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

About Exide Industries

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

What are the underlying business or industry changes driving this perspective?

• 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

How have these above catalysts been quantified?

• Analysts are assuming Exide Industries's revenue will grow by 6.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.7% today to 7.7% in 3 years time.
• Analysts expect earnings to reach ₹16.6 billion (and earnings per share of ₹19.57) by about July 2029, up from ₹8.5 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as ₹18.5 billion.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 29.3x on those 2029 earnings, down from 45.0x today. This future PE is greater than the current PE for the IN Auto Components industry at 27.7x.
• Analysts expect the number of shares outstanding to decline by 0.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.39%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• 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

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of ₹384.0 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 ₹485.0, and the most bearish reporting a price target of just ₹300.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be ₹216.6 billion, earnings will come to ₹16.6 billion, and it would be trading on a PE ratio of 29.3x, assuming you use a discount rate of 14.4%.
• Given the current share price of ₹452.25, the analyst price target of ₹384.0 is 17.8% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
• 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.