Wednesday, November 9, 2011

Bajaj Electricals Ltd – An update

We discussed the stock of Bajaj Electricals Ltd (BjEL) in April 2011 here.
CMP is Rs 194 and the stock price has corrected by about 28% since April 2011.

Coming to its Q2-FY2012 results, revenue at Rs 700.80 crore increased by 19% on the back of a strong growth in lighting and consumer durables which grew by 25% and 21% respectively. E&P growth was lower at 10%.

Earnings increased slower at 7% as interest costs jumped up significantly.

Let us evaluate the key risks to our investment case:
  1. Large number of unorganized and small players operating in the electrical appliances business.
  2. Increasing competition from branded players including some new entrants will squeeze operating margins of BjEL.
  3. Excessive dependence on certain vendors for key supplies or production.
  4. Performance of E&P segment is a concern, and this could lock higher working capital debt resulting in more interest outgo.
Now we look at some of the mitigants and comforts:
  1. Lighting division has some pricing power despite competition.
  2. Morphy Richards brand products in the premium segment are growing well ahead of the industry average.
  3. BjEL has taken steps to stop bleeding in the E&P division and cut down the number of projects handled to around 50 to improve project execution.
  4. Commodity prices have softened which will benefit BjEL margins.
  5. Consumer durable division will maintain its momentum given the market positioning of BjEL products.
We expect BjEL to close fiscal FY12E with topline of about Rs 3,000 crore and EPS of Rs 14. In less than 6 months from now, markets would start discounting FY13 estimates. At about 9-10 times FY13E earnings, EV/EBIDTA of 6, MCap/Sales of 0.6, ROE of 25% and decent Free Cash Flow expected in FY2013, BjEL looks quite attractively placed.

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