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Gaining market share via innovation: initiate with ADD

Orient Electric’s aggressive investments in R&D and ad-spend have helped it build competitive advantages in consumer electricals. With distribution expansion, it has gained market share across segments (fans, consumer durables) over the past decade. We believe the company has the potential to grow higher than the industry growth of ~15% due to (1) differentiated launches, (2) distribution expansion and (3) steady expansion of product portfolio. We model the company’s EBITDA margin to correct 30bps in FY24E due to prevailing input material inflation. We model 15.2% and 17.2% CAGRs in revenue and PAT over FY22-24E. We initiate coverage on the stock with an ADD rating and a DCF-based target price of Rs285 (implying 35x FY24E EPS). Key risks: Potentially higher competitive intensity and delay in distribution expansion.

* Strong competitive advantages: Orient has developed multiple competitive advantages over the past decade such as (1) established brand ‘Orient’, (2) strong distribution network of 125,000 retail outlets and (3) large portfolio of R&D based differentiated products across segments.

* Steady expansion of product portfolio; reducing dependence on fans: The company had only two products (fans and lighting) in FY11 and was highly dependent on fans. However, over a period of 10 years, the company has diversified its portfolio and has introduced switches, switchgear and consumer durables. It has also introduced multiple variants and SKUs under lighting and fans.

* Scope to improve market share: Orient has been steadily gaining market share across segments (fans, consumer durables) led by innovative launches and steady distribution expansion. Distribution is growing at a CAGR of 7.7% over FY18-21. The company’s ad-spend to sales is also higher than peers by at least 150bps, indicating higher investments leading to higher market share.

* Scope to improve margins: We note while Orient has strong product portfolio compared to peers, its profitability margins are still lower than peers due to (1) higher staff cost and (2) brand-building efforts. We model the company to largely maintain its EBITDA margin in FY24E at FY22 levels due to (1) premiumisation of portfolio and (2) operating leverage.

* Initiate coverage with ADD: We model revenue and PAT CAGRs of 15.2% and 17.2%, respectively, over FY22-FY24E. We forecast RoE to be upwards of 24% over FY22-24E. We initiate coverage on the stock with an ADD rating and a DCF-based target price of Rs285 (implying 35x FY24E EPS). Key risks: Delay in distribution expansion, failure of some new products and potentially higher competitive intensity.

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