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Published on 6/02/2021 10:46:31 AM | Source: SPA Securities Ltd

Buy Orient Electric Ltd For Target Rs.330 - SPA Securities

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OEL recorded a revenue of INR 6183mn for the quarter compared to INR 4957mn a year ago with revenue from ECD division rising 42% to INR 4605mn whereas that of Lighting division dropping 8% to INR 3044mn. Tailwinds due to heightened consumer demand for all types of home appliances in the wake of increased home bound working, together with a strong support of pent-up demand and festival season, led to encouraging growth in offtakes. Gross margins as % to revenue dropped by 320 bps YoY to 31% primarily led by a substantial change in segment mix and product mix with a higher increase in share of business during the quarter in ECD vs-a-vis Lighting. EBITDAM expanded 440bps despite drop in gross margins primarily driven by better operating leverage. PAT witnessed a substantial jump to INR 520mn from INR 192mn, up 171%.

 

Revenue growth accelerated to 25% YoY driven by ECD business growth at 42%

OEL revenue growth accelerated to 25% to INR 6183mn for the quarter from INR 4957 mn a year ago driven by ECD business growth at 42%, 4605mn revenue. Lighting division revenue dropped 8% to INR 1579 mn despite consumer luminaires business doing well as B2B environment remained sluggish due to new projects still remaining on hold. Tailwinds due to heightened consumer demand for all types of home appliances in the wake of increased home bound working, together with a strong support of pent-up demand and festival season, led to encouraging growth in offtakes. Consistent network expansion has been the key enabler for driving the growth. The upsurge in organised industry revenues presumably were also arising from a supply chain shift from smaller scale and unorganized sector to larger established brands. The steep increase in commodity prices compelled all industry players to take up the prices effective Q4'21. The forewarning of price increase propelled dealer stocking during Dec'20. Premium products are steadily making a comeback with rising share of business. A&SP spends have been initiated with a targeted focus with TVC campaigns, dealer & distributor engagement programs, influencer meets, and on ground activation.

 

EBITDAM expanded 440bps YoY to 13.6% despite drop in Gross Margins

Gross margins as % to revenue dropped by 320 bps YoY to 31% primarily led by a substantial change in segment mix and product mix with a higher increase in share of business during the quarter in ECD vs-a-vis Lighting. Contribution to revenue from air coolers, having one of the highest gross margins amongst its product basket, was very much low during the quarter due to inventory pile up in the channel & that drove gross margins lower. EBITDAM expanded 440bps despite drop in gross margins primarily driven by better operating leverage. In view of the positive consumer sentiment, Advertisement and promotion expenses have resumed at last year levels during the quarter.

 

Working Capital

Sharper inventory planning, increased collections and channel financing, coupled with restructuring vendor terms assisted a reduction of working capital from 60 days (INR 364 cr.) last year to 18 days (INR 146 cr.) end-Dec'20. This has also resulted in improving the cash conversion cycle by around 40 days YoY.

 

Outlook & Valuation

Consumer durable industry witnessed good demand comeback with some pent-up demand, supported by higher rural consumption from tier-3 and tier-4 towns. Home appliances and lighting segment found renewed traction as "home focus" increased due to consumers by and large staying indoors. On the contrary, quite many projects and infra push by the government as well as the private sector was slow or withheld leading to sluggish demand in the B2B space. Net Debt stood at a negative INR 155 crore at Q3FY21 end from a positive INR 12 crore at FY20 end. Greenfield project based in South India for capacity expansion is progressing well & construction work for the same is likely to commence from Q1FY22. Gross margins are likely to witness normalcy on the back of average price increase undertaken to the tune of 3-7% across product line starting Jan'21. We introduce FY23 earnings & fine tune our earnings estimates for FY21 & 22 to adjust for accelerated growth in revenue & profitability. During FY20-23, Revenue & PAT are estimated to compound annually at 14% & 23% respectively. We maintain BUY on the stock with revised target price of INR 330 (40x FY22E EPS). Relatively younger product profile of businesses other than fans & focus on innovative &premiumised product categories should enable it to outperform peers in terms of growth as well as profitability over longer term.

 

Key Risks :

* Volatility in raw material prices

* Prolonged slowdown in new construction activities

 

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