Limited Q2 comeback sets tone for fully-charged ride

Powered by the 3R Research Philosophy Automobiles Sharekhan code: EXIDEIND Result Update Update Stock

3R MATRIX + = - Summary

Right Sector (RS) ü Š Exide Industries (Exide) Q2 results were broadly in line with estimates Š Demand is improving with topline recovering strongly to 6% growth in Q2 Right Quality (RQ) ü compared to 44% drop in Q1. We expect double digit growth in FY22 driven by normalisation of economic activities. Right Valuation (RV) ü Š Cost control and technological upgradation measures to result in margin improvement. + Positive = Neutral - Negative Š P/E of ~12x FY23 core earnings is lower than long term historical average of 16-17x. We recommend Buy with PT of Rs 192.

Reco/View Change The Q2FY21 results of Exide were broadly in line with estimates. Revenue recovered strongly to 6% y-o-y growth (compared to 44% y-o-y drop in Q1FY21). Reco: Buy  A strong pick up in replacement demand and UPS (uninterrupted power supply) batteries on the back of Government unlock measures and pick up in business CMP: Rs. 162 activities led to a recovery in demand. Exide stated the OEM demand (both automotive and industrial) also witnessed apickup in the latter part of Q2 led Price Target: Rs. 192  by increased preference for personal transportation and improving economic activities. We expect double-digit growth in FY22 driven by normalisation á Upgrade  Maintain â Downgrade of economic activities. With Exide undertaking cost control initiatives such as increased backward integration, enhanced automation, increasing share Company details of renewable energy for power and higher digitisation initiatives we expect margins to improve. Exide is the market leader in theduopoly led acid battery Market cap: Rs. 13,796 cr market with market share of 55% having strong brand image. Exide has strong balance sheet (zero debt) and has healthy return ratios of 14-16%. 52-week high/low: Rs. 208/122 Key positives NSE volume: 26.5 lakh Š The topline growth for Exide at 6% y-o-y in Q2FY21 was marginally better (No of shares) than our estimates. Strong recovery in replacement and UPS batteries led to a better than expected topline. BSE code: 500086 Š Exide stated that OEM both industrial and automotive saw a recovery towards NSE code: EXIDEIND the latter part of the quarter.

Free float: Key negatives 45.9 cr (No of shares) Š During Q2FY21, Exide stated that operations at some plants were intermittently disrupted due to COVID-19 which impacted the supplies Our Call Shareholding (%) Reasonable valuations; recommend Buy with TP of Rs 192: Q2 results were Promoters 46.0 broadly in-line with expectations. Exide is witnessing recovery in the demand driven by pick-up in economic growth and unlock measures. Margins are expected FII 9.4 to improve driven by cost control initiatives and technological upgradation measures. We have broadly retained our earnings estimates for both FY21 and DII 31.3 FY22. We have also introduced FY23 earnings estimates in this note. At CMP, stock is trading at ~12x FY23 core earnings as compared to its long-term historical Others 13.3 average of 16-17x. We recommend Buy rating on the stock with TP of Rs 192. Key Risks Price chart Prolonged COVID-19 infection in can dampen economic sentiments. Also, 250 increase pricing pressures can impact the margins and financial performance

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190 Valuation Rs cr 160 Particulars FY19 FY20 FY21E FY22E FY23E 130

100 Revenues 10588.3 9856.7 9524.4 10796.8 11880.4 20 19 20 20 - - - - OPM (%) 13.3 13.8 13.7 14.0 14.1 Jul Nov Nov Mar Net Profit 735.8 847.2 705.3 825.5 919.1 EPS 8.7 10.0 8.3 9.7 10.8 Price performance Core P/E (x) 14.8 13.2 15.9 13.6 12.2 Core P/BV (x) 3.5 3.0 2.6 2.3 2.1 (%) 1m 3m 6m 12m EV/EBIDTA (x) 9.5 10.0 9.8 8.3 7.2 Absolute 0.8 -0.3 9.5 -14.9 Core ROE (%) 15.9 17.2 13.0 13.8 13.9 Relative to -5.8 -13.0 -27.6 -22.1 Core ROCE (%) 18.8 16.8 14.0 15.0 15.3 Sensex Source: Company; Sharekhan estimates Sharekhan Research, Bloomberg Note: We now convert Exide Industries into a stock update; It was earlier a ‘Viewpoint’ under our coverage

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Results Broadly in line with estimates: Exide Industries reported broadly in line performance for Q2FY21. The topline grew 6% y-o-y to Rs 2,753 crores(marginally better than our expectations of 3% y-o-y growth). The company stated that automotive replacement and UPS battery sales improved during the quarter. Exide also witnessed positive traction in OEM business (both automotive and industrial) towards the latter part of Q2FY21. Company stated that operations at some plants were intermittently disrupted due to COVID-19 which impacted the supplies. Exide maintained operating margins at 14.2% (in line with our estimates) driven by benefits of operating leverage.Gross profit margins dropped 120 bps y-o-y to 35%. EBIDTA at Rs 392 crores grew 7% y-o-y (slightly better than our estimates of Rs 382 cr).Tax/PBT in Q2FY21 stood at 25% as compared to 15.6% in Q2FY20.Adjusted Net Profit declined 4% y-o-y to Rs 229cr which is marginally ahead of our estimates of Rs 219 cr. Demand recovering strongly; expect double-digit growth FY22: Exide is witnessing improvement in the demand. From a dropof 44% y-o-y in the topline drop in Q1FY21, Exide reported a 6% y-o-y growth in Q2FY21. The company witnessed healthy growth in the automotive replacement and UPS (uninterrupted power supply) in Q2FY21 driven by the opening up economy under its unlock measures and a pickup in business activities. Also, OEM demand (both automotive and industrial) witnessed recovery in the latter part of Q2 driven by increased preference for personal transportation and improving economic activities respectively. We expect double-digit growth in revenues in FY22 driven by normalisation of economic activities. Margins to improve on cost control measures, technological upgradation: Exide is working on several cost control measures to improve profitability. It is looking at increasing backward integration and diversifying supplier base to control raw material costs. On the operational front it is enhancing automation in the plants, increasing share of renewable power, and enhancing digital initiatives to control the costs. Exide is also upgrading technology and working on import substitution of raw materials to enable reduction in costs and improvement in profitability.

Results Rs cr Particulars Q2FY21 Q2FY20 YoY (%) Q1FY21 QoQ (%) Revenues 2,753.4 2,610.9 5.5 1,547.6 77.9 EBIDTA 392.0 367.2 6.8 148.5 164.1 EBIDTA Margins (%) 14.2 14.1 10 bps 9.6 460 bps Other income 14.8 5.6 166.1 7.0 109.8 Depreciation 95.3 89.8 6.1 91.4 4.3 PBT 305.2 281.2 8.5 62.7 386.5 Tax 76.4 43.9 74.1 18.8 306.8 Adjusted PAT 228.8 237.3 (3.6) 44.0 420.5 Reported PAT 228.8 237.3 (3.6) 44.0 420.5 EPS 2.7 2.8 (3.6) 0.5 420.5 Source: Company; Sharekhan Research

SOTP table Particulars Value per share Comments Core business 162 15x FY23 earnings Exide Life Insurance 30 Embedded value Overall 192 Source: Company; Sharekhan Research

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Outlook and Valuation n Sector view - Organised Lead acid battery industry to maintain healthy growth driven by steady replacement demand and gains from unorganised players: Organised lead acid battery is a healthy growth industry with long term CAGR of 10-12%. It is a steady growth industry driven by continuous replacement demand (both auto and industrial) and is less cyclical compared to the automotive industry. Further, the organised players would continue to gain share from unorganised segment driven by increased GST compliance. Also, stricter implementation of environmental norms regarding scrapping of batteries would lead to continued gains for organised players. n Company outlook - Market leader in duopolistic lead acid battery market with strong brand image Exide Industries is the market leader in the duopolistic lead acid battery market commanding a market share of about 55%. The company manufactures a wide range of batteries under the brand “Exide”, “SF Sonic”, Dynex and CEIL in the automotive segment 3AH to 200 AH (four wheelers, two wheelers, commercial vehicles and gensets and home inverter systems) and industrial segment ranging from 7AH to 3,200 AH (power, solar, railways, telecom UPS and traction batteries). Exide is the preferred OEM supplier having established its brand driven by robust product quality and supply chain management. With strong OEM presence and robust distribution network (has 150+ warehouses and 48,000 direct and indirect dealers), Exide is the market leader in the automotive replacement segment as well. n Valuation - Reasonable valuations; recommend Buy with TP of Rs 192 Q2 results were broadly in-line with expectations. Exide is witnessing recovery in the demand driven by a pickup in economic growth and unlock measures. Margins are expected to improve driven by cost control initiatives and technological upgradation measures. We have broadly retained our earnings estimates for both FY21 and FY22. We have also introduced FY23 earnings estimates in this note. At CMP, the stock is trading at ~12x FY23 core earnings as compared to its long-term historical average of 16-17x. We recommend a Buy rating on the stock with TP of Rs 192.

One-year forward P/E (x) band

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Source: Sharekhan Research

Peer Comparison P/E (x) EV/EBITDA P/BV (x) RoE (%) Particulars FY21E FY22E FY21E FY22E FY21E FY22E FY21E FY22E Exide Industries 15.9 13.6 9.8 8.3 2.6 2.3 13.0 13.8 Amara Raja Batteries 22.9 19.1 12.0 9.7 3.4 3.0 14.6 15.7 Source: Sharekhan Research

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About company Exide is one of the leading battery manufacturers in India catering to automobiles and industrial segments. The company is present in the OEM as well as replacement and export segments. Exide designs, manufactures, markets and sells the widest range of lead acid storage batteries in the world from 2.5Ah to 20,600Ah capacity to cover the broadest spectrum of applications. Exide has nine factories strategically located all over India, out of which seven factories are dedicated to batteries and the other two factories manufacture home UPS systems. Exide derives around 94% of its revenue from domestic markets, while the balance 6% comes from exports markets. The automotive segment constitutes ~65% of its revenue, while the industrial segment constitutes ~33% of sales. The balance 2% comes from other segments.

Investment theme Exide revenues recovered strongly to record a growth of 6% y-o-y in Q2FY21 (compared to 44% y-o-y drop in Q1FY21). A strong pick up in replacement demand and UPS (uninterrupted power supply) batteries on back of Government unlock measures and pick up in business activities led to recovery in demand. Exide stated the OEM demand (both automotive and industrial) also witnessed pick up in the latter part of Q2 led by increased preference for personal transportation and improving economic activities. We expect double-digit growth in FY22 driven by normalisation of economic activities. With Exide undertaking cost control initiatives such as increased backward integration, enhanced automation, increasing share of renewable energy for power and higher digitisation initiatives we expect margins to improve. Exide is the market leader in duopoly led acid battery market with market share of 55% having strong brand image. Exide has strong balance sheet (zero debt) and has healthy return ratios of 14-16%.

Key Risks A Prolonged slowdown in automotive volumes on account of COVID-19. Also, increase pricing pressures can impact the margins and financial performance.

Additional Data Key management personnel Mr Bharat D Shah Chairman & Independent Director Mr R B Raheja Vice Chairman & Non-Executive Director Mr G Chaterjee MD & CEO Mr A K Mukherjee Director Finance & CFO Source: Company

Top 10 shareholders Sr. No. Holder Name Holding (%) 1 Chloride Eastern Ltd 45.99 2 ICICI Prudential Asset Management 4.63 3 Hathway Investments Pvt Ltd 4.32 4 Life Insurance Corp of India 3.09 5 HDFC Asset Management Co Ltd 2.54 6 Aditya Birla Sun Life Asset Manage 1.95 7 Co Ltd/The 1.93 8 HDFC Life Insurance Co Ltd 1.76 9 GOVERNMENT PENSION FUND - GLOBAL 1.47 10 DSP Investment Managers Pvt Ltd 1.44 Source: Bloomberg

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

November 10, 2020 4 Understanding the Sharekhan 3R Matrix Right Sector Positive Strong industry fundamentals (favorable demand-supply scenario, consistent industry growth), increasing investments, higher entry barrier, and favorable government policies Neutral Stagnancy in the industry growth due to macro factors and lower incremental investments by Government/private companies Negative Unable to recover from low in the stable economic environment, adverse government policies affecting the business fundamentals and global challenges (currency headwinds and unfavorable policies implemented by global industrial institutions) and any significant increase in commodity prices affecting profitability. Right Quality Positive Sector leader, Strong management bandwidth, Strong financial track-record, Healthy Balance sheet/cash flows, differentiated product/service portfolio and Good corporate governance. Neutral Macro slowdown affecting near term growth profile, Untoward events such as natural calamities resulting in near term uncertainty, Company specific events such as factory shutdown, lack of positive triggers/events in near term, raw material price movement turning unfavourable Negative Weakening growth trend led by led by external/internal factors, reshuffling of key management personal, questionable corporate governance, high commodity prices/weak realisation environment resulting in margin pressure and detoriating balance sheet Right Valuation Positive Strong earnings growth expectation and improving return ratios but valuations are trading at discount to industry leaders/historical average multiples, Expansion in valuation multiple due to expected outperformance amongst its peers and Industry up-cycle with conducive business environment. Neutral Trading at par to historical valuations and having limited scope of expansion in valuation multiples. Negative Trading at premium valuations but earnings outlook are weak; Emergence of roadblocks such as corporate governance issue, adverse government policies and bleak global macro environment etc warranting for lower than historical valuation multiple. Source: Sharekhan Research Know more about our products and services

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