One off expenses drag EBITDA margin…

About the stock: Bajaj Electrical’s business portfolio spans across s consumer products (CP) and EPC (illumination, power transmission and power distribution).

* CP (appliances, fans, lighting) contributes ~72% to topline and its premium brands includes Morphy Richards and Nirlep. The company has over 2.18 lakh retail touch points across India

* BEL has been reducing exposure in the EPC business with maximum on executing high margin business

Q1FY22 Results: Revenues came in better than our estimate but one off expenses and losses from EPC business hit margins.

* Revenues were up 41% YoY to | 857 crore (down 32% QoQ)

* EBITDA margin came in at 0.1%, much lower than our estimate of 5% due to one off expenses and losses from EPC business in Q1

* Reported loss of | 25 crore in Q1FY22 tracking low margin in Q1

What should investors do?

Bajaj Electrical’s share price has grown by ~4.5x over the past five years (from ~| 240 in July 2016 to ~| 1080 levels in August 2021).

* We maintain our BUY rating on the stock

Target Price and Valuation: We value Bajaj Electrical at | 1250 using SOTP i.e.28x and 8x EV/EBITDA for CP and EPC on FY23 EBITDA.

Key triggers for future price performance:

* Continuous focus on driving growth through CP categories. CP contribution in topline increased from 42% in FY19 to 72% in FY21

* Rural electrification, urbanisation and housing for all (~11.2 mn new houses under PMAY) will drive growth for home appliances

* Focus to increase CP margins by 1% every year

Alternate Stock Idea: We also like Crompton Greaves Consumer in same space.

* CGCEL is the market leader in the fan industry and increasing its presence in the small appliance category. The company has a strong balance sheet with RoCE, RoEs of 34% & 39%, respectively

* BUY with a target price of | 540

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