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Long term story intact; maintain BUY

Bajaj Electricals’ (BEL) 2QFY23 standalone revenue fell by 6% YoY (+4% 3-year CAGR) with Consumer Products/ Lighting segment revenue declining by 2%/ 4% YoY respectively. While Fans / Morphy Richards and B2C Lighting revenue fell by 7% 4%/ 26% respectively, Appliances and B2B lighting saw 2% / 4% YoY growth. Although rural and economy segments continue to be under pressure, BEL remains cautiously optimistic on demand recovery led by a) encouraging festive sales, and b) good monsoon and jobs data. Given the stable RM environment, BEL remains confident of delivering atleast 100bps+ annual margin improvement over the next 2 years led by a) premiumisation of portfolio (fans’ share up to 20% vs. 6% in FY19), b) sustained investments in brand and product architecture, and c) improving mix in the lighting segment. The company reported the 14th consecutive quarter of positive CFO. We broadly maintain our FY23-25 estimates and keep our Sep’23TP of INR 1,500 unchanged. BUY. This is our top pick in the ECD coverage universe.

* 2QFY23 summary: Revenue fell 6% YoY to INR 12.2bn (+4% 3-year CAGR; flat QoQ and in line with JMFe) as a) Consumer Products (excluding Lighting) revenue fell 2% YoY (Havells / Crompton/ Orient reported YoY growth of +6%/ -3%/ -26% respectively), b) Lighting (including B2B) revenue fell 4% YoY (vs. +12%/ -7%/ +15% YoY for Havells / Crompton/ Orient respectively), while c) EPC revenue fell 39%YoY (in line with the management’s strategy of containing the business). EBITDA grew 2% YoY to INR 938mn (20% above JMFe). Consumer Products (excluding Lighting) EBIT margin fell 310bps YoY (+170bps QoQ) to 7% while Lighting (including B2B) EBIT margin rose by 310bps YoY (+150bps QoQ) to 9.3%. EPC segment remained profitable and reported EBIT margin of 8.7%. PAT grew by 3% YoY to INR 639mn (+44% QoQ; 20% above JMFe).

*Softening RM prices, improving mix to aid margin expansion: Despite liquidation of highcost inventory, BEL saw margin improvement led by the Lighting solutions segment (EBIT margins up 310bps YoY). As per the management, 2QFY23 CP margin was impacted as a few players resorted to price cuts in order to stimulate demand but believes demand softness has bottomed out given a) softening RM prices b) premiumisation of portfolio (for fans it was 19% vs. 6%) and c) improving mix in the Lighting segment.

*Tweak estimates; reiterate BUY: We tweak our FY23-25 estimates by 2-4% to reflect 2QFY23 performance and commentary. We continue to like BEL due to a) turnaround in the EPC business (cash flow generation; containment of revenue growth; EBIT positive), b) expected margin improvement and strong cash flow generation in the CP business as it continues to invest in product rejuvenation (category presence, premium mix, etc.) as well as brand-building activities c) demerger of its EPC business (BEL will be a pure consumer appliances play), and d) reorganisation and strengthening of the leadership team. We value BEL’s a) CP business at 40x Sep’24EPS, and b) EPC at 5x Sep’24EPS to arrive at a Sep’23TP of INR 1,500 (unchanged). BUY. Key Risk: Deceleration in macro recovery and inability to pass on the sharp spike in RM costs to consumers.

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