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All-round performance; balance sheet turns net cash

Cost rationalization offsets gross margin pressure

* Orient Electric (OEL)’s 4QFY21 revenue was up 42%, in line with our estimate, with the two-year CAGR at 12%. Despite pressure on gross margins, a strong focus on cost led to EBITDA margin expansion of 50bps YoY to 12.1%.

* In FY21, strong pent-up demand post the first lockdown led to flat revenue on a YoY basis. Lower employee cost (-10% YoY) and other expenses (-23% YoY) aided margin expansion to 10.8% (+220bps). The sustainability of these cost rationalizations in FY22 remains to be seen – we have built in a 60bps cushion.

* With strong cash generation, OEL has now almost entirely repaid ~INR1.0b worth of debt, leading to net cash of INR2.4b (v/s net debt of INR0.9b in FY20). CFO stood at INR4.3b (FY20: INR1.3b) and FCF at INR3.9b (FY20: INR0.8b).

* The recent surge in COVID cases and resultant lockdowns pose near-term risk to revenues. However, once the situation normalizes, we believe OEL is best placed to capture the pent-up demand with its strong manufacturing and distribution capabilities. We maintain our FY22/FY23E EPS estimates. We value OEL at 45x FY23E EPS, with unchanged TP of INR365.

Strong earnings performance; balance sheet turns net cash

* 4QFY21 snapshot: Revenue was up 42% YoY to INR8b (two-year CAGR: 12%), in line with our expectation. EBITDA grew a strong 49% YoY to INR968m, 12% ahead of our expectation. The EBITDA margin expanded 50bps YoY to 12.1%. Strong cost management helped mitigate gross margin pressure. Adj. PAT grew 75% YoY to INR627m, 14% ahead of our expectation.

* FY21 snapshot: Revenue was almost flat at INR20.3b. EBITDA grew 24.4% YoY to INR2.2b. The EBITDA margin expanded 220bps YoY to 10.8%. Adj. PAT grew 52% YoY to INR1.2b.

* Key segmental highlights: a) Electrical Consumer Durables (ECD) – 4QFY21 revenue increase 42% YoY to INR6.5b, with PBIT margins contracting 150bp YoY to 14.3%. FY21 revenue stood flat at INR15.1b, with PBIT margins expanding 140bp YoY at 13.6%. b) Lighting and Switchgear – 4QFY21 revenue increase 44% YoY to INR1.6b, with PBIT margins expanding 310bp YoY to 14.4%. FY21 revenue declined 9% YoY at INR5.2b, with PBIT margins expanding 280bp YoY to 13.3%.

* Turns net cash: OEL has now almost entirely repaid ~INR1.0b worth of debt, leading to net cash of INR2.4b (v/s net debt of INR0.9b in FY20). CFO stood at INR4.3b (FY20: INR1.3b) and FCF at INR3.9b (FY20: INR0.8b).

Other key takeaways

* Due to various disruptions, including the farmers’ agitation, some critical components of premium fans were in shortage.

* Higher trade inventory and rising raw material prices led to margin compression in Air Coolers.

* In Water Heaters, proactive planning and strong vendor engagement helped in the localization of components, thus significantly reducing import dependence on China.

* Growth in Lighting was driven by consumer luminaries, with higher demand from tier 2 / tier 3 cities. A portion of the growth was also aided by market share gains from unorganized players. The B2B business has remained subdued due to muted construction activity.

* The Switchgears business faced headwinds – as the channel preferred to sell established brands with quick sales conversion.

Valuation and view

The recent surge in COVID cases and resultant lockdowns pose near-term risk to revenues. However, once the situation normalizes, we believe OEL is best placed to capture the pent-up demand with its strong manufacturing and distribution capabilities. We maintain our FY22/FY23E EPS estimates. We forecast a revenue / EBITDA / adj. PAT CAGR of 18%/16%/20% over FY21–23E.

We value OEL at 45x FY23E EPS, with unchanged TP of INR365. At CMP, the stock trades at FY22/FY23E PE of 43x/34x. Our longer term thesis indicates a reduction in the margin differential between Orient Electric and leading FMEG peers (refer to our initiation report). Note that while Orient Electric trades at a 14% premium to Crompton on an FY23E PE basis, it trades at a 15% discount on an EV/EBITDA basis.

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