BAJAJ ELECTRICALS Weak quarter :: Edelweiss,

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BAJAJ ELECTRICALS
Weak quarter



􀂄 Muted revenue growth; margins under pressure
Bajaj Electricals (BJE) reported weak Q2FY11 results. Revenues grew 14.8% Yo-
Y to INR 5.9 bn led by strong growth in the consumer durable division. While
lighting and consumer durable divisions grew 8.4% and 29.5%, Y-o-Y,
respectively, engineering & project (E&P) division reported flattish growth at
0.3%. This is due to high base effect as the E&P business had posted strong
growth in Q2FY10. The company reported 18.4% dip in EBITDA to INR 446 mn
as margins dipped 309bps Y-o-Y to 7.6% due to a sharp increase in raw material
costs (up 430bps Y-o-Y to 75.6% of sales). Weak operating performance led to
19.9% decline in PAT.
􀂄 Visibility increases; order backlog at INR 11.5 bn
The company’s order backlog stood at INR 11.5 bn (1.5x FY10 revenues from
the E&P division). The transmission tower comprised 58% and special projects
32% of the order book, while the execution period stands at 18-24 months and
8-24 months, respectively. High mast and lighting contracts accounted for the
balance, at 10%, with execution cycle of ~2 months. The average blended
execution cycle of the total order book stands at 15 months.
􀂄 Revising down margin and earnings estimates
While the management is confident of a stronger Q4FY11 as it plans to pass on
the increased raw material prices to customers, overall FY11 margin is expected
to be under pressure given low margins in H1FY11 in the E&P division. We are
revising down our EBITDA margin for FY11E and FY12E by 70bps and 80bps to
10.0% and 10.2%, respectively. Accordingly, we are revising down our earnings
estimate by 9% each for both FY11 and FY12.

􀂄 Outlook and valuations: Positive; maintain ‘BUY’
While Q2FY11 results were marred by one-offs in terms of cost overruns in E&P
and lower margin in the lighting business, we expect the company to be able to
pass on the increased costs in subsequent quarters in the lighting and consumer
durable businesses. At our revised EPS of INR 15.2 and INR 19.4, the stock is
currently trading at P/E of 18.8x and 14.8x FY11E and FY12E, respectively. We
maintain ‘BUY’ recommendation on the stock and rate it ‘Sector
Outperformer’ on relative returns.