BUY Bajaj Electricals Limited - Geojit BNP Paribas

Investment Rationale

- BEL, a 72 year old company with FY 11 gross sales of Rs 2,763 crore and PAT of Rs 144 crore, is part of US $ 7 billion Bajaj Group. Promoters own 65.61% equity stake in the company, which is under Shekhar Bajaj.

- BEL has six strategic business units – Home Appliances (irons, toasters, OTGs, room heaters / coolers, pressure & induction cookers, water heaters & geysers, mixers-juicers-grinders, etc.), Fans, Luminaires, Lighting, Morphy Richards brand of premium end house appliances, and Engineering & Projects (E&P).

- BEL is a marketing & distribution play in fast moving branded consumer durable products with national presence, holding No. 1 or 2 positions in most of the categories. Company has 19 branch offices besides support of about 1,000 distributors, 4,000 authorized dealers, over 400,000 retail outlets and over 282 Customer Care Centres. Such a wide distribution reach gives competitive advantage to BEL.

- Company also markets products under arrangements with Trilux Lenze – Germany (Luminaires), Delta Controls – Canada (Building Management Systems), Securiton – Switzerland (Security Systems), Morphy Richards – UK and Nardi – Italy (Appliances), Disney – USA and Midea – China (Fans). Company has invested in Starlite Lighting for manufacture of energy saving lamps (CFL).

- Company manufactures only CFL / LED lamps, small portion of fans volumes and fabrication & galvanising for E&P SBU. Rest is all outsourced from third party vendors under strict quality supervision. That way, company is quite fixed capital light.

- In E&P, it undertakes projects like high masts in airports and other industrial & commercial establishments, transmission line towers (TLT) for power and telecom, street lighting, and special projects like stadia lighting etc. Thrust on infrastructure spending and renovated APDRP are going to be key growth drivers for this SBU.

- Company has record of innovation and has been regularly launching new products to cater to changing consumer demand and thus taking on local competition and imports.

- Driven by changing lifestyle & aspirations, increasing urbanisation and rising disposable incomes; company has track record of growing top-line at CAGR of 19% during last 4 years and expects it to grow at CAGR of around 20-22% given Indian GDP growth of at least 6-7%.

- For BEL as a whole, the worst seems to be over in H1 FY 2012. From H2 FY 2012, earnings are expected to commence its upward journey. Company has been focusing on expanding EBIDTA margin in all its businesses and for that, nationwide rollout of Oracle ERP will reduce inventory levels and thus significantly improve RoCE. Company is also revamping its E&P SBU to be more selective in taking profitable orders having quicker turnaround in receivables. Both these initiatives will reduce its debt (Rs 286 crore + Suppliers Bills Acceptance Rs 390 crore on Sep 30, 2011). This coupled with softening of interest rate is expected to improve company's financials from FY 2013.

Valuation

- At CMP, share (Rs 2/-) is trading at 9.86 times estimated FY 12 EPS of Rs 13.96 and at 7.83 times estimated FY 13 EPS of Rs 17.57. It is available at 0.62 times EV / FY 12 Sales. Given market leadership in fast growing consumer products space, presence in infrastructure related offerings, and focus on improving profitability; the present valuation makes BEL an excellent BUY with 2-3 years' horizon.

- Market price of the company has corrected by ~ 24% during December 2011 (from ~ Rs 180 to CMP of Rs. 137.65) and may correct further. One should buy in the price range of ~ Rs 130-135, as at that price risk would be minimal; whereas reward could be quite high.

Source : Equity Bulls

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