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Continued momentum in consumer products with solid balance sheet improvement; maintain BUY

Our view

Consumer products (CP) saw continued broad‐based growth momentum in Q2 despite absence of pent‐up demand. Margins in the CP business were impacted by increased A&P spends and normalization of costs. EPC business continues to see clean‐up actions and is expected to exit FY22 at breakeven levels. Management is confident of buoyant demand and margin improvement in CP business despite higher overheads allocation and EPC business is expected start generating profits from FY23. Strong growth in emerging channels, continued product innovation to fill portfolio gaps and potential for margin improvement make us bullish on the CP business while we do not expect any incremental drain from the EPC business as well from FY23. We continue with our positive stance on the company and maintain BUY as the company has demonstrated strong growth in CP business with substantial improvement in balance sheet.  

Result Highlights

* Quarter summary – Bajaj Electricals delivered inline revenue with strong growth across consumer products business (Appliances +75%, Fans +49%, Morphy Richards +85% and Lighting +12%).   

* Margins – Margins in consumer business contracted by 73bps due to higher allocation of Rs.70mn to the CP business and incremental publicity spends of Rs70mn. Gross margin was maintained despite commodity headwinds.    

* EPC business – EPC business saw 37% revenue decline with an EBIT loss of Rs135mn. Company is expected to exit FY22 with break‐even levels in addition to continued reduction in power distribution receivables.  

* Net Debt and Cashflow – Net debt has decreased to Rs2.37bn in Sep’21 vs Rs7.33bn in Jun’21. This decline is despite company taking additional debt of Rs2.1bn on account of Starlite acquisition Company has generated OCF of Rs4.8bn in 1HFY22, with Rs 3bn coming in from vendor financing initiative.

Valuation

Strong growth momentum is expected to continue in consumer products business, with EPC business turning black in FY23. Company’s initiatives of limiting EPC business, focusing on collection efficiencies and increasing vendor financing have led to significant de‐leveraging of balance sheet. Considering the above factors, we build in FY21‐24E Revenue/EBITDA/PAT CAGR of 12%/25%/33% and maintain BUY with PT of Rs1,352 continuing to value the company at 35x FY24EPS. We expect the stock to re‐rate further with a further recovery in efficiencies and profitability in EPC business.

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