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Industrials: Bajaj Electricals meeting reiterates our faith in consumer growth; positive for
CG
• Meeting with Bajaj Electricals - more confidence in consumer business growth story
• CG Consumer business: 23% of consolidated EBIT; leader in fans, pumps and large
player in lights
• Industrials (20% of consolidated EBIT) is largely LT motors; has similar characteristics
as consumers
• Brand, distribution network, SCM, design are key; competition will rise but not
overnight
• CG (BUY, TP: Rs310) on diversified business, resilient consumer business, overseas
business recovery
Industrials
India
Bajaj Electricals meeting reiterates our faith in consumer growth; positive for CG.
Our recent meeting with Bajaj Electricals boosted our confidence in the consumer
growth story. Strong growth, led by rising income levels, share of organized sector and
quality consciousness, is expected to continue for the next 3-4 years. Competition is
likely to rise but brand, distribution network and SCM (key to success) are not easy to
develop overnight. We reiterate our confidence in Crompton Greaves’ consumer-facing
business (37% of EBIT).
Meeting with Bajaj Electricals—more confidence in consumer business growth story
We recently met the Bajaj Electricals management to get a better understanding of the consumer
industry. Bajaj Electricals’ consumer business (55% of total sales) recorded very strong growth of
about 33% in 9MFY11 continuing the strong growth momentum witnessed over the past 4-5
years (over FY2005-10). Growth in the segment was likely led by increased purchasing power/
income levels, gaining share of organized sector in the total pie (with excise-free manufacturing;
GST would further drive this), and higher levels of quality/ brand consciousness among consumers.
The management believes these trends are likely to continue and hence expects the strong growth
momentum to continue over the next 3-4 years. We note that a similar trend was recorded by the
consumer businesses of other industrial companies such as Crompton, Voltas, Havells etc.
CG Consumer business: 23% of consolidated EBIT; leader in fans, pumps and large player in lights
We expect Crompton’s consumer products business to contribute to about 21% of consolidated
revenues (Rs20.6 bn, 34% of standalone) and 23% of EBIT (Rs3 bn, 29% of standalone) in
FY2011E. This is likely to be led by the fans segment, expected to contribute about 38-40% of
total consumer business revenues. The company’s consumer segment includes fans, lighting
equipment (light sources and luminaries), pumps and household electrical appliances. We have
attempted to map the consumer products market, Crompton’s market share and expected
FY2011E consumer segment revenues for various product groups.
Industrials (20% of consolidated EBIT) is largely LT motors; has similar characteristics as consumers
We note that about 65-70% of Crompton’s industrial systems business originates from Low
Tension (LT) motors segment. We believe characteristics of this segment may be similar to the
consumer business such as (1) sales done via a channel/ distribution network (has over 40 dealers
across several states), (2) no direct interaction with end-user and (3) importance of brand image/
perception. This could be one of the reasons why the industrials segment of Crompton remained
relatively unaffected by the slowdown versus the power systems segment.
Brand, distribution network, SCM, design are key; competition will rise but not overnight
Bajaj Electricals management cited that (1) brand/ quality recognition, (2) widespread distribution
network, (3) supply chain management expertise and (4) product development capability are the
key to success of the consumer durables business in India. Manufacturing set-up plays a relatively
smaller part in a firm’s success. Hence, we believe that while competition will come in, it may not
be very easy as brand recognition, distribution networks etc. cannot be established overnight by
new players. The threat of competition is likely to be more from existing player entering new
product segment (rather than new players) as they would already have the required set-up in place.
CG (BUY, TP: Rs310) on diversified business, resilient consumer business, overseas business recovery
Reiterate BUY on Crompton (TP: Rs310) on (1) diversified business profile, (2) resilient consumerfacing
business, (3) strong cash-flow generation, and (4) recovery in overseas subsidiaries.
Consumer growth driven by increasing income levels, organized share and
quality consciousness
We recently met Bajaj Electricals’ management to get a better understanding of the
consumer industry (appliances, lighting and fans). Key takeaways from the meeting were
(1) the company recorded very strong growth in the consumer business in 9MFY11 as well
as the past four years (trend witnessed in other consumer companies as well)—growth is
expected to continue for the next 3-4 years, (2) growth was led by increasing income levels
in India, increased share of organized sector (with excise-free manufacturing; GST would
further drive this) in the consumer business and increasing levels of quality consciousness
among customers, and (3) brand equity, distribution network, supply chain management
expertise and product development ability are key to business success—not easy to develop
by a new player.
Bajaj Electricals: Consumer growth momentum expected to continue over next
3-4 years
The consumer-facing business segments of Bajaj Electricals (appliances, fans and lighting)
recorded strong growth in 9MFY11 with revenues growing about 33% yoy. This growth
trend has been witnessed over the past 5-6 years wherein these segments have recorded a
CAGR of about 25-30% over FY2006-10. About 80% of this growth is likely to be volumedriven
while the remaining 20% of the growth was on pricing.
Similar trend witnessed in sector as well
We note that a similar trend was recorded by the consumer businesses of other industrial
companies as well. Crompton’s consumer business recorded a very strong growth of about
30% yoy in 3QFY11 versus a moderate 8% growth in inflows. Similarly, the unitary cooling
products business of Blue Star recorded a strong growth of 31% yoy versus relatively flat
inflows in 3QFY11.
A look at the quarterly revenue numbers of key consumer products companies indicates that
the total revenues saw strong growth of 27% on a yoy basis as well as a strong 18.4% 2-
year CAGR. The consumer product revenues have recorded strong growth for about six
consecutive quarters.
Crompton’s consumer business—20-22% of consolidated EBIT
Crompton’s consumer segment includes fans, lighting equipment (light sources and
luminaries), pumps and household electrical appliances such as geysers, mixers, grinders,
toasters and lanterns. It is the market leader in fans with a strong brand image, it occupies
the second position in lighting and is the leader in the domestic pumps segment.
We have built in about Rs21 bn in revenues from Crompton’s consumer products business
for FY2011E. This is likely to be led by the fans segment, expected to contribute about 38-
40% of the total consumer business revenues. We have attempted to map the consumer
products market, Crompton’s market share and expected FY2011E consumer segment
revenues for various product groups.
Of Crompton’s Rs16 bn in consumer products segment revenues in FY2010, about 45%
was from fans, 29% from lighting business, 23% from pumps and the remaining from
appliances and other products. We expect this broad revenue mix between the various
product categories in Crompton’s consumer business to remain in the same band in
FY2011E as well.
We expect Crompton’s consumer segment business to contribute to about 21% of
consolidated revenues (Rs20.6 bn) and 23% of EBIT (Rs3 bn) in FY2011E. This increase is
driven by strong growth in the consumer business seen in FY2011 so far and relatively flat
power systems business.
Industrials LT motors business also may have similar characteristics as consumers
We note that about 65-70% of Crompton’s industrial systems business originated from the
Low Tension (LT) motors segment. Key application areas of these motors include pumps,
fans, crushers, conveyors, machine tools, milling applications, centrifugal machines, presses,
etc. The sales for these products are done via an established widespread distribution
network (over 40 dealers across several states). We therefore believe that the characteristics
of this segment may be similar to the consumer business such as (1) sales done via a
channel/ distribution network, (2) no direct interaction with end-user and (3) importance of
brand image. Hence, this segment may also have similar growth trends as the consumer
business. This could be one of the reasons why the industrials segment of Crompton
remained relatively unaffected by the slowdown versus the power systems segment.
Including this segment, total consumer-facing businesses of Crompton would contribute to
about 30% of consolidated sales and 37% of consolidated EBIT in FY2011E (27% of
revenues and 34% of EBIT in FY2010).
Brand, distribution network play a greater role than manufacturing set-up
Bajaj Electricals management cited that (1) brand/ quality recognition, (2) wide-spread
distribution network, (3) supply chain management expertise, and (4) product development
capability are the key to success of the consumer durables business in India. Manufacturing
set-up plays a relatively smaller part in a firm’s success. Hence, we believe that this business
segment may not be very easy to conquer as critical factor such as brand recognition and
distribution network cannot be established overnight by new players. In fact, the threat of
competition is likely to be more from existing player entering new product segment (rather
than new players) as they would already have the required set-up in place.
Bajaj Electricals: Engineering & projects segment faced slowdown, marginrelated
issues
The engineering & projects segment of the company has witnessed a slowdown in FY2011
so far in terms of revenues as well as margins. The segment recorded relatively flat revenues
on a yoy basis (up 1.9%), partially led by high base effect; had recorded 40-45% growth
over the past two year (FY2009 and FY2010).
The company also reported low profitability in this segment, recording EBIT margin of 7.5%
in 9MFY11 versus about 11.5% recorded in the past two years. The low profitability was
attributed to higher-than-expected erection costs in certain projects further built up by a
severe monsoon in 2010. Furthermore, the management also cited that several of the
projects (12 of the 25 under construction) are near the completion stage. At this stage, the
company earns very low margins in the project leading to the lower margins in this year.
Would soon qualify as a Class A supplier but likely to remain a fringe player
Bajaj Electricals management cited that the company is likely to qualify as a Class A supplier
for PGCIL in the next 2-3 months (post completion of three large projects). The company
would be qualified to bid for the larger (400 kV) transmission line/ tower projects of PGCIL
competing with the likes of KEC, Kalpataru, Jyoti Structures etc. We note that this industry
has already seen a sharp increase competition and related pricing pressures over the past
year. Hence, the company would be entering an already crowded market with limited
demand. However, Bajaj Electricals is likely to remain a fringe player in this space; primarily
entering the market to utilize its existing capacity (galvanizing capacity of 30,000 tons per
annum, fabrication capacity of 20,000 tons per annum). The zinc in the galvanizing plant
needs to be maintained in a molten state, gas requirement for heating the same is one of
the major costs that the company incurs in this plant.
Retain our positive stance on Crompton (BUY, TP: Rs310)
We reiterate our BUY rating with a target price of Rs310 on Crompton based on (1)
diversified business profile across geographies and segments, (2) strong pick-up witnessed in
overseas subsidiaries in the past quarters, (3) relatively resilient consumer-facing businesses
of Crompton, (4) potential for strong near-term revenue growth and margins in
international subsidiaries on strong trend witnessed in 9M and low base effect of 4QFY10,
(5) strong cash-flow generation characteristics, (6) potential upside from higher participation
in substation package tenders, and (7) expected robust T&D spending in XII plan.
Our target price of Rs310/share is comprised of (1) Rs300/share based on 19X March-12E
earnings of Rs16.2 and (2) Rs10/share for its stake in Avantha Power.
Key risks to earnings relate to (1) aggressive competition and large capacity additions in the
domestic power T&D segment may pressure revenue growth and margins, and (2) slowerthan-
expected pick-up in international demand, (3) Euro area business (17% of business)
and Euro currency (translation), and (4) change in guard at the top.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Industrials: Bajaj Electricals meeting reiterates our faith in consumer growth; positive for
CG
• Meeting with Bajaj Electricals - more confidence in consumer business growth story
• CG Consumer business: 23% of consolidated EBIT; leader in fans, pumps and large
player in lights
• Industrials (20% of consolidated EBIT) is largely LT motors; has similar characteristics
as consumers
• Brand, distribution network, SCM, design are key; competition will rise but not
overnight
• CG (BUY, TP: Rs310) on diversified business, resilient consumer business, overseas
business recovery
Industrials
India
Bajaj Electricals meeting reiterates our faith in consumer growth; positive for CG.
Our recent meeting with Bajaj Electricals boosted our confidence in the consumer
growth story. Strong growth, led by rising income levels, share of organized sector and
quality consciousness, is expected to continue for the next 3-4 years. Competition is
likely to rise but brand, distribution network and SCM (key to success) are not easy to
develop overnight. We reiterate our confidence in Crompton Greaves’ consumer-facing
business (37% of EBIT).
Meeting with Bajaj Electricals—more confidence in consumer business growth story
We recently met the Bajaj Electricals management to get a better understanding of the consumer
industry. Bajaj Electricals’ consumer business (55% of total sales) recorded very strong growth of
about 33% in 9MFY11 continuing the strong growth momentum witnessed over the past 4-5
years (over FY2005-10). Growth in the segment was likely led by increased purchasing power/
income levels, gaining share of organized sector in the total pie (with excise-free manufacturing;
GST would further drive this), and higher levels of quality/ brand consciousness among consumers.
The management believes these trends are likely to continue and hence expects the strong growth
momentum to continue over the next 3-4 years. We note that a similar trend was recorded by the
consumer businesses of other industrial companies such as Crompton, Voltas, Havells etc.
CG Consumer business: 23% of consolidated EBIT; leader in fans, pumps and large player in lights
We expect Crompton’s consumer products business to contribute to about 21% of consolidated
revenues (Rs20.6 bn, 34% of standalone) and 23% of EBIT (Rs3 bn, 29% of standalone) in
FY2011E. This is likely to be led by the fans segment, expected to contribute about 38-40% of
total consumer business revenues. The company’s consumer segment includes fans, lighting
equipment (light sources and luminaries), pumps and household electrical appliances. We have
attempted to map the consumer products market, Crompton’s market share and expected
FY2011E consumer segment revenues for various product groups.
Industrials (20% of consolidated EBIT) is largely LT motors; has similar characteristics as consumers
We note that about 65-70% of Crompton’s industrial systems business originates from Low
Tension (LT) motors segment. We believe characteristics of this segment may be similar to the
consumer business such as (1) sales done via a channel/ distribution network (has over 40 dealers
across several states), (2) no direct interaction with end-user and (3) importance of brand image/
perception. This could be one of the reasons why the industrials segment of Crompton remained
relatively unaffected by the slowdown versus the power systems segment.
Brand, distribution network, SCM, design are key; competition will rise but not overnight
Bajaj Electricals management cited that (1) brand/ quality recognition, (2) widespread distribution
network, (3) supply chain management expertise and (4) product development capability are the
key to success of the consumer durables business in India. Manufacturing set-up plays a relatively
smaller part in a firm’s success. Hence, we believe that while competition will come in, it may not
be very easy as brand recognition, distribution networks etc. cannot be established overnight by
new players. The threat of competition is likely to be more from existing player entering new
product segment (rather than new players) as they would already have the required set-up in place.
CG (BUY, TP: Rs310) on diversified business, resilient consumer business, overseas business recovery
Reiterate BUY on Crompton (TP: Rs310) on (1) diversified business profile, (2) resilient consumerfacing
business, (3) strong cash-flow generation, and (4) recovery in overseas subsidiaries.
Consumer growth driven by increasing income levels, organized share and
quality consciousness
We recently met Bajaj Electricals’ management to get a better understanding of the
consumer industry (appliances, lighting and fans). Key takeaways from the meeting were
(1) the company recorded very strong growth in the consumer business in 9MFY11 as well
as the past four years (trend witnessed in other consumer companies as well)—growth is
expected to continue for the next 3-4 years, (2) growth was led by increasing income levels
in India, increased share of organized sector (with excise-free manufacturing; GST would
further drive this) in the consumer business and increasing levels of quality consciousness
among customers, and (3) brand equity, distribution network, supply chain management
expertise and product development ability are key to business success—not easy to develop
by a new player.
Bajaj Electricals: Consumer growth momentum expected to continue over next
3-4 years
The consumer-facing business segments of Bajaj Electricals (appliances, fans and lighting)
recorded strong growth in 9MFY11 with revenues growing about 33% yoy. This growth
trend has been witnessed over the past 5-6 years wherein these segments have recorded a
CAGR of about 25-30% over FY2006-10. About 80% of this growth is likely to be volumedriven
while the remaining 20% of the growth was on pricing.
Similar trend witnessed in sector as well
We note that a similar trend was recorded by the consumer businesses of other industrial
companies as well. Crompton’s consumer business recorded a very strong growth of about
30% yoy in 3QFY11 versus a moderate 8% growth in inflows. Similarly, the unitary cooling
products business of Blue Star recorded a strong growth of 31% yoy versus relatively flat
inflows in 3QFY11.
A look at the quarterly revenue numbers of key consumer products companies indicates that
the total revenues saw strong growth of 27% on a yoy basis as well as a strong 18.4% 2-
year CAGR. The consumer product revenues have recorded strong growth for about six
consecutive quarters.
Crompton’s consumer business—20-22% of consolidated EBIT
Crompton’s consumer segment includes fans, lighting equipment (light sources and
luminaries), pumps and household electrical appliances such as geysers, mixers, grinders,
toasters and lanterns. It is the market leader in fans with a strong brand image, it occupies
the second position in lighting and is the leader in the domestic pumps segment.
We have built in about Rs21 bn in revenues from Crompton’s consumer products business
for FY2011E. This is likely to be led by the fans segment, expected to contribute about 38-
40% of the total consumer business revenues. We have attempted to map the consumer
products market, Crompton’s market share and expected FY2011E consumer segment
revenues for various product groups.
Of Crompton’s Rs16 bn in consumer products segment revenues in FY2010, about 45%
was from fans, 29% from lighting business, 23% from pumps and the remaining from
appliances and other products. We expect this broad revenue mix between the various
product categories in Crompton’s consumer business to remain in the same band in
FY2011E as well.
We expect Crompton’s consumer segment business to contribute to about 21% of
consolidated revenues (Rs20.6 bn) and 23% of EBIT (Rs3 bn) in FY2011E. This increase is
driven by strong growth in the consumer business seen in FY2011 so far and relatively flat
power systems business.
Industrials LT motors business also may have similar characteristics as consumers
We note that about 65-70% of Crompton’s industrial systems business originated from the
Low Tension (LT) motors segment. Key application areas of these motors include pumps,
fans, crushers, conveyors, machine tools, milling applications, centrifugal machines, presses,
etc. The sales for these products are done via an established widespread distribution
network (over 40 dealers across several states). We therefore believe that the characteristics
of this segment may be similar to the consumer business such as (1) sales done via a
channel/ distribution network, (2) no direct interaction with end-user and (3) importance of
brand image. Hence, this segment may also have similar growth trends as the consumer
business. This could be one of the reasons why the industrials segment of Crompton
remained relatively unaffected by the slowdown versus the power systems segment.
Including this segment, total consumer-facing businesses of Crompton would contribute to
about 30% of consolidated sales and 37% of consolidated EBIT in FY2011E (27% of
revenues and 34% of EBIT in FY2010).
Brand, distribution network play a greater role than manufacturing set-up
Bajaj Electricals management cited that (1) brand/ quality recognition, (2) wide-spread
distribution network, (3) supply chain management expertise, and (4) product development
capability are the key to success of the consumer durables business in India. Manufacturing
set-up plays a relatively smaller part in a firm’s success. Hence, we believe that this business
segment may not be very easy to conquer as critical factor such as brand recognition and
distribution network cannot be established overnight by new players. In fact, the threat of
competition is likely to be more from existing player entering new product segment (rather
than new players) as they would already have the required set-up in place.
Bajaj Electricals: Engineering & projects segment faced slowdown, marginrelated
issues
The engineering & projects segment of the company has witnessed a slowdown in FY2011
so far in terms of revenues as well as margins. The segment recorded relatively flat revenues
on a yoy basis (up 1.9%), partially led by high base effect; had recorded 40-45% growth
over the past two year (FY2009 and FY2010).
The company also reported low profitability in this segment, recording EBIT margin of 7.5%
in 9MFY11 versus about 11.5% recorded in the past two years. The low profitability was
attributed to higher-than-expected erection costs in certain projects further built up by a
severe monsoon in 2010. Furthermore, the management also cited that several of the
projects (12 of the 25 under construction) are near the completion stage. At this stage, the
company earns very low margins in the project leading to the lower margins in this year.
Would soon qualify as a Class A supplier but likely to remain a fringe player
Bajaj Electricals management cited that the company is likely to qualify as a Class A supplier
for PGCIL in the next 2-3 months (post completion of three large projects). The company
would be qualified to bid for the larger (400 kV) transmission line/ tower projects of PGCIL
competing with the likes of KEC, Kalpataru, Jyoti Structures etc. We note that this industry
has already seen a sharp increase competition and related pricing pressures over the past
year. Hence, the company would be entering an already crowded market with limited
demand. However, Bajaj Electricals is likely to remain a fringe player in this space; primarily
entering the market to utilize its existing capacity (galvanizing capacity of 30,000 tons per
annum, fabrication capacity of 20,000 tons per annum). The zinc in the galvanizing plant
needs to be maintained in a molten state, gas requirement for heating the same is one of
the major costs that the company incurs in this plant.
Retain our positive stance on Crompton (BUY, TP: Rs310)
We reiterate our BUY rating with a target price of Rs310 on Crompton based on (1)
diversified business profile across geographies and segments, (2) strong pick-up witnessed in
overseas subsidiaries in the past quarters, (3) relatively resilient consumer-facing businesses
of Crompton, (4) potential for strong near-term revenue growth and margins in
international subsidiaries on strong trend witnessed in 9M and low base effect of 4QFY10,
(5) strong cash-flow generation characteristics, (6) potential upside from higher participation
in substation package tenders, and (7) expected robust T&D spending in XII plan.
Our target price of Rs310/share is comprised of (1) Rs300/share based on 19X March-12E
earnings of Rs16.2 and (2) Rs10/share for its stake in Avantha Power.
Key risks to earnings relate to (1) aggressive competition and large capacity additions in the
domestic power T&D segment may pressure revenue growth and margins, and (2) slowerthan-
expected pick-up in international demand, (3) Euro area business (17% of business)
and Euro currency (translation), and (4) change in guard at the top.
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