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Offbeat quarter amid Fans transition and GTM rollout

ORIENTEL’s Q2FY23 was a one-off suppressed quarter with revenue decline, low operating margins and a net loss. Sales fell 14% YoY to Rs5.1bn, 12%/13% below our /consensus estimates. Fans sales were impacted due to (1) aggressive de-stocking by trade amid BEE transition, (2) one-time restructuring of distribution network in 4 states leading to loss of primary sales and (3) geopolitical disturbances in key export markets. Gross margin fell 220bps YoY to 26.3% due to high cost inventory and lower price realization following competitive pricing. EBITDA margin was weak at 2.3%, much below our/consensus estimate of 7.6%/7.7% due to lack of operating leverage, higher input costs and other expenses. Other expenses included investment in brand building and cost of GTM consultancy, adjusting for which normalized EBITDA margin would have been ~6%. Lower operating profit led to net loss of Rs3mn vs. our/consensus profit estimate of Rs194mn/Rs221mn. Fans distribution rejig and BEE transition impact is likely to continue for the next two quarters, but FY24E is likely to see normalization. Factoring in the Q2 performance and near term disruption, we trim our estimates for FY23/24. We roll forward our valuation to H1FY25 with a revised target price of Rs322 (Rs355 earlier) based on P/E of 40x. Retain BUY.

ECD: Fans transition, GTM roll out and high cost inventory dents growth and margin

ECD sales fell 26% YoY to Rs3.1bn with EBIT margin of only 4.4%, down 790bps YoY. Primary sales of Fans were impacted by (1) destocking by trade channel (expectation of price correction by trade, unpredictability of prices post BEE), (2) distribution rejig (elimination of master distributor in four states) and (3) political disturbances in key export markets (accounting for ~8% decline in fans). ORIENTEL is eliminating master distributor in six states (UP, Bihar, AP, TN, KNTK, Orissa - collectively 25% of fans market) and appointing exclusive non-retailing multiple distributors with mapped areas as well as digitized data through BMS software and salesforce. It will help ORIENTEL to ramp up its market share in these six underperforming states, but will have to sacrifice primary sales for six months of transition period. Initial signs are promising as the two states where rejig is over, are growing by 40%. BEE transition is due on 1 st January 2023, post which upstocking of new star rated fans by trade is likely, which will be priced higher by 3-10%.

Lighting: Healthy growth sustained led by B2B expansion; Forays in house wires

Lighting and switchgears sales were up 15% YoY at Rs2bn with EBIT margin of 11.3%, down 440bps YoY but better than industry peers. The growth was driven by continued expansion in B2B segment (up 40% YoY) while consumer luminaries grew 17% YoY. Margins were impacted by aggressive investment in brand building and currency depreciation. ORIENTEL has forayed in house wires with a goal to complete the product portfolio for influencers like electricians and dealers. Manufacturing will be outsourced, and it will positively aid sales and margins.

Maintain BUY, with a revised target price of Rs322

We expect ORIENTEL to post 12%/16% revenue/EPS CAGR over FY22-25E. While short term outlook is challenging, FY24E onwards ORIENTEL will be a key beneficiary of shift to BEE norms (higher realizations) and distribution rejig (improved market share).

Valuations

We value ORIENTEL at 40x H1FY25E EPS and arrive at the target price of Rs322.

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