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History and Business Model
Bajaj Electricals Ltd is a 68 year old diversified Company with operations in five key
strategic business units, namely, Appliances, Fans, Lighting, Luminaries and E&P.
The Company with its comprehensive product portfolio is present across segments
and various price points with strong presence in ‘value for money’ segment of
consumer durable products. To strengthen its product portfolio, BEL strategically
entered the premium segment through tie- ups with global premium brands. It has
a pan India network of 19 branch offices in addition to distribution base of about
1000, 4000 authorized dealers, over 4,00,000 retail outlets and over 282 Customer
Care centers. The E&P segment has three main divisions namely High- mast &
Street Lighting Division, Special Projects and Transmission Line Towers.
Financials
The Company has been growing at a steady rate with revenue and profit CAGR of
26% and 39% resp. over 2007-2011. The Consumer Durable segment comprising
of fans and appliance is the highest contributor to the revenue pie with 45% share.
The E&P division contributes ~30% while the Lightening division forms 22-24%.
The Q1FY12 results were poor as Consumer Durable business faced unfavorable
market conditions (shorter summer) and its E&P business reporting slower growth
of 2.5% (due to slower execution). The product mix was also unfavorable in
Q1FY12 hurting the profitability along with rise in steel prices. This resulted in
EBIDTA margin decline and a 50% drop in profits. We expect that FY12 as a whole
will see an improvement as E&P division is expected to report normal profits in H2.
Growth Drivers
• Enjoys dominant market share: It enjoys 15-30% market share in various
product categories like Oven Toaster and Griller (30%), Irons (26%) and
Water Heaters (23%). Apart from appliances, BEL is one of the top 3 players
in Fans (16% of organized market), Lighting (8%) and Luminaires (17%).
• E&P business to improve: This division is undergoing clean up exercise
which involves completing all pending projects irrespective of cost escalation
so as the resources will be freed and which could be deployed gainfully going
forward. Target is to reduce the number of projects from 82 to ~ 50 levels.
Management has guided for EBIT margin improving from -6.7% in Q1FY12 to
12.7% by Q4FY12 and FY12 margin at ~8%.
• Ability to maintain margins: Being a market leader in most of the segment it
operates can easily pass on the increase in cost to its consumers. It also
undertakes hedging for its key raw materials which also helps in maintaining
margins in adverse commodity price movement.
• Strong R&D supports new product launches: Due to its strong R&D and
global collaborations, new product introduction is easier at various price
points. It has entered the pressure cooker segment after a gap of 25 years. It
is also planning to foray into water purifier segment and plans to Introduce
Microwave ovens under Morphy Richards in the near future.
• Benefits from outsourcing model: The Company does outsourcing of most
of its manufacturing. It imports 20% of appliances and 5% from China. BEL
has built up a strong base of 200 vendors to outsource its manufacturing jobs.
This approach provides flexibility in operation and competitive pricing.
Outlook:
According to management, the consumer durable business will grow 3x the GDP
growth. The E&P order book is ~Rs 730 crore and is expected to grow to Rs 1100
cr by FY12. Thus, it is poised for strong growth going forward. The 20%+ decline in
share price after poor Q1 results provides a good entry point. P/E is 13.5x
Technicals
This scrip has fallen from its top of Rs 345 and has found support at 61%
retracement levels of Rs 150s. The cyclical downside has upside slop resistance at
Rs 240 levels. After sustaining these levels the upside can be sharp towards Rs
300. However before such move there can be some more time spend around Rs
150 levels which would give chance to accumulate.
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