Add Orient Electric Ltd For Target Rs.245 - ICICI Securities
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Strong growth across segments with recovery in margins
Orient faced multiple extraordinary events such as regulatory changes in fans, steep inflation and distribution restructuring in FY23. It led to 340bps EBITDA margin contraction and 40% PAT decline in FY23 YoY. We believe most of these issues are behind now and the company is likely to report strong performance across segments in FY24-25. We remain enthused by its Q1FY24 performance with strong revenue growth across segments (Fans: 16%, water heaters 23%, small appliances 32% and B2B lighting 40% YoY). We model Orient’s EBITDA margin to recover to 8.4% in FY24 from 6% in FY23 due to normalisation of business activities and commodity deflation. We maintain ADD rating with DCF-based unchanged target price of Rs245 (implied P/E of 33x FY25E).
Q1FY24 results
Orient reported revenue, EBITDA and PAT growth of 13.5%, 15.3% and 3.9%, respectively YoY. While gross margin was up 290bps due to correction in commodity prices, EBITDA margin was up just 10bps due to higher staff cost and other expenditure (higher brand building spends in our view).
Segment-wise performance
ECD and Lighting & Switchgear segments reported revenue growth of 15.6% and 8.1%, respectively YoY. EBIT margin of ECD contracted 327bps but Lighting & Switchgear EBIT margin was up 45bps YoY. Exports grew 35% YoY. Fans, Water Heaters and small appliances revenues were up 16%, 23% and 32%, respectively. Air cooler demand was impacted due to unseasonal rains.
Model improvement across business functions
Orient suffered multiple one-offs like (1) distribution restructuring, (2) regulatory changes in fans in H2FY23 and (3) steep inflationary pressures. As most issues are behind now, we model steady improvement in margins, reduction in working capital and higher return ratios in FY24-25.
Maintain ADD
We model Orient to report revenue and PAT CAGR of 13.9% and 44.7%, respectively with RoE improvement with input deflation. We maintain ADD rating with DCF-based unchanged TP of Rs245 (implied P/E 33x FY25E).
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