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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 drive 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 EBIT FY11.
„ 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
Investment Thesis
Leadership in attractive electrical appliances market. Bajaj Electricals has a
leading position in India’s Rs45-50bn domestic electrical appliances market—its
consumer durables (electrical appliances and fans) division posted a 31%
revenue CAGR over FY06-FY11. We consider electrical appliances a very
attractive market given:
Q We expect above GDP growth rates: BJEL’s fan segment recorded a 29%
revenue CAGR over FY06-FY11, and fans are the electrical appliances with
the greatest penetration. We think the electrical appliances market will
continue to grow faster than GDP.
Q It is highly fragmented: Only two companies have market shares above 10%:
BJEL at 18% and Philips at 14% (and Philips has built market share through
acquisitions). Given the high level of fragmentation, we think BJEL can
continue to gain market share for the foreseeable future.
BJEL has a proven ability to launch new brands. BJEL’s premium Morphy
Richards brand grew to a Rs1bn brand in five years. The company has launched
the Bajaj Platini brand to bridge the gap between the value and premium
segments. It has tied up with China’s Midea Group to launch table fans in India.
BJEL intends to grow its brand portfolio further to target various consumer
segments.
Concerns about E&P division overdone. The division’s Q1 FY12
performance was driven by completion of a large number of ‘almost complete’
projects and does not represent normalised profitability, in our view. We expect
the division’s ROIC to return to the mid to high teens in FY13, which should
abate investor concerns.
Q About 40% of E&P revenue is derived from: 1) the high masts and poles
segment; and 2) the power plant/industrial/stadium lighting segment, where
we believe Bajaj Electricals has competitive advantages and specialty
expertise. These are also high margin (12% EBIT margin) segments. The
remainder of E&P revenue is driven by the transmission line and towers
(TLT) and rural electrification segments.
Q The E&P division has generated an average pre-tax ROIC of 18% over the
past six years. We think there is potential for improvement in ROIC in the
TLT segment (TLT ROIC is about 10%) as industry majors such as Jyoti
Structures and Kalpataru Power Transmission have ROICs of 25%-30%.
Our price target implies 12.5x FY13E PE for the products (lighting and
consumer durables) divisions and 1.0x FY13E P/BV for the E&P division. Our
price target implies 11x FY13E PE. This is at a discount to Indian peers and in
line with the company’s historical PE
Key catalysts
Q Stabilisation of margins in consumer durables and lighting divisions. In
FY11, BJEL’s EBIT margin declined 165bp in the consumer durables
division and 110bp in lighting, as both came off a high base in FY10 from
low raw material prices. In Q1 FY12, despite higher raw material prices,
EBIT margin in the consumer durables/lighting divisions increased
10bp/280bp YoY. We expect margins in both divisions to stabilise.
Q Margin expansion in E&P division. EBIT margin in the E&P division
dropped 190bp in FY11, and declined to a 6.7% loss FY12. We expect E&P
division margin to improve to 7.2% in FY12 and then stabilise at 10.5%. We
expect the stabilising EBIT margins in the consumer durables/lighting
divisions and improvement in E&P division EBIT margins to be key positive
catalysts.
Q Expect resumption of EPS growth in FY12. After recording a 39% EPS
CAGR over FY06-FY10, EPS growth was only 14% in FY11. However, we
expect the EPS growth rate to accelerate to 29% in FY12 and forecast a 29%
CAGR over FY11-FY14. We believe the acceleration of EPS growth will act
as a key catalyst for the share price.
Risks
Q Macroeconomic slowdown. We believe that a macroeconomic slowdown is
the key risk to our thesis. However, we believe that appliances’ small ticket
size and the correlation of appliance purchases with festivals make appliance
revenue relatively stable.
Q Inflation in raw material prices. While BJEL outsources a large part of its
production, we estimate raw material costs are equal to 45-50% of revenue.
Copper, aluminium and steel are the company’s key raw materials. Raw
material inflation can be a risk to margins in the lighting and consumer
durables divisions. In FY11, EBIT margins in the lighting/consumer durables
divisions declined 110bp/165bp. We expect margins to stabilise in FY12. In
Q1 FY12, EBIT margin improved 280bp/10bp in the lighting/consumer
durables divisions.
Q Competition. Havells has entered the appliances market and Orient Paper is
also planning to do so. However, we expect BJEL to grow its market share
given the high level of fragmentation, low penetration rates, and the
company’s leadership position.
Q BJEL is not audited by an internationally recognised accounting firm.
Valuation and basis for our price target
We value BJEL’s consumer durables and lighting divisions on a PE basis by
comparing them with other consumer durables companies. We value BJEL’s E&P
division at 1x FY13E P/BV. In FY07-FY11, the lighting division recorded a
revenue CAGR of 18% and average ROIC of 75%, and the consumer durables
division recorded a revenue CAGR of 31% and ROIC of 135%.
Valuation
Over the past three years, BJEL has traded between (mean +/- one standard
deviation) PE of 6.3-13.3x and EV/EBITDA of 5-9x. The average PE and
EV/EBITDA multiples over the same period were 9.8x and 7.0x. BJEL is
trading at FY12E/FY13E PE of 8.9x/6.5x. At our price target, BJEL would trade
at 11x FY13E PE. This is in line with the three-year average.
Valuation comparables
While BJEL can be compared with other Indian consumer durables companies
such as VIP Industries, Havells India (Havells), Asian Paints, TTK Prestige,
Voltas and Blue Star, none of these companies are directly comparable, in our
view. The paint industry has a far higher industry consolidation with Asian Paints
having a >50% market share, while consumer products are <20% of value for
Crompton Greaves and Havells has a large international business. TTK Prestige is
likely the only direct comparable with BJEL’s products division.
Q Bajaj Electricals
Bajaj Electricals (BJEL) is the leading electrical appliances company in India
with an 18% market share. It also has a lighting products division that is focused
on retail consumers and institutional buyers, and an engineering and projects
(E&P) division.
Q Statement of Risk
We think the key risks facing BJEL include macroeconomic slowdown, higher
commodity prices that it is not able to pass through, and increased competition.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
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 drive 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 EBIT FY11.
„ 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
Investment Thesis
Leadership in attractive electrical appliances market. Bajaj Electricals has a
leading position in India’s Rs45-50bn domestic electrical appliances market—its
consumer durables (electrical appliances and fans) division posted a 31%
revenue CAGR over FY06-FY11. We consider electrical appliances a very
attractive market given:
Q We expect above GDP growth rates: BJEL’s fan segment recorded a 29%
revenue CAGR over FY06-FY11, and fans are the electrical appliances with
the greatest penetration. We think the electrical appliances market will
continue to grow faster than GDP.
Q It is highly fragmented: Only two companies have market shares above 10%:
BJEL at 18% and Philips at 14% (and Philips has built market share through
acquisitions). Given the high level of fragmentation, we think BJEL can
continue to gain market share for the foreseeable future.
BJEL has a proven ability to launch new brands. BJEL’s premium Morphy
Richards brand grew to a Rs1bn brand in five years. The company has launched
the Bajaj Platini brand to bridge the gap between the value and premium
segments. It has tied up with China’s Midea Group to launch table fans in India.
BJEL intends to grow its brand portfolio further to target various consumer
segments.
Concerns about E&P division overdone. The division’s Q1 FY12
performance was driven by completion of a large number of ‘almost complete’
projects and does not represent normalised profitability, in our view. We expect
the division’s ROIC to return to the mid to high teens in FY13, which should
abate investor concerns.
Q About 40% of E&P revenue is derived from: 1) the high masts and poles
segment; and 2) the power plant/industrial/stadium lighting segment, where
we believe Bajaj Electricals has competitive advantages and specialty
expertise. These are also high margin (12% EBIT margin) segments. The
remainder of E&P revenue is driven by the transmission line and towers
(TLT) and rural electrification segments.
Q The E&P division has generated an average pre-tax ROIC of 18% over the
past six years. We think there is potential for improvement in ROIC in the
TLT segment (TLT ROIC is about 10%) as industry majors such as Jyoti
Structures and Kalpataru Power Transmission have ROICs of 25%-30%.
Our price target implies 12.5x FY13E PE for the products (lighting and
consumer durables) divisions and 1.0x FY13E P/BV for the E&P division. Our
price target implies 11x FY13E PE. This is at a discount to Indian peers and in
line with the company’s historical PE
Key catalysts
Q Stabilisation of margins in consumer durables and lighting divisions. In
FY11, BJEL’s EBIT margin declined 165bp in the consumer durables
division and 110bp in lighting, as both came off a high base in FY10 from
low raw material prices. In Q1 FY12, despite higher raw material prices,
EBIT margin in the consumer durables/lighting divisions increased
10bp/280bp YoY. We expect margins in both divisions to stabilise.
Q Margin expansion in E&P division. EBIT margin in the E&P division
dropped 190bp in FY11, and declined to a 6.7% loss FY12. We expect E&P
division margin to improve to 7.2% in FY12 and then stabilise at 10.5%. We
expect the stabilising EBIT margins in the consumer durables/lighting
divisions and improvement in E&P division EBIT margins to be key positive
catalysts.
Q Expect resumption of EPS growth in FY12. After recording a 39% EPS
CAGR over FY06-FY10, EPS growth was only 14% in FY11. However, we
expect the EPS growth rate to accelerate to 29% in FY12 and forecast a 29%
CAGR over FY11-FY14. We believe the acceleration of EPS growth will act
as a key catalyst for the share price.
Risks
Q Macroeconomic slowdown. We believe that a macroeconomic slowdown is
the key risk to our thesis. However, we believe that appliances’ small ticket
size and the correlation of appliance purchases with festivals make appliance
revenue relatively stable.
Q Inflation in raw material prices. While BJEL outsources a large part of its
production, we estimate raw material costs are equal to 45-50% of revenue.
Copper, aluminium and steel are the company’s key raw materials. Raw
material inflation can be a risk to margins in the lighting and consumer
durables divisions. In FY11, EBIT margins in the lighting/consumer durables
divisions declined 110bp/165bp. We expect margins to stabilise in FY12. In
Q1 FY12, EBIT margin improved 280bp/10bp in the lighting/consumer
durables divisions.
Q Competition. Havells has entered the appliances market and Orient Paper is
also planning to do so. However, we expect BJEL to grow its market share
given the high level of fragmentation, low penetration rates, and the
company’s leadership position.
Q BJEL is not audited by an internationally recognised accounting firm.
Valuation and basis for our price target
We value BJEL’s consumer durables and lighting divisions on a PE basis by
comparing them with other consumer durables companies. We value BJEL’s E&P
division at 1x FY13E P/BV. In FY07-FY11, the lighting division recorded a
revenue CAGR of 18% and average ROIC of 75%, and the consumer durables
division recorded a revenue CAGR of 31% and ROIC of 135%.
Valuation
Over the past three years, BJEL has traded between (mean +/- one standard
deviation) PE of 6.3-13.3x and EV/EBITDA of 5-9x. The average PE and
EV/EBITDA multiples over the same period were 9.8x and 7.0x. BJEL is
trading at FY12E/FY13E PE of 8.9x/6.5x. At our price target, BJEL would trade
at 11x FY13E PE. This is in line with the three-year average.
Valuation comparables
While BJEL can be compared with other Indian consumer durables companies
such as VIP Industries, Havells India (Havells), Asian Paints, TTK Prestige,
Voltas and Blue Star, none of these companies are directly comparable, in our
view. The paint industry has a far higher industry consolidation with Asian Paints
having a >50% market share, while consumer products are <20% of value for
Crompton Greaves and Havells has a large international business. TTK Prestige is
likely the only direct comparable with BJEL’s products division.
Q Bajaj Electricals
Bajaj Electricals (BJEL) is the leading electrical appliances company in India
with an 18% market share. It also has a lighting products division that is focused
on retail consumers and institutional buyers, and an engineering and projects
(E&P) division.
Q Statement of Risk
We think the key risks facing BJEL include macroeconomic slowdown, higher
commodity prices that it is not able to pass through, and increased competition.
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