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Playing the right notes; Reiterate BUY

Bajaj Electricals’ (BEL) 1QFY23 standalone Consumer Products (CP) segment sales grew by 7% on 3-year CAGR (+59% YoY on a low base; 2% above JMFe) with the quarter being impacted by demand slowdown in the later half and ERP transition (INR300-400mn lost sales). Within CP, Fans / Lighting/ Applainces grew 65%/ 90%/ 53% YoY (leading to market share gains) while Morphy Richards remained under pressure (-9% YoY). With softening RM prices and 5% price hike undertaken in Apr’22, CP margin remained resilient (-10bps QoQ) at 6.1% and is expected to improve further going ahead. EPC recorded the second consecutive quarter of positive EBIT. PAT at INR 506 mn was in line with JMFe. Cash flows continue to be strong with BEL reporting the 13th consecutive quarter of positive CFO. We like the company’s startegy of simplying the corporate structure (de-merger of EPC, integration of Hind Lamps, Starlite and now Nirlep) which will help bring in efficiencies. BEL remains optimistic on the medium-term outlook (double-digit margin guidance in the medium term) on the back of a) market share gains in fans and lighitng verticals (filling product gaps, GTM, etc.), b) good monsoon and healthy MSP to aid rural demand in 2HFY23, c) softening input costs, and d) strategic initiatives to augment Morphy Richards and Nirlep. We broadly maintain our estimates and introduce FY25. Nothwithstanding the nearterm demand weakness, we maintain BUY with a Sep’23TP of INR 1,550 (INR 1,490 earlier). This is our top pick in the ECD coverage universe.

* 1QFY23 summary: Revenue fell 2% (3-year CAGR) to INR 12.3bn (+44% YoY on a low base; -7% QoQ and 2% above JMFe) as a) Consumer Products revenue grew 7% (3-year CAGR) (Havells / Crompton/ Orient reported 3-year CAGR of +14%/ +8%/ +1% respectively), while b) EPC revenue fell 21% (3-year CAGR) in line with the management’s strategy of containing the business. Gross margin contracted by 340bps YoY (+450bps QoQ). EBITDA margin expanded by 500bps YoY to 5.8% (+130bps QoQ) with 400bps/440bps decline in employee cost / op expenses more than offsetting gross margin weakness. EBITDA fell 4% on 3-year CAGR (+20% QoQ) to INR 712mn (4%below JMFe). Consumer Products EBIT margin expanded 360bps YoY to 6.1% (JMFe: 6.8%) while EPC segment performance remained profitable for the second consecutive quarter and reported EBIT profit of INR 51mn. Other income grew 49% YoY to INR 198mn while finance cost declined 51% YoY to INR 72mn, which aided PAT growth of 43% (3-year CAGR) to INR 506mn (+14% QoQ and in line with JMFe).

* Demand slowdown, ERP transition impact 1Q performance; outlook positive: After a strong start to April, demand softened post the 2 nd half of May. Moreover, ERP transition in May negatively impacted sales by INR 300-400mn, as per the management. BEL carried out a c.5% price hike across categories in Apr’22, but with softening RM prices it scrapped plans for further price hikes during the quarter and does not foresee any cut in the near term. Although some demand weakness continued in July as well, early trends seen in August are encouraging and the management remains optimistic of a strong bounce-back in the coming months aided by an early festive season. It expects rural demand also to recover in 2Q/3Q given the expectation of a good monsoon and healthy MSP. It also expects the recent RM softening to support margin recovery in the coming quarters

* Persistent efforts on streamlining business structure to drive growth and efficiencies in long term: With the demerger of the EPC business (ex of Illumination) into a wholly owned subsidiary now on the horizon (end of FY23) and merger of Hind Lamps, BEL is looking to further streamline the corporate structure to help drive efficiencies. Integration of Starlite is expected by end of 2QFY23 while BEL has also received in-principle approval from the board for the integration of Nirlep. Illumination and B2C lighting business will now be unified with a separate procurement, supply chain, marketing and GTM team. Furthermore, in the near term, BEL remains focused on scaling up and filling product gaps in fans (premium) and lighting (value added products) while in the medium to long term it will focus on scaling up Morphy Richards (product portfolio, GTM, branding, etc.) and Nirlep.

* Maintain estimates; reiterate BUY: We broadly maintain our FY23/24 estimates and introduce FY25. We continue to like BEL due to a) turnaround in the EPC business (cash flow generation; containment of revenue growth; EBIT positive for 2 consecutive quarters, b) expected margin improvement and strong cash flow generation in the CP business as it continues to invest in product rejuvenation (category presence, premium mix, etc.) as well as brand-building activities c) demerger of its EPC business (BEL will be a pure consumer appliances play), and d) reorganisation and strengthening of the leadership team. We value BEL’s a) CP business at 40x Sep’24EPS, and b) EPC at 5x Sep’24EPS to arrive at a Sep’23TP of INR 1,550 (INR 1,490 earlier). We maintain BUY. Key Risk: Deceleration in macro recovery and inability to pass on the sharp spike in RM costs to consumers.

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