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Improving growth momentum and cost efficiencies; upgrade to ADD

Result Highlights

* Quarter summary –

Orient Electric delivered better than expected revenue growth of 42% yoy. ECD and Lighting and switchgears have registered growth of 42% and 44% respectively. Increased commodity prices led to 257bps contraction in gross margin while EBITDA growth stood at 48.5% yoy on cost control initiatives.

* Growth across segments –

ECD and Lighting & switchgears have equally contributed to revenue growth. Growth was on back of low base, sustained consumer demand and high growth from B2C business.

* Commodity inflation impact –

Gross margins contracted sharply by 257bps to 28% on back of steep increase in commodity prices part of which could not be passed on in view of prevailing business environment.

* Working capital –

ORIENTEL’s initiatives on higher channel financing, reduction of outstanding and increasing vendor financing has been bearing fruits. Working capital cycle has reduced to 11 days in Mar’21 vs 47 days in Mar’20.  

Valuation and view –

4Q saw broad based growth across segments with both ECD and Lighting & Switchgear equally contributing. Growth has been led by B2C business across channels with E‐commerce delivering 2x growth. Gross margins were impacted on rising commodity prices; however, improving product mix and some pricing action has partly offset the impact. Lockdown/restrictions across various part of the country on back of second wave could challenge growth momentum in the near term; but we expect ORIENTEL to sail through as new product launches, comfortable channel inventory and high retail demand continue to support growth.      

ORIENTEL is on strong footing as B2C business is witnessing increased traction with well entranced distribution network, product innovation and brand investments.We expect strong growth momentum to continue in B2C this along with gradual recovery in tender and project business from 2HFY22. This along with increased working capital efficiencies and sharp reduction in borrowings should result in increased efficiencies. We expect FY21‐23E Revenue/EBITDA/PAT to grow 14%/7%/12% and arrive at PT of Rs319 valuing it at 45x FY23 EPS. We upgrade stock to ADD rating as recent stock price correction gives a good entry opportunity.

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