Bajaj Electricals - Growth momentum in all divisions expected in 2HFY17; Buy with a target price of Rs 298
On the recent applicability of the TOC-based model, Bajaj Electricals' Q1 sales slid 4.5% yoy. The company expects margins to expand. With healthy growth in EPC division in FY17, a robust order book, and higher profitability, we maintain a Buy, with a revised price target of Rs. 298 (earlier Rs. 287).
Q1 revenue tanks.Q1FY17 sales slid 4.5% yoy to Rs. 9.51bn (16.4% below our estimate). This was due to the decline in consumer durables (down 7.6% yoy) on implementing the ToC (Theory of Constraints)-based distribution model and no growth in the E&P division. Fans, appliances and Morphy Richards recorded ~0.5-2% yoy growth.
Slow operating margin growth. Falling raw material costs led to the operating profit margin rising a bare 37bps yoy to 5.9%. The consumer durables margin shrank 84bps yoy to 4.6% due to declining top-line growth. Profit climbed 12.2% yoy to Rs. 221m helped by lower interest cost, depreciation and the tax rate.
Better project execution leads to higher margin. Despite the E&P division' flat revenue, its margin rose 169bps yoy to 7.5%, powered by better project execution, lower provisioning and curtailed operating expenses. The company has a Rs. 24.7bn order book. This segment will be the major contributor to future overall revenue growth momentum.
Guidance. The TOC distribution model will stabilise by end-FY18 and RREP benefits reaped from FY18. The company expects the E&P division to contribute higher in FY17. It expects consumer durables to be positive by Q2, and luminaries to grow 15-20% in FY17.
Valuation. The E&P division's double-digit growth is expected to continue in the long term. With the focus on R&D and TOC, growth is expected. We have introduced FY19 estimates, and recommend a Buy. Assigning a PE of 17.5x to FY18e earnings, we arrive at a target of Rs. 298. Risks. Performance of the E&P division, lower demand for electrical appliances.
Shares of BAJAJ ELECTRICALS LTD.-$ was last trading in BSE at Rs.264.2 as compared to the previous close of Rs. 260.15. The total number of shares traded during the day was 17614 in over 469 trades.
The stock hit an intraday high of Rs. 267.4 and intraday low of 262.4. The net turnover during the day was Rs. 4652207.