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High inflation impacts demand in Q2…

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 to the EPC business with maximum focus on executing high margin business

Q2FY23 Results: Lower rural demand amid high inflation and inventory de-stocking restricted revenue growth.

* Revenues were down 6% YoY to | 1226 crore, dragged by lower revenues from both consumer product (CP) and E&P revenues. CP (including lightings) revenue declined 3% YoY to ~ | 1156 crore dragged by lower rural demand and de-stocking of fans

* EBITDA margin was up 56 bps YoY (172 bps QoQ) to 7.8%, supported by improved profitability of its E&P business. However, the CP segment was hit by high RM costs and low operating leverage

* PAT was flat at | 62 crore on a YoY basis supported by improved EBITDA margin and lower interest outgo

What should investors do? Bajaj Electricals’ share price has grown to 3x over the past five years (from ~| 397 in November 2017 to ~| 1162 in November 2022).

* We revise our rating on the stock from BUY to HOLD

Target Price and Valuation: We value Bajaj Electrical (BEL) at | 1275 using SOTP i.e. 40x 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 BEL 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 million 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 18%, 22%, respectively

* BUY with a target price of | 3300

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