Monday, January 11, 2016

Bajaj Electricals: Lighting up

For investors with a long time horizon, it is a good opportunity to buy the stock of consumer electrical company Bajaj Electricals. In the last six months, the stock has corrected by about 30 per cent and at Rs.199 now, it trades at an attractive valuation of 12 times the likely earnings of 2016-17.

Its peers Havells India and V-Guard Industries trade at about 25-28 times their one-year forward earnings. The market appears to be concerned about the company’s adoption of the ‘theory of constraints’ approach which has pulled sales lower in the consumer durable goods segment in the last few quarters.

But there are reasons to be optimistic about the company.

A strong lighting business with improved margins and turnaround in the E&P business are positives. Sales in the consumer durables business should also grow given the new marketing initiatives.

In the first half of 2015-16, the company reported sales growth of 11 per cent. It has also moved from a net loss to a profit of Rs.31.6 crore.

Consumer business worries

Bajaj Electricals’ consumer durables (appliances and fans) business, which contributes about 40 per cent of the revenue, has been under stress since the March quarter last year. In the first six months of 2015-16, the consumer durables segment posted a 5 per cent drop in sales and margins dropped to 4.5 per cent from 6.4 per cent in the same period last year.

This can be attributed to the company moving from the ‘push’ to ‘pull’ strategy on marketing, resulting in a drop in primary (dealer) sales. The ‘theory of constraints’ approach will take time to show results. Over the next three to four quarters, sales should gradually improve.

With the high brand recall that it enjoys and the efforts to strengthen relationship with customers through new advertisement campaigns, growth should soon return for the company. Bajaj Electricals may re-gain the lost market share if the strategy turns successful.

Also, given that the urban consumption is likely to improve this year, thanks to Pay Commission bounties, lower interest rates and drop in inflation, the outlook seems positive.

Morphy Richard, UK’s top domestic appliances brand that Bajaj Electricals has been marketing in India for the last 12 years, also holds promise. In 2014-15, sale of products under the brand grew 12 per cent. New launches in this premium brand in the last financial year should also buttress sales.

Further, with its pan-India reach through 2,200 plus distributors, 5,000 plus dealers and 45,000 retail stores (for appliances) besides company-owned retail chain, Bajaj Electricals should be able to make use of the demand revival opportunity.

Turnaround in E&P business

High masts, transmission line towers and special projects (rural electrification, power plant lighting and stadium lighting) are the three key segments of Bajaj Electricals’ engineering and projects (E&P) business. The segment contributes about 35 per cent of revenues.

It returned to profits in the third quarter of 2014-15 after wrapping up all old low-margin projects, with conscious efforts to cut costs and improve working capital management.

For the first six months of 2015-16, the segment recorded 35 per cent sales growth with operating margin of about 4-5 per cent. As of end-September, the order book stood at about Rs.3,200 crore. This offers good visibility for for the company on revenue growth for at least a year.

LED takes the lead

The lighting business contributes a fourth of the company’s revenue. The company’s new range of LED bulbs and lighting (targeting modern work spaces) should give a fillip to growth.

In the first two quarters of 2015-16, the lighting segment recorded sales growth of 18 per cent. Margins also increased by a sharp three percentage points to 5 per cent as realisations improved.

This segment is likely to be a major driver of revenue growth in 2016-17 too, backed by the new range of products and lighting systems that cover commercial as well as street lighting, and more tenders expected from the government for LED lighting. Despite a late start, the company made good strides in the LED market this year.

Margins improve

Bajaj Electricals reported strong expansion in margins over the last two quarters, thanks to improved realisations in the lighting segment and the E&P segment turning profitable.

There were savings on raw material costs too on drop in commodity prices in the international market. Margins may continue to get a boost from lower commodity prices in the coming quarters too.

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