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Bajaj Electricals Ltd>
  • CMP : 1,060.1 Chg : -0.90 (-0.08%)
  • Target : 1,275.0 (11.84%)
  • Target Period : 12-18 Month

03 Feb 2023

Adverse sales mix hurts profitability of core business

About The Stock

Bajaj Electricals business portfolio spans across consumer products (CP) and EPC (illumination, power transmission and power distribution).

  • CP (appliances, fans, lighting) contributes ~78% to topline. Its premium brands include Morphy Richards and Nirlep. The company has over 2.3 lakh retail touch points across India
  • The company has been reducing exposure to the EPC business with maximum focus on executing high margin business
Q3FY23 Results

Mixed bag performance.

  • Revenues were up 12.5% YoY to ~₹ 1485 crore supported by ~10% growth in the consumer product (CP) revenues to ~₹ 1040 crore. Lighting segment revenues declined ~2% YoY to ₹ 270 crore
  • EBITDA margin at 6.9% was flat YoY (down 100 bps QoQ) mainly due to lower profitability in the CP segment. The CP segment margins were impacted by adverse sales mix, higher A&P and logistics costs
  • PAT was up 27% YoY to ₹ 61 crore on a favourable base (impacted by one-time exceptional loss)
What should Investors do?

Bajaj Electricals’ share price has grown to 2.2x over the past five years (from ~₹ 524 in February 2018 to ~₹ 1150 in February 2023).

  • We maintain HOLD rating on the stock
Target Price and Valuation

We roll over valuation on FY25E and maintain our target price at ₹ 1275. We value BEL using SOTP i.e. 35x and 8x PE for CP & lightings and EPC segments, respectively, on FY25E EPS each.

Key Triggers for future price performance
  • Corporate restructuring (demerger of project business) will help BEL to focus on growing its core consumer product business
  • Continuous focus on driving growth through CP categories (revenue contribution increased from 42% in FY19 to 78% in FY22). Higher disposable income, increased government capex on infra and housing and rising urbanisation are key catalysts for CP revenue growth, going forward
  • Focus to increase CP and lighting margins through better sales mix
Alternate Stock Idea

We like Havells in the same space.

  • Havells has a strong presence in the organised product category across its segments ranging from cables, switchgears, ACs, etc. Its market share ranges between 6% and 20% across these segments
  • BUY with a target price of ₹ 1420

Key Financial Summary

(| Crore) FY20 FY21 FY22 5 Year CAGR (FY17-22) FY23E FY24E FY25E 3 Yr CAGR (22-25E)
Net Sales 4,987.2 4,584.6 4,813.0 0.0 5,286.6 6,573.9 7,160.0 0.1
EBITDA 208.3 303.2 250.2 0.0 365.1 503.3 582.5 0.3
EBITDA Margin (%) 4.2 6.6 5.2 - 6.9 7.7 8.1 -
PAT -10.3 189.0 124.4 0.0 223.7 356.9 422.3 0.5
EPS (|) -0.9 16.5 10.8 - 19.5 31.1 36.8 -
Price/Book value (x) 9.6 8.3 7.6 - 7.9 6.7 5.6 -
Mcap/sales (x) 2.6 2.9 2.7 - 2.5 2.0 1.8 -
RoE (%) -0.8 10.7 7.8 - 13.5 18.2 18.1 -
RoCE (%) 7.9 15.1 13.5 - 20.2 24.6 24.3 -
Source: Company, ICICI Direct Research

Key takeaways of recent quarter & conference call highlights

Q3FY23 Results: Consumer product profitability hit by adverse sales mix

  • Consolidated revenue increased 12.5% YoY to ~| 1485 crore, supported by CP segment revenue growth of 10% to | 1040 crore
  • CP segment revenue increased ~10% YoY to ~| 1040 crore led by strong growth in fan revenue. During Q3FY23, fan revenue increased ~64% YoY led by focus on de-stocking of non BEE rated fans to comply with change in BEE norms. However, appliances and Morphy Richards revenues were down ~4% and ~15% YoY, respectively, mainly due to lower demand in rural regions and slower offtake of water/room heaters amid delay in onset of winter
  • Lighting revenues declined ~2% YoY to | 270 crore owing to lower revenues from consumer lighting segment. Consumer lighting revenue impacted by re-alignment of distribution networks. However, professional lighting segment grew strongly supported by market share gains
  • E&P segment revenue increased ~87% YoY to | 175 crore on a favourable base and healthy order book position
  • EBITDA margin at 6.9% was flat YoY (down 95 bps QoQ) impacted lower profitability of C&P segment
  • CP segment EBIT margin declined 280 bps YoY to 7.5%, due to adverse sales mix (lower sales of water heater) and higher A&P and logistics costs in this segment. However, lighting segment EBIT margin increased 260 bps YoY to 6.4% supported by improved operating leverage and better sales mix in the segment. E&P business turned into profit and reported an EBIT of ~| 0.7 crore in Q3FY23 due to focus on execution of quality orders and various cost optimisation measures
  • PAT came in at ~| 61 crore, up 27% YoY on a favourable base and sales growth in Q3. The company had incurred exceptional losses of | 9 crore associated with voluntary retirement schemes in base quarter

Q3FY23 Earnings Conference Call highlights:

  • Demand Outlook:
    • The demand for consumer appliances is likely to pick up from Q1FY24 onwards led by fresh inventory build-up of new star rated fans at dealer level and pick up in rural demand (supported by ease in inflationary pressure)
    • BEL has increased focus on new product launches (into premium segments) and market share gains in the lighting segment
    • Consumer lighting distribution restructuring is likely to be completed by H1FY24. The company is strengthening its management team  and adding new dealers in the lighting segment to drive revenue growth
    • On the EPC front, it has a healthy order book of ~| 1200 crore. The company expects steady growth in the segment, going forward
  • Margins:
    • Consumer product EBIT margin is expected to improve from Q2FY24 onwards supported by subsiding impact of logistic/warehouse related costs, normalising advertisement and promotional costs and improved product mix
    • Under the lighting segment, the company expects EBIT margin to move upwards from current level supported by new product launches and higher operating leverage
  • Others:
    • The company has gained market share in the lighting, fans and kitchen appliances segments in 9MFY23
    • The company is awaiting approvals from shareholders and regulators to demerge its E&P business. The management expects the demerger to complete by H1FY24



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