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Weak volumes in near term; expect strong margin recovery in H2FY23

Bajaj Electricals (Bajaj Ele) might face revenue growth pressures in the remaining period of FY23E due to: (1) muted demand from rural markets (company has relatively higher exposure to rural markets); (2) lower offtake in economy segment; and 3) sluggishness in the kitchen appliances market. However, we model overall margin to expand considering higher scale for lighting segment and correction in input prices. We also note the company is introducing multiple products in fans and the initial consumer/ trade feedback is positive. We model Bajaj Ele to report an earnings CAGR of 42.5% over FY22-FY24E. Maintain ADD with an unchanged DCF-based target price of Rs1,230 (44x FY24E EPS).

* Muted demand from economy segment: Our discussions with the company, industry and channel checks suggest slow demand from tiers 3 and 4 and rural areas in Jul-Aug’22. However, we note premium products and tier 1 and 2 cities continued to report healthy growth. The demand for economy segment products remain muted. We expect the company’s volume growth to be impacted due to higher exposure to rural areas.

* Kitchen appliances market might be sluggish: We expect lower volume offtake in kitchen appliances over FY23E-FY24E due to: (1) high base in FY20-FY22, which resulted from higher sales driven by increase in in-home time for consumers, and (2) likely postponement of demand in economy segments due to ongoing high inflation.

* Expect margin expansion in lighting segment: We believe uptick in B2B and B2G spends (which will likely improve scale of the project lighting business) and correction in input material prices will result in EBIT margin expansion in the company’s lighting and luminaire business. It will lead to higher overall margins for Bajaj Ele.

* Distribution expansion: Bajaj Ele is the most penetrated player in India’s consumer electrical space with presence across 0.23mn outlets (universe: 0.35mn). While the top 50,000 outlets contribute 80% of the total industry-wide sales (source: company), expansion of sales through the smaller outlets is indispensable for driving volume growth in tier-3 and lower areas.

* Maintain ADD: We model for Bajaj Ele revenue and PAT CAGRs of 16.9% and 42.5% respectively over FY22-FY24E, and RoCE at >16% by FY24E. Maintain ADD with an unchanged DCF-based target price of Rs1,230 (implied P/E 44x FY24E EPS). Key risks: Sharp increase in input prices and competitive pressures.

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