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Resilient growth on high base, remain optimistic despite commodity headwinds; maintain BUY

Result Synopsis

3Q saw better than expected revenue growth on back of 15‐17% cumulative price increase in past 9 months, while volumes registered decline given a high base and slackness in demand post festive season. Relentless increase in commodity prices continues to impact gross margins. Company is confident of demand recovery and is expected to grow faster than the industry. Considering strong R&D efforts in launching innovative products and increased focus on Southern/Eastern markets (historically weak geographies for the company), we believe the company can continue to deliver industry‐leading revenue growth with margins expected to normalize once commodity prices stabilize. Product superiority in some segments, improving brand equity and export markets should remain key long‐term growth drivers for the company. We continue with our positive stance and maintain a BUY rating on the stock.

We now expect FY21‐24E revenue CAGR of 17%, with margins also expected to gradually normalize going forward, we estimate FY21‐24E EBITDA and PAT CAGR of 17% and 19% respectively. We maintain our positive stance and maintain BUY rating with an increased TP of Rs 423 based on 45x FY24E earnings as we believe investment in a new manufacturing facility in Hyderabad for fans will further help the company gain market share in South where it has been aggressively increasing its presence.

Result Highlights

* Quarter Summary ‐ Orient Electric (ORIENTEL) delivered better than expected revenue growth of 9.5% yoy led by switches and lighting segments. Commodity inflation has resulted in significant gross margin erosion especially in ECD segment.

* ECD segment saw muted growth ‐ ECD saw muted growth as festive season has been slack for appliances (Kitchen Appliances) and water heaters got impacted due to delayed winter.

* Volumes register decline – Volumes in Q3 saw decline of 5‐7% as price hikes in the range of 15‐17% have resulted only in revenue growth of 9.5%. Management is confident of a demand as economic impact of 3rd Covid wave seems minimal.  

* Working capital and operating cashflow  ‐ Working capital has increased 16 days on yoy basis on back of planned inventory build‐up. Net cash has improved due to better collection efficiency.

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