hurt first-time replacement demand for batteries in FY24. Batteries typically have a well-defined 3yr replacement cycle. A fall in first-time replacement volumes will drag down overall replacement growth. They also expect Exide’s Auto OE segment to see sharp deceleration, in line with their expectation for auto industry volume growth.

Investment in Li-ion batteries to weigh on cash flows/earnings:

Exide is setting up a green-field plant to manufacture Li-ion batteries (incl. cells). Phase-1 would involve a capex of Rs40bn and would become operational in late-FY25. This project has a long gestation period (two years to commissioning). Even after the plant is commissioned, there would be uncertainty on cash flows given lack of clarity on pace of EV adoption and low visibility on margins.