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Consumer products driving growth

Consumer products segment of Bajaj Electricals continued its strong growth momentum led by (1) continuous launch of new innovative SKUs (53 in Q2), (2) distribution expansion of Morphy Richards, (3) strong double-digit growth across appliances, fans and lighting. Due to steep inflation in input prices, the gross margins were down 566bps YoY, but its cost-saving initiatives Mulya and Samridhhi arrested the impact on EBITDA margin (down only 136bps YoY). We believe the company will continue to generate RoE > cost of capital due to (1) higher focus on Consumer business and reduction in losses of EPC segment and (2) investments in innovation. We model Bajaj Electricals to report an earnings CAGR of 34.2% over FY21-FY24E and downgrade stock to ADD rating with a revised DCF-based target price of Rs1,165 (30x FY24E; Earlier TP-Rs1,235).

* Q2FY22 performance: Bajaj Electricals reported revenue growth of 6.9% YoY. While EBITDA declined 9.9% YoY, adjusted PAT was up 17.8% due to higher other income. Gross and EBITDA margins were down 566bps and 136bps due to inflation in input material costs.

* Segment-wise details: Revenues of Appliances were up 41% YoY. Revenues of Fans, Morphy Richards and Lighting were up 13%, 35% and 20% YoY, respectively. Consumer products segment reported 30.7% YoY revenue growth, EPC segment reported revenue declined 37.3% YoY, led by selective new orders in-take. The company carries a healthy order book of Rs7.58bn in EPC segment. Illumination business unit grew 25% YoY to Rs1.5bn in Q2FY22.

* Steady launch of new products and improved reach: Bajaj Electricals launched 53 new SKUs in consumer products segment. It also expanded its illumination portfolio with 94 launches. The company’s investments in ecommerce and modern trade are resulting in strong performance of both channels, up 74% and 64% YoY. We believe strong product innovation and reach expansion will likely lead to strong growth for the company.

* Focus on margin expansion: We model the company’s EBITDA margin to be 8.6% in FY24 due to (1) its focus on Consumer products segment which has higher margins, (2) strategy to be selective in choosing EPC projects, (3) launch of new innovative products and (4) adequate price hikes. The company also reduced its net debt by Rs4.19bn in Q2FY22 which will also lead to lower finance costs.

* Downgrade to ADD: We model Bajaj Electricals to report PAT CAGR of 34.2% over FY21-FY24E and RoCE to be >20% by FY24. Downgrade the stock to ADD rating with a DCF-based target price of Rs1,165 (implied P/E 30x FY24E EPS; Earlier TPRs1,235).

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