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Consumer product growth outlook remains intact…

Bajaj Electricals’ consumer product segment reported 7% YoY revenue growth in FY21 despite loss of sales in Q1FY21. The company has maintained double digit growth guidance in consumer product (CP) for FY22 despite disruptions in May 2021 owing to lockdown. The urban regions, which contribute about two-third of segment sales will be key growth driver for Bajaj in the medium term as these regions are likely to recover fast from the pandemic. However, pent up demand in rural regions is unlikely to be same as last year due to deep penetration of Covid-19 in the hinterlands. The management expects a gradual recovery in consumer demand from Q2FY22 onwards. The management has also reiterated continuous investment in CP segment to increase products offerings, brand building activities and increasing reach. This would help BEL to achieve double digit revenue growth in FY21-23E along with improved segment margin profile. On the project front, the focus remained on reduction of exposure in the power distribution segment (the order book size declined from | 828 crore in FY20 to | 224 crore in FY21) and to report segment profit from H2FY22.

Strong performance of consumer products

Bajaj Electrical’s Q4FY21 revenue fell ~3% YoY mainly due to 49% revenue dip in the project business. However, CP revenue growth came in at 31%, better than our estimate of 24%, mainly due to strong demand for consumer appliances (up 37% YoY), fans (up 36% YoY) and Morphy Richards (up 30% YoY). On the EPC front, the company’s focus on reducing power distribution revenue exposure resulted in a sharp decline of segment revenue by 49% in Q4FY21. Going forward, we build in revenue CAGR of 11% in FY21-23E led by ~14% revenue CAGR in CP segment. For project business, we build in a flattish revenue CAGR of 4% for FY21-23E due to the company’s focus to bid for only quality orders.

Double digit margin guidance of CP segment

Bajaj’s CP EBIT margin increased 190 bps YoY to 8.7% in Q4 (up 320 bps YoY to 9.6% in FY21) led by price hikes and higher operating leverage. On the EPC front, the company managed to reduce losses from | 23 crore in Q4FY20 to ~ | 8 crore in Q4FY21 due to reduction in exposure of low margin orders and various cost optimisation measures. While BEL guided that project business will start a positive contribution from FY22E onwards, the CP segment margin would see further improvement (EBIT margin of 10%+) owing to cost optimisation measures and focus on premiumisation.

Valuation & Outlook

We believe strong demand outlook of CP and focus on debt reduction (gross debt reduced by 60% in FY21) will lead to an improved RoE and RoCE for Bajaj Electrical, going forward. We value stock on a SOTP by ascribing 28x, 8x of FY23E EBITDA, to CP and EPC business, respectively. We maintain our BUY rating on the stock with a revised target price of | 1280 (earlier | 1075).

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