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Sustained weakness; Greenshoots visible

Bajaj Electricals’ (BEL) 4QFY24 performance was below our/consensus expectations, on account of a) weaker than expected demand scenario, particularly in rural segment (BEL has higher mix vs peers), b) higher extent of channel discount/schemes by industry (c500-600bps impact on sales/margins) in kitchen appliances, matched by BEL. As a result, Consumer Product (CP) segment revenue declined 7% YoY (-4% QoQ, 11% below JMFe), though Fans (c. 40% of CP) saw a single digit growth YoY. Price erosion in the LED, particularly in consumer lighting, continued to hurt growth in lighting segment as revenue declined 11% YoY (flat QoQ, 7% below JMFe). Further, adverse operating leverage led to EBITDA margin contraction of 310bps YoY to 4.2%. Management highlighted, BEL continues its strive to achieve robust profitability over medium term through a) improving product mix and sourcing in both consumer product and lighting segments (gross margin expansion), b) reevaluating its logistics operation (margin lever of upto 200bps), and c) operating leverage. We cut FY25-26EPS to reflect delayed recovery in growth/margins amidst a hyper-competitive environment and arrive at Mar’25TP of INR 1,340 (earlier INR1370), basis 40xFY26EPS. We maintain BUY.

* 4QFY24 summary (excluding EPC):

Revenue declined by 8% YoY to INR 11.9bn (-8% YoY/-3% QoQ, 10% below JMFe) as Consumer products and Lighting solutions revenue declined by 7% YoY (-4%QoQ, 11% below JMFe) and 11% YoY (flat QoQ, 7% below JMFe) respectively due to tepid demand for appliances, LED price erosion in consumer lighting and higher base effect in professional lighting. Fans saw single digit growth both in the premium and non-premium segment. Morphy Richards continued with its single digit growth during the quarter. Consumer products EBIT margin contracted 480bps YoY (+30bps QoQ, 280 bps below JMFe) to 1.8% on account of discounting (c.600bps impact) and adverse operating leverage. EBITDA margin contracted by 310bps YoY to 4.2% (-310bps YoY, 200bps below JMFe). EBITDA declined by 47% YoY to INR 497mn (- 14%QoQ, 40%/44% below JMFe/Consensus). Adj PAT fell by 66% YoY/54% QoQ to INR 183mn and was 54% below JMFe (65% below consensus).

* Weakness in consumer products continues:

Consumer product revenue declined 7% YoY, primarily on account of weakness in appliances and general trade (GT). However, fans segment saw single digit growth both in the premium and non-premium portfolio. Gross GT revenue (62% of total) declined 3% YoY while alternate channels such as Modern retail grew 17% YoY, E-com grew 25% YoY and exports grew 25% YoY respectively. Gross margin contracted by over 90bps YoY (-20bps QoQ) on account of higher discounts/schemes (discounts c. 6% across categories) to the channel and price erosion in the Lighting segment. EBITDA margin contracted 310bps YoY to 4.2% largely due to adverse operating leverage. The company didn’t take any price hike during the quarter, though has announced a price increase of 3-5% in select categories w.e.f. 16th May’24 in attempt to recalibrate its pricing strategy.

* LED Price erosion continued, volume growth flat YoY:

Lighting segment revenue declined 11% YoY (flat QoQ, 7% below JMFe) on account of continued price erosions in LED and on a high base effect in professional lighting. Volume growth in lighting during the quarter was flat YoY. In lighting segment, consumer lighting contributes 35% to the sales while professional lighting contributes 65%. As per the management, price erosion is expected to bottom out over next couple of months as DoB technology led price reduction has stabilised recently. EBIT margin expanded by 110bps YoY (+20 bps QoQ, in line JMFe), mainly owing to product mix. The management is hopeful of revival in consumer demand in a couple of quarters.

* FY24 performance:

Revenue declined 5% YoY to INR 46.4bn largely due to continued slowdown in consumer products segment and pricing erosion in the lighting segment. EBITDA margin contracted 210bps YoY to 5.6% on account of adverse operating leverage and higher discounts to the channel. The company reported net profit of INR 1.4bn, which declined 41% YoY to INR 1.4bn. During the year, company generated net cash flow from operation of INR 3.5bn vs. INR 4.5bn in FY24. Net cash stood at INR 2.7bn vs. INR 3.7bn in FY23.

* RREP 2.0:

BJE’s RREP 1.0 helped in expanding its reach in tier 2/3/rural India, where a single distributor was appointed for the entire product portfolio. However, the company has recalibrated its distribution model now to focus its reach in Urban India, given its premiumisation strategy. The company is now adopting a tactical approach in appointing non-exclusive distributor/work with wholesalers (e.g., fans) to ensure improved reach and wallet share in urban retail counters. BEL adopted the same strategy for its lighting division 18 months ago and saw positive results.

* Cut estimates; maintain BUY:

We cut our FY25-26 estimates respectively due to delayed recovery in demand and, consequently, adverse operating leverage. We arrive at Mar’25 TP of INR 1,340 (earlier INR1,370) , basis 40xMar’26EPS. We retain our faith in BEL as it a) continues to work on its long-term measures of brand building, product launch/refreshment, b) has not lost any meaningful market share and c) is more impacted due to demand environment (more external challenges) and more particularly due to one of the highest revenue mix from rural markets. BUY. Key Risk: Deceleration in macro recovery and heightened competitive intensity.

Key takeaways from 4QFY24 Concall:

*  Demand was sluggish largely throughout the quarter; however, momentum picked up in Apr-May’24. Management highlighted, Apr’24 has witnessed double digit growth.

* Advertisement spends during the quarter and year was lower at 3%, which the company will expand to ~4%.

* Logistics: BEL has been redoing its logistics exercise as it expects to lead to cost savings of c.200 bps. To improve its logistics operation, company will also be looking to hire external consultants.

* The management has guided for capex for INR 1.2bn-1.3bn for FY25, which will majorly pertain to dyes moulds for new products. Currently, in-house manufacturing contributes 20%, which the management aims to gradually increase in the next couple of years. ? EPR during the year (FY24) was INR 90mn and expects it to be around INR 120mn in FY25.

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SEBI Registration Number is INM000010361