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.

Bajaj Electricals Ltd

I find Bajaj Electricals Ltd (BjEL) a formidable play in the consumer electrical space, and a good long term investment bet.

Business Operations:

1. Bajaj Electricals is a 72 year old company with a turnover of over Rs 2,000 crore. It has 6 strategic business units:

(i)                  Appliances

(ii)                 Engineering and Projects

(iii)                Fans

(iv)                Luminaires

(v)                 Lighting

(vi)                Morphy Richards

 

2. Bajaj Electricals has wide presence in different parts of India through 19 branches, and supported by 1000 distributors, 4000 authorized dealers and 4 lakh retail outlets and 282 customer service centres.

3. Excellent distribution network and tie-ups are a source of competitive advantage for BjEL. It has distribution arrangement with Trilux of Germany for Luninaires, tie-up with Delta controls of Canada for Building Management systems, with Morphy Richards of England and Nardi of Italy for Appliances segment, with Secuiton of Switzerland for Security systems, with Midea of China and Disney of US for Fans, with Starlite for CFL.

4. Domestic Appliances include a range of products like Water Heaters, Mixers, Food Processors, Microwave Ovens, Air Coolers, Steam and Dry Irons, Electric Kettles, Water Filters, Toasters, Rice Cookers, OTGs, Microwave Ovens, Juicer-Mixer-Grinders, Hair  Dryers, Chimneys, Gas Stoves, Room Heaters, Home UPS.

5. Demand for  lighting products like  Lamps,  Tubes and Domestic  fittings is round the year growing by about 10% y-o-y.

6. Luminaires Business Unit is developing energy-efficient consumer luminaires, and also launched LED based luminaries for landscape, commercial and retail lighting applications. Sales of CFL (Compact Fluorescent Lamps) have recorded increase and crossed the Rs.150 crore mark in FY2010.

7. Engineering & Projects division of BjEL achieved a turnover of Rs.755 crore in FY 10 registering a healthy growth  of  39% over FY09.  E&P Unit produced 4,600 Highmasts and 33,255 Poles besides manufacturing 17,446 MT of transmission line towers. BjEL has in-house facilities for civil, structural and product design. This SBU's order book position at over Rs.1100 crore is decent.

8. BjEL has manufacturing units at Chakan which is mainly into fans and Ranjangaon-Pune unit that manufactures high mast and transmission line towers.

Industry prospects:

1. Power sector development and Infrastructure growth continue  to  be  the Government's focus areas, which offers good long term opportunity for BjEL, in particular for future growth of its Engineering & Projects SBU.

2. Domestic appliances market is estimated to be over Rs 6,000 crore with a large part of it controlled by the organized players. BjEL has an impressive trackrecord to exploit this business opportunity.

3. Peers: Havells and Kalpatharu Power.

Management:

1. BjEL is a part of the Bajaj Group which is a reputed business group with an established history and brand recall.

2. High promoter's holding 68% is a positive.

3. BjEL is led by Shekhar Bajaj who is the Chairman & Managing Director of the company with Mr R.Ramakrishnan and Mr Anant Bajaj as the EDs.

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Financial summary:                                                    

                                                                       

Particulars	FY2008	FY2009	FY2010	FY2011E	FY2012E
Revenue (Rs crore)	1381.60	1765.70	2228.6	2724.10	3115.60
EBIDTA (Rs crore)	143.20	176.80	220.90	260.70	310.05
PAT (Rs crore)	73.10	89.30	125.40	146.85	172.30
EPS (Rs)	8.45	10.32	13.40	15.04	17.65
NPM (%)	5.29	5.05	5.62	5.39	5.53
ROE (%)	44.34	37.86	24.14	24.19	23.10
ROCE (%)	35.60	41.41	37.55	33.90	33.30

Auditors: Dalal & Shah

Investment Rationale: 

1. Strong brand backed by excellent business model and distribution network.

2. On the back of increasing investments in T&D space, Engineering & Special Projects division of BjEL will be an important growth driver for next 3 years, estimated to grow by 20%.

3. CFLs will register good volume growth in current environment.

4. Our estimate is that fans division will post a revenue CAGR in excess of 25% over the next few years, since this company has presence both in premium and lower priced segments.

5. BjEL has nicely complemented its appliances segment by entering into the Pressure cookers market which will reap benefits of its strong distribution network.

6. Consumer appliances is a highly competitive industry. Given its brand and established systems, BjEL commands some pricing power and can also pass on the rise in raw material price to the end-consumers.

Risks:

1. High inflation scenario can impact consumer spending and result in slowdown.

2. Delay in closure and/or execution of engineering projects.

Stock parameters:

CMP: Rs.270 (FV: Rs 2); Market cap: Rs.2,656 crore; 52-wk Hi/Low (NSE): Rs.345/188; 200DMA: Rs.256; Free Float: 34.80%

Valuation parameters:

PE: 17.95; P/BV: 4.1; Dividend yld: 0.89%; EV/EBIDTA: 8.4 (all based on FY11 estimates).

Outlook:

1.     BjEL combines the best of Consumer stories that attract lot of market fancy and Engineering infrastructure which can give significant growth in coming year.

2.     30% capital appreciation with a time horizon of 15 months looks reasonable.