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On route to 10% EBITDA margin by FY23

We remain positive on Bajaj Electricals as turnaround play. We note (1) it is successful in improving EBITDA margin steadily (244bps expansion in FY21) due to higher focus on Consumer business and reduction in losses of EPC segment, (2) investments in innovation with 170 new product launches in FY21 and (3) focus on higher revenue per store which will lead to decline in working capital days and increase in market shares. The working capital days reduced to 48 in FY21 from 66 in FY20. We model Bajaj Electricals to report an earnings CAGR of 59% over FY21-FY23E with: (1) strong volume growth, (2) EBITDA margin expansion to 10% in FY23 from 6.6% in FY21 and (3) market share gains across segments. Maintain BUY with a DCF-based target price of Rs1,325 (implied P/E 33x FY23E; Earlier TP-Rs1,099). There is high margin of safety with the stock trading at 28x FY23E, at discount to other White Goods and Durable companies.

Q4FY21 performance:

Bajaj Electricals reported revenue decline of 3.2% but EBITDA growth of 94.6% YoY. It reported adjusted PAT of Rs572mn in Q4FY21 vs loss of Rs1mn in Q4FY20. While Consumer products segment reported 30.6% revenue growth, EPC segment revenue declined 48.9% YoY. Change in revenue mix resulted in higher EBITDA margins. It was up 290bps YoY.

Segment-wise details:

Revenues of Fans, Appliance and Morphy Richards were up 5%, 11% and 13% whereas revenues of Lighting declined 5% YoY. The company expects the revenue mix of Consumer products and EPC to remain at current levels (75:25) in FY22-23 but expects better profitability in both the segments. While it has introduced multiple new consumer products over past two years, the revenue contribution of these products is still less than 20%.

Focus on margin expansion:

We model the company’s EBITDA margin to be 10% in FY23 due to (1) its focus on Consumer products segment which has higher margins, (2) strategy to be selective in choosing EPC projects and reduce losses by Q4FY22, (3) invest in innovation. Bajaj Ele introduced 170 new SKUs in FY21 and plans to drive innovation in FY22 too and (4) implementation of cost saving initiatives.

To invest in improving revenue per store:

Higher focus on revenue per store will result in improving market shares in core regions. It will also result in better asset turns and higher RoI. We expect the company to invest in expanding distribution in South India as the revenue contribution of South is relatively lower. Geography-wise revenue contribution- East 31%, West 27%, North 26% and South 16%

Maintain BUY:We model Bajaj Electricals to report PAT CAGR of 59% over FY21- FY23E and RoCE to be >20% over FY22-23. We remain positive on its strategy to focus on consumer business and margin expansion strategy. Maintain BUY with a DCF-based target price of Rs1,325 (implied P/E 33x FY23E; Earlier TP-Rs1,099).

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