Bajaj Electricals - E&P overhang to subside; upgrade to BUY - Religare

Our meeting with the BJE management revealed that the number of active sites for the E&P business has come down to 6 (versus 24 in April'11) and the management expects to close all the troubled sites by FY13. Robust growth in the Consumer/Lighting businesses and price hikes in July'12 are expected to aid BJE's margin profile in the short to medium term. We upgrade the stock to BUY and roll over to a September'13 TP of Rs 240 (from Rs 185), based on a target P/E multiple of 12x.

- Overhang on E&P business to subside; improvement in order book: BJE's current order book has strengthened to Rs 6bn (1x FY13E sales; order backlog at Q1FY13-end stood at Rs 4.5bn, down 38% YoY), and the company is L1 for additional orders worth Rs 4bn. The number of active sites for the E&P business has come down to 6 (vs. 17 in Q1FY13). The management expects to discontinue unprofitable projects in this business during FY13 and achieve higher efficiency at project sites through better on-site monitoring. Further, the management indicated that competition in the transmission line tower business has also stabilised.

- Price hikes to support margins in Consumer Durables: BJE took its latest round of price hikes in July'12 (4-8%) across consumer durable product lines. These are expected to support operating margins for the segment.

- Positioned to benefit from incremental INR appreciation: BJE imports ~13% of total purchases: ~10% of procured Fans, 15% of appliances and 40% of the Morphy Richards portfolio. Incremental rupee appreciation against the dollar would thus be beneficial for margins.

- Upgrade to BUY: The stock is trading at 14.4x/10.9x FY13E/FY14E earnings. With an improving risk profile for E&P (fewer troubled sites, increasing order book) and a stronger margin outlook for the company, we upgrade the stock to BUY.

Source : Equity Bulls

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