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Growth and margin improvement trajectory to continue; upgrade to BUY

Valuation and view – Consumer products (CP) saw continuing broad‐based growth momentum in Q1 despite a challenging environment. Margin in CP business was impacted due to higher allocation of over‐heads, increased A&P spends and additional spends on warehousing due to delay in transition to 3rd party logistics. EPC business continued to see clean‐up actions and is expected to exit FY22 at break even levels. Management is confident of buoyant demand and margin improvement in CP business despite higher allocation.

We expect strong growth momentum to continue in consumer products business, with profitably returning in the EPC business FY23. Company’s initiatives of price increases coupled with shifting of logistics and warehousing to 3PL logistics company will enable costs savings and expand margins for CP business. Moreover, EPC business is expected to deliver positive results from FY23 onwards. Considering above factors, we build in FY21‐24E Revenue/EBITDA/PAT CAGR of 14%/23%/31% and increase our PT to Rs1,310 as we roll forward our valuations to FY24 continuing to value the company at 35x FY24EPS. We upgrade the stock to BUY rating as recent correction in the stock price provides good opportunity to enter this relatively undervalued transformation play.

Result Highlights

* Quarter summary – Bajaj Electricals revenue was higher than estimated on strong growth across consumer products business (Appliances +75%, Fans +49%, Morphy Richards +85% and Lighting +12%).   

* Higher A&P spends and few one‐off’s impacted margin – EBITDA margin was impacted on account of higher other expenses which was result of 1) Higher A&P spends, 2) Higher logistics and ware‐housing costs due to delay in transition, 3) employee incentives and 4) Rs100mn write‐off on EPC receivables. These one‐off expenses are expected to normalize from Q2 onwards.  

* EPC business – EPC business saw 12% revenue revenue growth with an EBIT loss of Rs133mn. EBIT losses are on reducing trajectory and expected to exit FY22 with break‐even levels.  

* Net Debt and Cashflow – Net debt has increased to Rs6.56bn in June’21 vs Rs4.25bn in Mar’21. This increase includes debt addition due to Starlite acquisition. However Net debt as on 7th Aug stood at Rs4.34bn. Company has generated OCF of Rs390mn in Q1.

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