Bajaj Electricals - SPA

CMP: INR 169
Target Price: INR 210
Bajaj Electricals (BJE) reported Net Sales of INR 7,936mn, a YoY growth of 15.10% in Q3FY12. Company's EBIDTA margin declined by 212bps YoY to 8.16%. PAT at INR 328mn was down by 19.09% YoY. Despite good performance by consumer businesses (lighting & consumer durables), Engineering & Project (E&P) division played spoilsport, dragging down the overall sales growth and profitability. With ensuing slowdown in order inflow and delay in execution of projects in E&P segment along with uncertain economic outlook, we have revised down our sales and profitability targets for FY12-13.

Consumer businesses on strong track

Consumer businesses of BJE which constitutes of lighting (consumer lighting & luminaires) and consumer durables (appliances and fans) reported good performance in Q3FY12. Sales in lighting and consumer durables segment came at INR 2,002mn (up 18.84% YoY) and INR 4,138mn (up 24.66% YoY) respectively. Higher sales growth came on the back of strong sales of CFLs (~30% YoY) in lighting and appliance (~29% YoY) in consumer durable segment. Fans sales growth improved in Q3FY12 to 14% YoY compared to 4% in Q2FY12 with market share gain of ~1.4%. At EBIT margin front, lighting business reported 119bps YoY expansion of margins on the back of improved product mix, whereas margins in consumer durables got impacted by unfavorable exchange rate fluctuation which came at 11.13%, down 185bps YoY.

E&P division remains the nemesis

E&P division of BJE disappointed again with YoY sales de-growth of -5.03% and EBIT decline of 63.54% (much below our expectations) owing to slower order inflows and delay in execution. The division continued to be battered due to slow decision making in the government for environmental clearances and delay in payment resulting higher fixed and working capital cost which impacted profitability. Currently the order book in E&P division stands at INR 7,420mn (INR 2,860mn special projects, INR 1,400mn high masts and INR 3,160mn transmission towers). Going ahead, quick decision making by the government to improve power situation in the country would play a crucial role for this segment. However, based on the current uncertain economic outlook, we have revised our estimates for revenue and EBIT downwards for E&P segment to INR 8,500mn and INR 459mn in FY12 and INR 9,242mn & INR 658mn in FY13.

Change in estimates

On the back of expected poor performance by E&P segment and slowdown in growth of consumer businesses owing to uncertain economic environment, we have revised our sales estimates downwards. We expect EBIDTA margins to improve in consumer businesses with expected stabilization of exchange rate and higher realization due to favorable product mix. However, EBIDTA margins are expected to stay under pressure in E&P segment.

Outlook & Valuation

Higher demand for small appliances due to lifestyle changes have envisaged well for the consumer businesses of the company, which accounts for ~70% of overall turnover. Strong brand, wide distribution network along with better after sales services provides an edge against the competitors. Due to current economic headwinds, E&P division would remain under pressure in the short term but expected to perform well in the long term riding the growth in power sector. We have revised down our target price to INR 210 (11x FY13E EPS) and maintain BUY recommendation.

Source : Equity Bulls

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