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UBS Investment Research
Bajaj Electricals
Electrical appliances leader charging on
Initiate coverage with a Buy rating
Bajaj Electricals (BJEL) is the leader in India’s electrical appliances market, with a
market share of approximately 18%. In FY06-11, BJEL’s consumer durables
(electrical appliances and fans) division recorded a 31% revenue CAGR through
market share gains driven by new product and brand launches. We think BJEL
could continue to gain market share, given the highly fragmented market. We
initiate coverage with a Buy rating and Rs285.00 price target.
Consumer-oriented, high ROE businesses have legs
Penetration in tier two/three cities is a key growth driver of consumer durable and
lighting products (consumer products) in India. BJEL’s’ROE in consumer products
is higher than the company average. It has products and brands across price ranges
to address various consumer segments. We forecast FY11-FY16 revenue CAGRs
of 23%/16% for the durables/lighting divisions, which contribute 80% of our
valuation for BJEL. Its consumer durables/lighting divisions were 47%/23% of
revenue and 58%/13% of FY11 EBIT.
E&P business: worst is behind the division
The engineering and projects (E&P) division (30% of FY11 revenue, 18%
historical ROIC) reported an EBITDA loss in Q1 FY12. However, we believe the
worst is behind the division and expect EBITDA margin to rise to 7.2% in FY12,
and stabilise at 10.5% thereafter. This should improve investor sentiment.
Valuation: initiate coverage with a price target of Rs285.00
We derive our price target from a sum-of-the-parts methodology. We value the
products (lighting and consumer durables) business at 12.5x FY13E EPS and the
E&P business at 1x FY13E P/BV. Our price target implies 11x FY13E PE.
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