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Long term potential intact with near term uncertainty; maintain BUY

Orient Electric (ORIENTEL) delivered mix bag performance with revenue growing 3% above estimates while operating margins seeing sequential decline of 456bps; while other peers have reported strong growth with higher operating margins. Company has been able to protect its gross margins as it has taken lead in passing on increased commodity prices to the customers. Also, there has been inventory de?stocking in channel on anticipation of price decrease owing to lower commodity prices. There could be some near?term uncertainty as orient is moving towards new distribution system, which could take time to stabilize. We expect margins to be lower as there would be additional expenses incurred in revamping distribution system.  

We now expect FY22?24E revenue CAGR of 13%, with margins also expected to gradually normalize going forward, we estimate FY22?24E EBITDA and PAT CAGR of 19% and 20% respectively. Change in distribution practice can result in disruption in short term before company the company starts realizing benefits in the longer term. Considering short term disruption, we have cut ourtarget multiple to 40x vs 45x earlier However, considering solid long?term growth potential and sharp correction in stock price, we maintain our BUY rating with TP of Rs341

Result Highlights

* Quarter Summary ? Orient Electric (ORIENTEL) delivered a below par performance with revenue growth of 47.2% yoy (Lower than peers to have reported so far). ECD segment registered growth of 37.4%; while lighting and switchgears saw revenue growth of 79.5%.

* ECD performance was below expectation – Slump in demand in the latter part of the quarter and inventory de?stocking by dealers in anticipation of lower prices owing to correction in commodity prices have resulted lower than expected revenue. Extension of direct to dealer approach to new markets has also resulted in some loss of revenue.

* Margins – Gross margin expanded 46bps yoy basis despite significant increase in raw material prices as company has taken lead in passing on increased costs. Company has been able to manage commodity inflation better.   

*  Working capital and operating cashflow ? Working capital at end of Q1FY23 stood at 33 days vs 52 days in Q1FY22. The Company aims to maintain a lean working capital cycle, where cash flows can be utilized to maximize the operating leverage of the company

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