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Consumer Products scaling up; margins set to revive

Bajaj Electricals (BJE) posted Q1FY23 sales at Rs12.3bn, 5%/2% above our/consensus estimates. Consumer Products (CP) sales at Rs9.7bn (Q1FY20-23 CAGR at 7.5%) were marginally higher than our estimate of Rs9.1bn, even though BJE lost sales worth Rs300mn-Rs500mn due to upgradation to SAP 4 Hana systems. EPC sales were in-line with our estimate at Rs2.6bn with negative Q1FY20-23 CAGR at 21% due to deliberate downsizing of order book. With better sales mix (CP’s share in total sales at 79.2% vs 77.6% QoQ) and 5% price hike in April’22, gross margin rose 450bps QoQ to 29.7%. EBITDA margin expanded 130bps QoQ to 5.8%, 50bps above our estimate. EBIT margin of CP was almost flattish QoQ at 6.1%, but was below our estimate of 7.4%, due to presence of high cost inventory. EBIT margin of EPC was at 2% and stayed positive for second consecutive quarter. PAT stood at Rs506mn, above our/consensus estimate of Rs404mn/Rs407mn. BJE remained net-debt free with healthy OCF of Rs1.7bn and cash surplus of Rs2.5bn. BJE is seeing signs of demand revival in August’22 and expects margin profile to improve due to input cost reduction. We cut our earnings estimates for FY23E by 8% while broadly retaining our FY24E estimates. We assign P/E of 35x/10x to FY24E EPS of Consumer/EPC business with a revised SOTP-based target of Rs1,200 (Rs1,210 earlier). However, post the recent run-up in stock price, our rating stands downgraded to ADD (from BUY earlier).

Consumer Products: Broad based growth across products and channels

CP sales was at Rs9.7bn (Q1FY20-23 CAGR at 7.5%) with EBIT margin of 6.1%. The share of general trade and alternate channel was 68 : 32. Within alternate channel, sales via modern retail/e-com/institutional/government grew 120%/19%/54%/41%, YoY. Fans sales grew 65% YoY with Q1FY20-23 CAGR at 7.4%, with BJE gaining market share. The share of premium fans rose to 20% vs. 15% QoQ. Economy and budget segment formed 20% and 60% of total sales. BJE didn’t take price cuts in fans to defend margins, but a couple of peers did. Lighting sales grew 90% YoY. BJE strengthened its B2C LED lights portfolio, where it lagged earlier, with 70 new launches of battens, panels and downlighters. Appliances sales grew 53% YoY with growth from core categories of mixers, water heaters, irons and air coolers. Morphy Richards sales fell 9% YoY.

EPC: Calibrated execution and improved collections led to positive EBIT

Revenue was on expected lines at Rs2.6bn with EBIT margin of 2%. Illumination business scale up continued with sales of Rs1.5bn along with improved market share and margins. Power distribution and transmission sales were at Rs1bn with positive EBIT. Order book at end-Q1FY23 stood at Rs9.1bn (down 5% QoQ) comprising of Rs7.1bn transmission line, Rs1.9bn illumination projects and Rs110mn power distribution. EPC receivables reduced Rs2bn QoQ to Rs7.1bn as on Q1FY23.

Downgrade to ADD with a revised target price of Rs1,200

We expect BJE to post 17% revenue CAGR over FY22-24E. Healthy margin expansion in Consumer Products and turnaround in EPC will lead to robust 63% EPS CAGR, on a low base. However, with limited upside on current valuations, we downgrade to ADD.

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