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Price hikes and cost control measures safeguards margin

ORIENTEL’s revenue fell 6% YoY to Rs7.5bn, 14% below our estimate, as ECD segment sales declined 11% YoY (to Rs5.7bn) amid challenging macro and a larger price hike than peers. Gross margin was sustained at 27.8% (down only 20bps YoY) with regular price hikes and systematic cost reductions. Consequently, EBITDA margin was healthy at 10.7%, albeit, down 140bps YoY on a high base. Lower topline led to 22% YoY fall in PAT to Rs488mn, 15% below our estimate. The demand outlook is optimistic while ORIENTEL aims to improve margin through cost control measures (project Sanchay), price hikes and product & channel mix. In FY22, it implemented 15-18% price hike vs. an 18-20% rise in cost structure. We cut our earnings estimate for FY23E/24E by 8%/10% and retain BUY rating on the stock, with a revised target price of Rs375 (Rs416 earlier) based on 40x FY24E EPS.

ECD: Secondary sales healthy, focus on retail reach expansion

ECD revenues fell 11% YoY to Rs5.7bn on a high base. For fans and air-coolers, the primary off-take by trade channel was slower but secondary sales remained positive. From April, the sales traction improved further with the onset of severe summer leading to optimistic outlook for Q1FY23 amid low channel inventory. ORIENTEL is enhancing its distribution and retail reach to improve its penetration. In Odisha and Bihar, it has opted for direct-to-dealer approach for fans instead of traditional route of master distributors. Similarly, it is adding its direct reach in South India by expanding retailer base by 10-20% every year. For fans, it is operating at capacity utilization of +100% in the peak season and 80% during non-peak season. The new greenfield plant at Hyderabad will be commissioned by end-FY23 with initial capacity of 0.4mn units/month. For BLDC fans, ORIENTEL is ready with its complete range, however, the BEE norms implementation timeline of 1st July 2022 is likely to be postponed as government’s technical notice is still awaited. For air cooler, healthy primary sales is expected in Q1FY23 as channel inventory depletes. EBIT margin was decent at 12.8%, down 150bps YoY.

Lighting: B2C growth healthy, B2B demand rebounds, healthy margin expansion

Lighting and switchgears revenue grew 15% YoY to Rs1.8bn, as the segment remained resilient to macro headwinds. Not much price hike was warranted in lighting as it was minimally impacted by commodity costs. Lighting sales grew 10% YoY led by healthy growth in luminaires driven by strong demand from homes, small offices and showrooms. B2B orders are picking up from private sector while government tenders for street lighting from NHAI, SLP and smart city projects are on the rise. Switchgears growth was healthy as the new mass-premium switches range receiving healthy response from channel and consumers. Higher sales volume and minimal input cost inflation impact led to robust EBIT margin at 15.7% (+130bps YoY and +100bps QoQ).

Maintain BUY, with a revised target price of Rs375

We expect ORIENTEL to post 13%/25% revenue/earnings CAGR over FY22-24E. Healthy growth prospects, margin expansion potential, strong return ratios, improving NWC, and strong OCF generation capabilities will support valuations.

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