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Increases focus on new launches and channel expansion

OEL’s FY21 Annual Report focuses on the strategy it adopted during the pandemicaffected fiscal. Improving product reach of existing categories, increasing adoption of digitization, and focus on cost saving programs were among the key focus areas in FY21. Here are the key highlights:

Cost savings program gathers pace:

The cost saving initiative – ‘Sanchay’ – has been repositioned into an entity-wide overarching ideation and cost consciousness platform, with the program enabled by a Cloud hosted digitized platform. With fixed cost savings, OEL achieved a lower breakeven point in FY21 (v/s FY20) and increased competitiveness across various market cycles.

Higher impetus on alternate channels:

In line with emerging trends and accelerated adoption of e-commerce, OEL created a dedicated team for this segment, with direct leadership oversight. OEL strengthened its channel relationship by launching a host of online first products (Inverter Fans, Lighting, Water Heater, and Kitchen Appliances) under different price points.

Focus on innovative launches intact:

The pandemic presented an opportunity to OEL to leverage its innovation capability and stay agile. It launched ‘UV Sanitech’– a UV-C light-based sanitization chamber that can sanitize all inanimate and daily use objects in four minutes from viruses and bacteria, including coronavirus.

Gross margin decline; cost control aids EBITDA margin:

With commodity price inflation, higher purchase of traded goods (up 9% YoY v/s flat revenue growth), and the change of mix in Fans towards entry-level products, gross margin declined to 30.1% (-150bp YoY). With a 10%/23% YoY reduction in employee/other expenses, EBITDA margin stood at 10.8% (+220bp YoY). Ad spends stood at 2.9% of sales (v/s 4% of sales in FY20).

Increasing adoption of automation and digitization:

OEL carried out a diagnostic study for adoption of the best manufacturing processes for Fans and Lighting, with verticals like Electronics manufacturing, Automation, Packaging, Paint Shop, Motor Winding Assembly, and Material Movement identified for immediate investments in the first leg. Implementation for the same is underway and is expected to be fully commissioned and utilized at peak capacity in the next two years.

Segment-wise performance and outlook highlights:

The Electrical Consumer Durables segment recovered its lost sales during the pandemic, strengthening its position in Fans, and gained market share in Appliances, ending FY21 flat YoY (INR15.1b). Lighting and Switchgear revenue declined by 9% YoY on account of a muted demand from the Institutional business. However, OEL outperformed the industry in the Consumer Lighting segment by ensuring product availability and optimizing the product mix.

FY21 performance highlights:

a) P&L highlights: Revenue was almost flat at INR20.3b. EBITDA grew 24.4% YoY to INR2.2b. EBITDA margin expanded by 220bp YoY to 10.8%. Adjusted PAT grew 52% YoY to INR1.2b. b) Balance Sheet highlights: The working capital cycle has reduced to six days from 50 days in FY20, owing to elongation in the payment cycle to vendors (93 days in FY21 v/s 59 days in FY20). With strong cash generation, OEL has almost entirely repaid ~INR1b worth of debt, leading to net cash of INR2.4b (v/s a net debt of INR0.9b in FY20). c) Cash flow highlights: Cash flow from operations almost tripled to INR4.7b. Coupled with a muted capex, FCF was strong ~INR3.9b (FY20: INR0.7b). d) Return ratios: RoE increased to ~26% (from 22% in FY20), while RoIC stood at 70% (v/s 22% in FY20).

Valuation and view:

While the recent lockdown has led to lower offtake, normal inventory level in the channel is expected to aid primary sales as demand stabilizes. We believe OEL is best placed to capture pent-up demand, with its strong manufacturing and distribution capabilities. We forecast a revenue/EBITDA /adjusted PAT CAGR of 17%/19%/23% over FY21-24E. We value OEL at 45x FY23E EPS, with a TP of INR395. At the CMP, the stock trades at a FY22E/FY23E P/E of 49x/37x. Our longer term thesis indicates a reduction in the margin differential between OEL and leading FMEG peers (refer to our initiation report). On a FY23E P/E multiple basis, OEL is trading at a discount of 33%/9% v/s HAVL/CROMPTON, while on an EV/EBITDA basis, the discount stands at 43%/32%. We maintain our Buy rating.

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