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:
- Large number of unorganized and small players operating in the electrical appliances business.
- Increasing competition from branded players including some new entrants will squeeze operating margins of BjEL.
- Excessive dependence on certain vendors for key supplies or production.
- 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:
- Lighting division has some pricing power despite competition.
- Morphy Richards brand products in the premium segment are growing well ahead of the industry average.
- 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.
- Commodity prices have softened which will benefit BjEL margins.
- Consumer durable division will maintain its momentum given the market positioning of BjEL products.