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Establishes sustainable double digit margin outlook in consumer business

Bajaj Electricals (BJE) now has a couple of major business triggers, namely: 1) deleveraging balance sheet, and 2) improving margin and market share in consumer durables (CD) segment. While margin expansion and market share gain apply to organised peers too, BJE stands differentiated by its premiumisation efforts, wide product portfolio, and efficiency-led cost savings. We therefore believe BJE can sustain 15% revenue CAGR in the CD segment with 10-11% EBIT margin. Management claims of ‘transformation’ and ‘New Bajaj Electricals’ have been backed by performance over the past two quarters. We upgrade our margin estimates, valuation multiple and rating on the stock to BUY (from Hold) based on 30x (25x earlier) FY23E EPS (Sep’21 earlier).

* BJE was always high on product diversification while working capital management (a challenge due to higher SKUs) had undergone a structural lift over the past 3-4 years. With proven business discipline in EPC and improved margins led by cost-efficiency and operating leverage, BJE becomes a better play on electricals / kitchen appliances than before. EPC though continues to pose risk, both upside and downside.

* Strong Q3FY21 performance; expect CD segment to grow ~15% in FY21E. BJE’s CD revenues grew 34/(-)0.3% YoY with 12.3/10% EBIT margin (all-time high) in Q3/9MFY21. Within CD, appliances / fans / lighting / Murphy Richards reported revenue growth of 36% / 22% / 18% / 69% YoY respectively. Strong margin performance in the segment was due to a combination of cost savings as well as operating leverage with no savings in adspend (Rs450mn in Q3FY21 at 3.9% of sales). This strong margin performance is in line with that of organised peers who benefitted from part pre-buying in Q3FY21 in anticipation of price hikes (due to higher commodity prices) in Q4 and gain in organised market share. BJE management feels this vantage position is likely to continue in H1CY21 too, post which, the market share gain can become sticky. 9MFY21 EPC segment reported Rs9.9bn in revenues with EBIT loss moderating to Rs462mn.

* Deleveraging and discipline in EPC project selection remains on track: Equity raising and healthy cashflow from operations (Rs6.1bn in 9MFY20) has led to deleveraging. Debt has reduced from ~Rs9.6bn in FY20 to Rs8.1bn in Q1FY21, Rs5.6bn in Q2FY21 and Rs4.4bn in Q3FY21. As of Q2FY21, BJE has Rs16bn receivables from the EPC business (Rs17bn/20bn in Sep/Mar’20). Continued discipline in project selection (especially in power distribution) and faster receipt of receivables in EPC can give a positive surprise on earnings. Management has guided for sustainable profits in this segment from H2FY22.

* Expect EBIT to increase from Rs1.3bn in FY20 to Rs5.4bn in FY23E: We expect EPC revenues of Rs14bn in FY21E (25% lower YoY) and expect a similar run rate for FY22E/FY23E in line with management guidance with modest EBIT of Rs284mn and Rs568mn in the respective years. We estimate CD revenues to grow at 14% CAGR between FY19-FY23E and EBIT margin to gradually increase from 6.5% in FY20 to 10%/10%/11% in FY21E/FY22E/FY23E respectively.

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