Lithium-Ion Expansion And Global Demand Poised To Boost Earnings And Profitability

Key Takeaways

• Organizational realignment and leadership changes aim to enhance market strategy and drive revenue growth in B2C and B2B markets.
  
• New international product launches and lithium-ion cell facility development are expected to significantly boost profitability and future earnings.
  
• Completion of 5G rollout and shift to lithium-ion batteries risks earnings, while capital investment and market volatility may impact Exide Industries' lead acid business margins.

Catalysts

Designs, manufactures, markets, and sells lead acid storage batteries in India and internationally.

• The recent organizational realignment at Exide Industries, including top leadership hiring, aims to strengthen and consolidate their go-to-market strategy in both B2C and B2B markets. This could enhance operational efficiency and drive revenue growth.
  
• Exide is capitalizing on strong international demand with plans to introduce new products for new markets. This focus on exports, particularly with high-margin products, is likely to boost revenue and profitability.
  
• The construction of Exide's lithium-ion cell manufacturing plant is progressing, with production expected to begin in FY '25. Successful commercialization and utilization of this facility could significantly impact future earnings.
  
• Despite recent downturns in some segments, Exide expects a rebound in automotive OEM, telecom, and inverter battery markets, potentially driving stronger revenue growth in upcoming quarters.
  
• The focus on increasing efficiency and a favorable product mix in the lead acid business, alongside planned cost excellence initiatives, are expected to improve net margins, aiming for a mid-teens percentage.

Exide Industries Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Exide Industries's revenue will grow by 7.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.9% today to 8.3% in 3 years time.
• Analysts expect earnings to reach ₹17.4 billion (and earnings per share of ₹20.42) by about December 2027, up from ₹8.4 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 33.3x on those 2027 earnings, down from 46.3x today. This future PE is greater than the current PE for the IN Auto Components industry at 19.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.76%, as per the Simply Wall St company report.

Exide Industries Future Earnings Per Share Growth

Risks

• The lead acid battery business faced modest overall sales growth of 4% in Q2 FY '25 and 5% in H1 due to declines in specific segments like home UPS, automotive OEMs, and telecom, impacting revenue and net margins.
  
• Telecom sector experienced tepid demand due to completion of 5G rollout and shift from lead acid to lithium-ion batteries, potentially reducing earnings in this segment.
  
• Automotive OEM demand suffered from increased channel inventories, causing a production cut, which could impede revenue growth in the near term.
  
• The transition to lithium-ion technology is not without risk, as market volatility, such as fluctuating lithium prices or delayed stabilization, could impact earnings projections for new projects.
  
• The large capital investment in lithium-ion facilities, amounting to ₹5,000 crores for Phase 1, and the volatile pricing environment may present financial risks that could affect net margins until the project stabilizes and scales up.

Valuation

• The analysts have a consensus price target of ₹463.0 for Exide Industries based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹570.0, and the most bearish reporting a price target of just ₹275.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹209.7 billion, earnings will come to ₹17.4 billion, and it would be trading on a PE ratio of 33.3x, assuming you use a discount rate of 13.8%.
  
• Given the current share price of ₹455.35, the analyst's price target of ₹463.0 is 1.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.