Sharekhan has reiterated its Buy rating on Exide Industries Ltd. with an upgraded target price of Rs 534. Despite a muted Q2 FY25 due to lower original equipment manufacturer (OEM) demand, Exide demonstrated strength in the replacement battery market and international segments. Strategic growth initiatives include the ongoing lithium-ion (Li-ion) cell project, which is on track for 2025 commissioning. Additionally, Exide’s robust cost-control measures and favorable product mix position it well for sustainable growth. Investors are encouraged to note the company’s strong financial projections, buoyed by market-leading positioning in the automotive and industrial battery sectors.

Q2 FY25 Earnings: Mixed Performance Amid Market Challenges

Resilient Revenue Growth
In Q2 FY25, Exide reported Rs 4,267 crore in revenue, marking a 3.9% year-over-year increase. The replacement market performed robustly, particularly for two-wheeler and four-wheeler segments, offsetting weaker OEM demand. Exide’s gross margins improved by 40 basis points due to favorable pricing and cost efficiencies.

EBITDA Margins Affected by Fixed Costs
Despite revenue growth, EBITDA rose by only 0.1% year-over-year to Rs 484 crore. This modest increase resulted from lower absorption of fixed costs in underperforming segments and inflationary pressures on operational expenses, leading to an EBITDA margin contraction to 11.3%.

Strategic Expansion in Replacement and Export Markets

Growth in High-Margin Replacement Market
Exide’s dominance in the automotive aftermarket sector, especially in two-wheeler and four-wheeler battery sales, saw double-digit growth. Rising rural demand and a shift toward organized brands boosted replacement demand, strengthening Exide’s market position.

International Expansion and Product Mix Optimization
Exide’s export growth is bolstered by the development of premium products for emerging markets. Despite economic headwinds in Europe, the company expects recovery driven by ongoing trials and homologation processes.

Lithium-Ion Cell Project: Progress on Schedule

Li-ion Plant Commissioning in 2025
The construction of Exide’s Li-ion cell plant is proceeding as planned, with commercial production expected to begin by mid-2025. The plant, which represents a Rs 5,000 crore investment for Phase I, will focus on LFP and NMC cell chemistries, catering to the increasing demand for electric and hybrid vehicles in India.

Strategic Partnerships to Strengthen Market Entry
Exide’s collaboration with a global technology partner on the Li-ion project is expected to facilitate market entry and support capacity utilization. The plant’s output could serve both automotive and industrial segments, positioning Exide as a key player in India’s emerging EV battery market.

Cost Optimization Initiatives for Profit Margin Enhancement

Ongoing Cost-Excellence Project
Exide has implemented a cost-excellence strategy over the past two years, resulting in savings from improved back-end efficiencies. This includes automation, import substitution for raw materials, and increased renewable energy use to streamline operational costs.

Price Increases in Aftermarket Products
Exide introduced a 1.5% price increase on aftermarket products in Q2 FY25, helping to offset inflationary pressures and support margin stability.

Financial Projections and Target Valuation

Projected Revenue and Earnings Growth
Sharekhan projects a 24% revenue CAGR over FY21-24, with continued growth momentum in FY25. Exide’s EBITDA and profit after tax (PAT) CAGRs are estimated at 21% and 19%, respectively, through FY27, supported by expansion in both core and new energy segments.

Valuation Metrics and Target Price
With a price target of Rs 534, Sharekhan values Exide at a P/E multiple of 25.7x for FY26 and an EV/EBITDA multiple of 10.2x for FY27. This valuation reflects Exide’s strategic positioning, cost advantages, and growth prospects in both traditional lead-acid and Li-ion battery segments.

Investment Risks and Considerations

Potential Impact of Pricing Pressures
Exide’s profitability could be impacted by pricing pressures from OEM clients, especially if lead prices remain volatile. The company’s ability to pass on cost increases will be crucial in sustaining margins.

Geopolitical and Economic Risks
Exide’s international growth could be affected by geopolitical instability and economic downturns, particularly in key export markets. The company’s ability to navigate these challenges will be essential for maintaining export momentum.

Conclusion and Investor Recommendation
With a Buy rating and a target price of Rs 534, Sharekhan underscores Exide’s robust market positioning and growth potential. The ongoing Li-ion project, alongside strong replacement demand and cost-efficiency efforts, positions Exide favorably in the battery industry. Investors should consider Exide’s leadership in the automotive sector and potential in the EV battery space as compelling factors for long-term value.