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Published on 10/01/2020 10:55:34 AM | Source: SPA Securities Ltd

Buy Orient Electric Ltd For Target Rs. 240 - SPA Securities

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We initiate coverage on OEL, a strong #2 player in domestic fans market & largest exporter of fans from India. With focus on premium segment, OEL dominates this segment with ~ 50% market share. Lighting and domestic appliances are other product categories where OEL is present. Relatively younger profile of various product categories (except for fans) that it operates in, compared to peers, enables it to be out performer. Orient Electric is a part of the diversified CK Birla Group & is a distinguished name in the consumer electrical space. The company got demerged from Orient Paper & Industries 2 years back.

 

Focus on Innovation & Premiumisation of Product Portfolio Enables Faster Growth

OEL's focus on innovative and premiumised products across categories enables it to remain ahead of competition in terms of revenue growth. Under fans business, launch of aero dynamically designed 'Aeroseries' Fans have enabled it to outgrow competition and corner as much as 50% market share in premium segment of fans market(INR 1,500-3,999 per unit price category). Similarly, in Lights segment, recently launched LED lights 'EyeLuv', India's First LED lights with flicker control technology are enabling it to outgrow market when the competition is facing price erosion. On the back of success of above launches, OEL's revenue growth across both its SBUs, Electric Consumer Durables (ECDs) & Lighting has been very much ahead of competition in H1FY'20.

 

Highest Gross Margin Compared to Competition

OEL's gross margin has remained ahead of its most close competitor Crompton Greaves Consumer Electricals (CG Consumer). Product portfolio of both these players is very much identical except for that the latter is engaged into residential & agricultural pumps business as well. Again, 55% of manufacturing being undertaken in-house by OEL, also aids to higher gross margins compared to peers that have lower proportion of in-house production. During H1FY'20, OEL's gross margin has been 33.4% whereas the same has been 32.3% for CG Consumer. In case of Havells & V-Guard, gross margins are not strictly comparable with OEL as their revenue comprises of other products like Cables & Wires, Switchgears, Electronic Products etc.

 

Expanding Geographical footprint by setting up Manufacturing Facility in South India

All its 5 existing manufacturing facilities are located in North & East India. Again, majority of its revenue, nearly 40-45% comes from Northern India and Southern region contributing lowest to its revenue. OEL is contemplating to set up its first manufacturing facility in South India (CAPEX - INR 1,200 mn) buoyed by strong revenue growth from there during H1FY'20.

 

Outlook & Valuation

Relatively younger profile of businesses other than fans & focus on innovative and premiumised product categories enables it to outperform peers in terms of topline growth as well as gross margins. We estimate revenue & PAT CAGR of 19%&25% respectively during FY'19-'22 and initiate BUY on the stock with PT of INR 240 (40x September'21E EPS). On Price Earnings to Growth (PEG) basis, for the period FY'19-'22E, OEL is currently quoting at 2.4x compared to 3.0x for Crompton Greaves Consumer Electricals.

 

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