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Satisfactory performance in challenging environment; maintain BUY; de‐merger to unlock value

Result Synopsis

Consumer products (CP) business registered a satisfactory performance in Q4 despite high base and a challenging environment. Margins in the CP business were impacted by high commodity inflation and normalization of costs. EPC business continues to see clean‐up action and has broken even in Q4. Management is confident of a gradual pick‐up in demand and margin improvement from 2HFY23 as it has taken 5% price increase in April; EPC business is expected start generating profits from FY23 on annualized basis with some volatility in quarterly profitability. Consistent improvement in balance sheet with strong cash generation ability makes us confident of company’s ability to overcome challenging environment. We continue with our positive stance on the company and maintain BUY. Further, demerger should lead to a sustained focus on CP business which can lead to outperformance driving a re‐rating of the consumer products business.

We expect growth momentum in the consumer business to continue as BJE has been launching new SKU’s across the categories at the premium end. This has resulted in market share increase in urban markets which was been a weak area for BJE. EPC business is now expected to turn profitable from FY23 on sustainable basis leading to a higher multiple. We have cut our FY23 and FY24 earnings as profitability is expected to improve only from 2HFY23 as commodity prices stabilize. We build in FY22‐24E Revenue/EBITDA/PAT CAGR of 13%/54%/84% and maintain BUY with PT of Rs1,286 continuing to value the company at 35x FY24EPS. We expect the stock to re‐rate with a further improvement in efficiencies and profitability in EPC business and concentrated focus on Consumer business.

Result Highlights

* Quarter summary – Bajaj Electricals delivered lower than estimated revenue with consumer products registering growth of 6.4% (Appliances  ‐5.3%, Fans +22.2%, Morphy Richards ‐34.4% and Lighting ‐31.3%). 

* Margins – Margins in consumer business contracted by 251bps due to higher commodity prices as company had not taken any price increases in Q4. Margins are expected to back at normalized levels from 2HFY23

* EPC – EPC business saw 4.7% revenue growth with an EBIT of Rs69.7mn. Company has broken even in Q4 and expects to be profitable on annualized basis from FY23 onwards

* Net Debt and Cashflow – Company has turned net cash positive in FY22 after almost a decade. Its cashflow from operation stood at Rs2.6bn, which is 12th consecutive quarter of positive CFO.

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