Hold Bajaj Electrical Ltd For Target Rs.1,050 - ICICI Direct
Delay in price hike slows margin recovery…
About the stock: Bajaj Electricals' business portfolio spans across consumer products (CP) and EPC (illumination, power transmission and power distribution).
* CP (appliances, fans, lighting) contributes ~78% to topline. Its premium brands include Morphy Richards and Nirlep. The company has over 2.3 lakh retail touch points across India
* The company has been reducing exposure in the EPC business with maximum on executing high margin business
Q4FY22 Results: High input costs pressure drags overall EBITDA margin.
* Higher raw material costs dragged gross margins down ~309 bps YoY in Q4FY22. EBITDA margin fall was restricted to ~105 bps YoY to 4.7%, supported by savings in employee costs and other expenditure
* Revenues were up 6% YoY (flat QoQ) to | 1334 crore supported by CP segment revenue growth of ~6% YoY to ~| 1038 crore
* PAT declined ~29% YoY tracking lower EBITDA margins in Q4
What should investors do? Bajaj Electricals’ share price has grown at a CAGR of 22.43% over the past five years (from ~| 349 in May 2017 to ~| 960 in May 2022).
* We maintain HOLD rating on the stock
Target Price and Valuation: We value Bajaj Electrical at | 1050 using SOTP i.e.38x and 6x PE for CP and EPC respectively on FY24E EPS each
Key triggers for future price performance:
* Corporate restructuring (demerger of project business) will help Bajaj Electricals to focus on growing its core consumer product business
* Continuous focus on driving growth through CP categories (revenue contribution increased from 42% in FY19 to 78% in FY22). Rural electrification, urbanisation and housing for all (~11.2 mn new houses under PMAY) are key catalysts for CP revenue growth, going forward
* Focus to increase CP margins by 1% every year
Alternate Stock Idea: We also like Polycab in the same space
* Polycab is a leader in the wire & cable industry with organised market share of ~24%. Robust b/s with average RoE, RoCE of 24%, 27%, respectively
* BUY with a target price of | 2850
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