BAJAJ ELECTRICALS E&P cost over runs wound profitability, yet again": Edelweiss,

Bajaj Electricals’ (BJE) Q4FY13 numbers were disappointing as lower
margins across businesses took a toll on overall profitability. While cost
over runs continued to plague engineering & projects (E&P), consumer
durables’ margin dipped due to inventory write-down of nonmoving/
defective items. Revenue grew 5% driven by consumer durables
(up 22%) and lighting (up 15%) even as E&P declined 22%. The company
estimates 25% (INR42bn) revenue growth and 100bps margin
improvement in consumer-facing business in FY14. We cut our FY14E and
FY15E earnings 9% and 8%, respectively, as we lower our E&P margin
estimate. We believe near-term pain is unlikely to subside in E&P as BJE
continues to execute low-margin sites. Hence, maintain ‘HOLD’ with
revised target price of INR185 (earlier INR200).

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E&P drags down PAT; FY14 revenue guidance at 25%
The E&P segment, driven by continued cost overruns along with revenue decline,
dragged down overall profitability as BJE reported earnings of INR6.3mn (INR491mn in
Q4FY12). The company’s margin also plunged 250bps and 150bps YoY to 7.9% and
8.0% in lighting and consumer durables segments, respectively. The dip was
predominantly due to a combination of inventory correction on account of non
moving/defective items and adverse forex movement affecting input cost for Morphy
Richards and fans. BJE has issued fresh revenue guidance of 25% revenue growth
(INR42bn) for FY14 where lighting, consumer durables and E&P are expected to report
18-20%, 20-22% and 50% growth, respectively.
Outlook and valuations: Challenging; maintain ‘HOLD’
E&P business continues to dent overall performance and its turnaround holds key for
BJE’s valuation. We maintain our concerns regarding overall profitability, especially
recovery in E&P segment’s margin, which remains a key drag for the company. Also,
weak margin in consumer durables business raises fresh concerns. We trim our FY14E
and FY15E earnings 9% and 8%, respectively, as we build in lower margin in E&P
business. The stock is trading at P/E of 11.6x and 8.7x FY14E and FY15E, respectively.
We maintain ‘HOLD/ Sector Performer’ with a revised target price of INR185 as we roll
forward to FY15E earnings.