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High base, input cost pressure drags profit…

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 ~72% to topline and its premium brands includes Morphy Richards and Nirlep. The company has over 2.18 lakh retail touch points across India

The company has been reducing exposure in the EPC business with maximum on executing high margin business

Q3FY22 Results: High base and lower volume offtake of consumer products weigh on overall performance

Revenues declined 12% YoY to | 1320 crore. CP & EPC revenues declined 6% & 31% YoY to | 1080 crore & | 240 crore, respectively

EBITDA margin down 286 bps YoY to 7%, mainly due to higher raw material costs

PAT declined ~51% YoY tracking lower sales and EBITDA margins in Q3

What should investors do? Bajaj Electricals’ share price has grown by ~4.6x over the past five years (from ~| 264 in February 2017 to ~| 1210 in February 2022).

We revised our rating from BUY to HOLD

Target Price and Valuation: We value Bajaj Electrical at | 1280 using SOTP i.e.40x and 7x PE for CP and EPC respectively on FY24E EPS each

Key triggers for future price performance:

Continuous focus on driving growth through CP categories. CP contribution in topline increased from 42% in FY19 to 72% in FY21

Rural electrification, urbanisation and housing for all (~11.2 mn new houses under PMAY) will drive growth for home appliances

Focus to increase CP margins by 1% every year

Alternate Stock Idea: We also like Crompton Greaves consumer in the same space.

CGCEL is the market leader in the fan industry and increasing its presence in the small appliance category. The company has a strong balance sheet with RoCE, RoEs of 34% & 39% respectively

BUY with a target price of | 525

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