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Add Bajaj Electricals Ltd For Target Rs.1,193

Consumer products outperformance now priced in; downgrade to ADD

Result Highlights

* Quarter summary – Bajaj Electricals missed revenue estimates largely on lower revenue from EPC segment. Consumer products business delivered better than expected revenue growth. Gross margins expanded on favorable business mix towards consumer products.

* Consumer products business – Consumer products registered 30.6% growth. All product categories except lighting led to growth in consumer business (Appliances +37%, Fans +36%, Morphy Richards +30% and Lighting ‐4%. Higher base led to growth being lower than peers.  

* EPC business – EPC business saw 49% revenue decline with an EBIT loss of Rs79mn. This decline is in line with management initiatives of limiting power distribution business which has been a pain point for the company.  

* Working capital – Working capital cycle has seen reduction to 122 days as on Mar’21 vs 135 days as on Mar’20 despite company making conscious decision to carry higher inventory to the tune of Rs1700mn. Reduction in working capital is on back of lower revenue from the EPC business.

Valuation and view – 4Q saw continuing growth momentum in consumer products, while EPC business saw subdued execution. All products except lighting continue to do well for the company. EPC business continues to see clean‐up and is expected to be profitable from 3QFY22. Increased efficiencies and change in business mix led to EBITDA margin expansion despite higher A&P spends. Merger of Starlite Lighting with company should bring in additional efficiencies

We expect strong growth momentum to continue in consumer products business, with profitably returning in the EPC business 2HFY22 onwards. Company’s strategy of carrying higher inventory will help them to better navigate commodity inflation headwinds. We expect FY21‐23E Revenue/EBITDA/PAT CAGR of 14%/33%/44% and arrive at a PT of Rs1,193 valuing the company at 35x FY23 EPS. We downgrade to ADD from Buy given limited room for further upside post the strong run‐up in recent past.

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