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Macro continues to take a toll

Bajaj Electricals’ (BEL) posted another weak set of earnings in 3QFY24 as revenue declined 6% YoY on account of a) a weak demand scenario, particularly in the rural segment (BEL has higher exposure than peers in rural region, in our opinion), and b) high base (fans grew 64% YoY in 3QFY23 on inventory liquidation prior to BEE transition; provisioning of INR 500mn towards RBP points). Core categories saw 150bps improvement in underlying gross margin (thanks to premiumisation, product mix), though that was more than offset by high discounting in a few categories (c.350-400bps margin impact) coupled with adverse operating leverage (current monthly run rate at INR3bn-3.1bn vs. INR3.5bn for operating leverage to kick in). Secondary sales were better than primary sales, according to the company, which bodes well for primary sales in the coming months/quarters. Adjusted for interest on IT refund, PAT was INR 286mn, down 56% YoY/24% QoQ and 34% below JMFe (50% below consensus). We cut FY24-26EPS to reflect delayed recovery in growth/margins amidst a hyper-competitive environment. We roll forward to Mar’25TP of INR 1,390, basis 40xFY26EPS. We maintain BUY.

3QFY24 summary (excluding EPC): Revenue declined by 6% YoY to INR 12.3bn (+10% QoQ, in line with JMFe) as a) Consumer products revenue declined by 8% YoY (+12%QoQ, in line with JMFe) due to tepid demand for appliances and high base of fans and b) Lighting (including B2B) revenue was flat YoY (+6%QoQ, 6% above JMFe). Consumer products EBIT margin contracted 610bps YoY (-370bps QoQ, 410 bps below JMFe) to 1.4% on account of a) one-time warranty provision of INR 230mn (INR210mn for consumer products; 220bps impact), and b) adverse operating leverage. EBITDA margin contracted by 350bps YoY to 4.5% (-70bps QoQ, 150bps below JMFe). EBITDA declined by 47% YoY to INR 550mn (-5%QoQ, 25% below JMFe/Consensus). Adj PAT fell by 56% YoY/24% QoQ to INR 286mn and was 34% below JMFe (50% below consensus).

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. The company has expanded its distributor count from 645 in FY23 (550 in FY22) to 742 in Dec’23.

Weakness in consumer products continues: Consumer product revenue declined 8% YoY, primarily on account of weak demand and high base led by a) fans (grew 64% YoY as it liquidated non-BEE rated inventory), and b) redemption of RBP points (retailer bonding programme) in 3QFY23 (INR 500mn). Excluding these two factors, consumer products revenue would have been flat YoY, as per the management. Gross margin improved by over 150bps YoY (premiumisation and product mix), more than offset by high competitive intensity (resulting into heavy discounting), one-time provision and negative operating leverage. Hence, EBIT margin declined 610bps YoY/370bps QoQ to 1.4%. The management highlighted that operating leverage kicks in at monthly turnover of INR 3.3bn; presently it is operating at lower levels of INR 3bn-3.1bn, which is impacting profitability (as most of the R&D, distribution and other overheads are frontloaded). The company undertook price hikes in Dec’23 (2-2.5% in fans), but partially reversed that with schemes/ discounts. The company talked of market share gains in some of its key categories such as fans and coolers in the past 4 quarters.

Lighting segment performance: Lighting segment reported muted YoY growth (+6% QoQ, 6% above JMFe), wherein higher contribution from premium products offsets the price correction (decline upto 20-25% YoY in commodity products). EBIT margin expanded by 190bps YoY (+270 bps QoQ, 240bps above JMFe), thanks to product mix. The management is hopeful of revival in consumer demand in a couple of quarters.

Cut estimates; maintain BUY: We cut our FY24 estimates by 31% to reflect 3QFY24 miss and cut FY25-26 estimates by 13%/7% respectively due to likely delayed recovery in demand and, consequently, adverse operating leverage. We roll forward to Mar’25 TP of INR 1,390, 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). BUY. Key Risk: Deceleration in macro recovery and heightened competitive intensity

Key takeaways from 3QFY24 Concall:

Demand was sluggish largely throughout the quarter; however, momentum picked up in Dec’23. During 3Q, Morphy Richards grew in mid-single digit, appliances declined by lowsingle digit and fans fell by high teens. During 9MFY24, appliance was flat while fans declined by higher-single digit, due to the high base in 3QFY23.

Post signing the long-term licence deal, the company launched differentiated products under Morphy Richards like coffee maker, steamers, air fryers, and digital toasters. Due to low-single digit product penetration, the management expects Morphy Richards to expand at a faster pace as the market evolves. Morphy Richards will have its major presence in top 50 cities, with a presence in the online channel; 60% of revenue is from alternate channel while the rest is from general trade.

The company has made a one-time provision relating to write-off of INR 230mn (INR 210mn for consumer products and INR 20mn for lighting) worth of claims towards insurance on warranty of its products. The company used to account for insurance payments on amortisation basis (as products were few and was impacted the margins by 220bps in consumer products and 70bps in the lighting segment). Recurring provision for warranty will be in the range of INR 5mn0-60mn every quarter, which are usually in sync with the actual costs/claims

The company has seen 150bps gross margin expansion YoY on a like-to-like basis, owing to improvement in CoGS and premiumisation of product portfolio. However, some gains were lost in the form of discounts (at scheme level due to stiff competition; 350-400bps impact). The company hiked prices in Dec’23 and strategically linked discounts/schemes to volumes to expand overall scale of production. It plans to reverse these schemes once demand recovers. It hiked prices by 2.5% during the quarter.

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