loader2
Partner With Us NRI
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

Disclaimer

ANALYST CERTIFICATION

I/We, Sanjay Manyal, MBA (Finance), Hitesh Taunk, MBA (Finance) and Ashwi Bhansali, MBA Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.

Terms & conditions and other disclosures:

ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products.

ICICI Securities is Sebi registered stock broker, merchant banker, investment adviser, portfolio manager and Research Analyst. ICICI Securities is registered with Insurance Regulatory Development Authority of India Limited (IRDAI) as a composite corporate agent and with PFRDA as a Point of Presence. ICICI Securities Limited Research Analyst SEBI Registration Number – INH000000990. ICICI Securities Limited SEBI Registration is INZ000183631 for stock broker. ICICI Securities is a subsidiary of ICICI Bank which is India’s largest private sector bank and has its various subsidiaries engaged in businesses of housing finance, asset management, life insurance, general insurance, venture capital fund management, etc. (“associates”), the details in respect of which are available on www.icicibank.com.

 

ICICI Securities is one of the leading merchant bankers/ underwriters of securities and participate in virtually all securities trading markets in India. We and our associates might have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. ICICI Securities and its analysts, persons reporting to analysts and their relatives are generally prohibited from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover.

 

Recommendation in reports based on technical and derivative analysis centre on studying charts of a stocks price movement, outstanding positions, trading volume etc as opposed to focusing on a companys fundamentals and, as such, may not match with the recommendation in fundamental reports. Investors may visit icicidirect.com to view the Fundamental and Technical Research Reports.

 

Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein.

 

ICICI Securities Limited has two independent equity research groups: Institutional Research and Retail Research. This report has been prepared by the Retail Research. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, and target price of the Institutional Research.

 

The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on a reasonable basis, ICICI Securities is under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities might be acting in an advisory capacity to this company, or in certain other circumstances.

 

This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities accepts no liabilities whatsoever for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice.

 

ICICI Securities or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months.

 

ICICI Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction.

 

ICICI Securities or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the companies mentioned in the report in the past twelve months.

 

 

ICICI Securities encourages independence in research report preparation and strives to minimize conflict in preparation of research report. ICICI Securities or its associates or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither ICICI Securities nor Research Analysts and their relatives have any material conflict of interest at the time of publication of this report.

 

Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions.

 

ICICI Securities or its subsidiaries collectively or Research Analysts or their relatives do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report.

 

Since associates of ICICI Securities and ICICI Securities as a entity are engaged in various financial service businesses, they might have financial interests or actual/ beneficial ownership of one percent or more or other material conflict of interest various companies including the subject company/companies mentioned in this report.

 

ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report.

 

Neither the Research Analysts nor ICICI Securities have been engaged in market making activity for the companies mentioned in the report.

 

We submit that no material disciplinary action has been taken on ICICI Securities by any Regulatory Authority impacting Equity Research Analysis activities.

 

This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.

 

 

 

 

Read More