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BAJAJ ELECTRICALS LTD (BAEL)
PRICE: RS.144 RECOMMENDATION: BUY
TARGET PRICE: RS.180 FY13E P/E: 9.3X
q BAEL has been observing resilient demand in lighting and consumer division; however sluggish outlook in E&P business and depreciating rupee
are likely to hurt profit accretion over FY12E and 1HFY13E.
q Management has reduced order book growth guidance for E&P business
in FY12. Margin outlook for 2HFY12 looks bleak.
q Engineering & Project segment reported marginal profits in the Q2FY12
vis-à-vis loss in Q1FY12. However, we believe that over FY12 margins in
this segment are likely to remain under pressure on account of delays in
pick up in major infrastructure projects.
q Pick-up in demand in lighting and consumer business in tier ii cities augers well for company's growth. However rising interest rate and depreciating rupee trend would remain the key variable to monitor for next
few quarters.
q We reduce our earnings estimate downward for FY12 and FY13 to factor
in 1) sluggish performance in E&P division that accounts for majority of
company's capital and 2) margin pressure on account of increase in interest rates and depreciating rupee trend leading to costlier imports for the
company.
q We maintain our 'BUY' on the company's stock with a one year DCF earlier revised price target of Rs 180 (Rs 272 earlier).
Conference call highlights
We recently interacted with the BAEL management to get a perspective on the business environment and earnings outlook for
the company. Below are the key highlights of our interaction
n Demand in consumer and lighting & luminaries' space continues to remain
strong. Management expects meaningful pick up in the revenues from tier ii and
rural areas. Management is confident of achieving growth of close to 25% and
20% in lighting and consumer business respectively.
n Demand for home appliances has remained more or less intact over 1HFY12. We
believe that this has been mainly on back of 1) growing disposable income
within Indian households (urban & rural) 2) evolving lifestyle patterns in India
leading to a peculiar shift in preference for premium products offered by organized players like HIL 3) shortening of product cycle due to higher rate of technological obsolescence 4) increasing electricity supply in urban and rural India.
n We highlight that there has been a reasonable growth in demand for lower
range product categories like television sets, semi-automatic washing machines;
medium range mobile sets, lighting products etc (refer update on Havells India
dated 20th Dec'11).
n Being a net importer, company has been observing margin pressure in the lighting business due to depreciating rupee trend. We highlight that the company's
imports comprises of 15-20% in fans and appliances business and 35-40% in
Morphy Richards.
n However company has received some respite from drop in input prices, mainly
aluminum and copper. Management has been trying to maintain margins by
employing steady cost management across the board and maximizing contribution from new products.
n Company has been incurring additional cost for business promotion activities. It
has been increasing its focus on deeper brand penetration especially in the rural/
semi urban areas. We believe that this likely to have a diminishing effect on the
margins in the short term.
n Company has reported increase in inventory levels of Rs 39 bn mainly on account
of piling up of finished goods inventory in the end of Q2FY12. It has observed
sluggish demand for fans and air-coolers this year due to lighter summer.
n In Q2FY12, company has reported 39% increase in capital employed in consumer durable SBU due to increase in finished goods inventory.
n E&P business has been observing pressure due sluggish public spending in infrastructure projects and building up of overcapacity in the T&D space. Management has cut its order book guidance to Rs 9 bn (Rs 10 bn in the end of Q2FY12)
by year end.
n In 1HFY12, E&P segment has reported the operating loss of Rs 11.5 mn vis-à-vis
profit of Rs 161.5 mn in 1HFYFY11.
n Company has been taking several measures to contain the overhead costs and
increase efficiency in the E&P business. For stances, it has been striving to reduce
the project sites from current 60 locations to 32 locations.
n In 1HFY12, interest charges have gone up significantly for the company due to
significant increase in interest rates. We believe that the increase in channel inventory has led to increase in the working capital requirement. Company has
built considerable amount of finished goods inventory over Q3-Q4FY11.
n Management has stated that the working capital in E&P is likely to get reduced
on back of closure of older project sites and release of retention money in few
projects. It expects to bring down the working capital from current 180 days to
150 days by the year end.
Company to sustain high growth in lighting and consumer appliances business; however sluggish growth in E&P business likely
to negatively affect free cash flow generation over FY12E-13E
n We project revenue growth of 15.5% CAGR between FY11-13 from Rs. 27 bn in
FY10 to Rs. 36 bn in FY13 on back of 1) continued momentum in consumer
durable space 2) pick up in investments in T&D space 3) incremental revenue
contribution from newly launched products 4) market share maintained at current levels in key product categories.
n Within the revenue streams, we expect consumer business to grow by 23%
CAGR, lighting by 17.4% CAGR and E&P by 2% CAGR in the same period.
n We expect the company to leverage its existing dealer network to introduce new
products in consumer business. Overseas technical collaborations with Morphy,
Securiton etc are likely to strengthen the revenue streams over FY12-13E.
n Company enjoys a strong brand positioning in the key markets where it operates. Despite increasing competition in the consumer appliances industry, it has
successfully taken the price hike of 2-3% over Q4FY11 and Q1FY12 to mitigate
the increasing raw material prices.
n We opine that the company is likely to experience margin pressure over 2HFY12
due to 1) sluggish performance in E&P division 2) increase in interest rates affecting working capital financing and 3) depreciating rupee trend making imports
expensive for the company. In our projected financials we build 7.6% EBITDA
margins for FY13E.
n We reduce our FY12 and FY13 earnings estimates for the company to factor in 1)
sluggish growth in E&P business 2) margin pressure on higher interest expense
and depreciating rupee trend.
n We arrive at one year DCF based target price of Rs 180 (Rs 272 earlier) on
company's stock.
Valuation & Recommendation
n At current price of Rs.144, company's stock is trading at 9.3x P/E and 5.3 x EV/
EBITDA on FY13E earnings.
n We reduce our estimates downward for FY12 and FY13 to factor in bleak business outlook in E&P business and margin pressure on account of increase in interest rates and rupee depreciation; maintain 'BUY' rating on the company's
stock with a one year DCF based revised price target of Rs 180 (Rs 272 earlier)
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
BAJAJ ELECTRICALS LTD (BAEL)
PRICE: RS.144 RECOMMENDATION: BUY
TARGET PRICE: RS.180 FY13E P/E: 9.3X
q BAEL has been observing resilient demand in lighting and consumer division; however sluggish outlook in E&P business and depreciating rupee
are likely to hurt profit accretion over FY12E and 1HFY13E.
q Management has reduced order book growth guidance for E&P business
in FY12. Margin outlook for 2HFY12 looks bleak.
q Engineering & Project segment reported marginal profits in the Q2FY12
vis-à-vis loss in Q1FY12. However, we believe that over FY12 margins in
this segment are likely to remain under pressure on account of delays in
pick up in major infrastructure projects.
q Pick-up in demand in lighting and consumer business in tier ii cities augers well for company's growth. However rising interest rate and depreciating rupee trend would remain the key variable to monitor for next
few quarters.
q We reduce our earnings estimate downward for FY12 and FY13 to factor
in 1) sluggish performance in E&P division that accounts for majority of
company's capital and 2) margin pressure on account of increase in interest rates and depreciating rupee trend leading to costlier imports for the
company.
q We maintain our 'BUY' on the company's stock with a one year DCF earlier revised price target of Rs 180 (Rs 272 earlier).
Conference call highlights
We recently interacted with the BAEL management to get a perspective on the business environment and earnings outlook for
the company. Below are the key highlights of our interaction
n Demand in consumer and lighting & luminaries' space continues to remain
strong. Management expects meaningful pick up in the revenues from tier ii and
rural areas. Management is confident of achieving growth of close to 25% and
20% in lighting and consumer business respectively.
n Demand for home appliances has remained more or less intact over 1HFY12. We
believe that this has been mainly on back of 1) growing disposable income
within Indian households (urban & rural) 2) evolving lifestyle patterns in India
leading to a peculiar shift in preference for premium products offered by organized players like HIL 3) shortening of product cycle due to higher rate of technological obsolescence 4) increasing electricity supply in urban and rural India.
n We highlight that there has been a reasonable growth in demand for lower
range product categories like television sets, semi-automatic washing machines;
medium range mobile sets, lighting products etc (refer update on Havells India
dated 20th Dec'11).
n Being a net importer, company has been observing margin pressure in the lighting business due to depreciating rupee trend. We highlight that the company's
imports comprises of 15-20% in fans and appliances business and 35-40% in
Morphy Richards.
n However company has received some respite from drop in input prices, mainly
aluminum and copper. Management has been trying to maintain margins by
employing steady cost management across the board and maximizing contribution from new products.
n Company has been incurring additional cost for business promotion activities. It
has been increasing its focus on deeper brand penetration especially in the rural/
semi urban areas. We believe that this likely to have a diminishing effect on the
margins in the short term.
n Company has reported increase in inventory levels of Rs 39 bn mainly on account
of piling up of finished goods inventory in the end of Q2FY12. It has observed
sluggish demand for fans and air-coolers this year due to lighter summer.
n In Q2FY12, company has reported 39% increase in capital employed in consumer durable SBU due to increase in finished goods inventory.
n E&P business has been observing pressure due sluggish public spending in infrastructure projects and building up of overcapacity in the T&D space. Management has cut its order book guidance to Rs 9 bn (Rs 10 bn in the end of Q2FY12)
by year end.
n In 1HFY12, E&P segment has reported the operating loss of Rs 11.5 mn vis-à-vis
profit of Rs 161.5 mn in 1HFYFY11.
n Company has been taking several measures to contain the overhead costs and
increase efficiency in the E&P business. For stances, it has been striving to reduce
the project sites from current 60 locations to 32 locations.
n In 1HFY12, interest charges have gone up significantly for the company due to
significant increase in interest rates. We believe that the increase in channel inventory has led to increase in the working capital requirement. Company has
built considerable amount of finished goods inventory over Q3-Q4FY11.
n Management has stated that the working capital in E&P is likely to get reduced
on back of closure of older project sites and release of retention money in few
projects. It expects to bring down the working capital from current 180 days to
150 days by the year end.
Company to sustain high growth in lighting and consumer appliances business; however sluggish growth in E&P business likely
to negatively affect free cash flow generation over FY12E-13E
n We project revenue growth of 15.5% CAGR between FY11-13 from Rs. 27 bn in
FY10 to Rs. 36 bn in FY13 on back of 1) continued momentum in consumer
durable space 2) pick up in investments in T&D space 3) incremental revenue
contribution from newly launched products 4) market share maintained at current levels in key product categories.
n Within the revenue streams, we expect consumer business to grow by 23%
CAGR, lighting by 17.4% CAGR and E&P by 2% CAGR in the same period.
n We expect the company to leverage its existing dealer network to introduce new
products in consumer business. Overseas technical collaborations with Morphy,
Securiton etc are likely to strengthen the revenue streams over FY12-13E.
n Company enjoys a strong brand positioning in the key markets where it operates. Despite increasing competition in the consumer appliances industry, it has
successfully taken the price hike of 2-3% over Q4FY11 and Q1FY12 to mitigate
the increasing raw material prices.
n We opine that the company is likely to experience margin pressure over 2HFY12
due to 1) sluggish performance in E&P division 2) increase in interest rates affecting working capital financing and 3) depreciating rupee trend making imports
expensive for the company. In our projected financials we build 7.6% EBITDA
margins for FY13E.
n We reduce our FY12 and FY13 earnings estimates for the company to factor in 1)
sluggish growth in E&P business 2) margin pressure on higher interest expense
and depreciating rupee trend.
n We arrive at one year DCF based target price of Rs 180 (Rs 272 earlier) on
company's stock.
Valuation & Recommendation
n At current price of Rs.144, company's stock is trading at 9.3x P/E and 5.3 x EV/
EBITDA on FY13E earnings.
n We reduce our estimates downward for FY12 and FY13 to factor in bleak business outlook in E&P business and margin pressure on account of increase in interest rates and rupee depreciation; maintain 'BUY' rating on the company's
stock with a one year DCF based revised price target of Rs 180 (Rs 272 earlier)
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