Bajaj Electricals: BUY

The stock of Bajaj Electricals has corrected sharply in the last few weeks. This could be a good buying opportunity for investors with a long-term perspective. At Rs 160, the stock discounts its estimated earnings for FY-15 by 11 times, which is at the lower end of its valuation multiple of the last five years (10-27 times).

The stock’s slump has mainly been due to concerns in the Engineering & Projects (E&P) business of the company. But with the segment expected to return to profits in FY-15, the stock could get a boost.

In the recent September quarter, Bajaj Electricals reported net loss of Rs 16 crore. Though the lighting and consumer durables segment performed well, the loss in the E&P segment and a one-time Rs 13 crore advertisement expense on its 75{+t}{+h} anniversary, dragged the company into the red.

Losses in the E&P business unit followed cost overruns. But there are signs of improvement. In the last two quarters, the company has completed work at most sites where there were dealys in execution. Also, it has resumed bidding for new orders.

The company recently bagged an order worth Rs 757 crore for transmission line towers in Bihar. Its order book currently is Rs 1,465 crore (more than twice last year revenue).

Also, the company should continue to do well in its mainstay, consumer appliances business. The good monsoon this year should see demand for consumer appliances go up. With over 20 per cent market share and being a national player, Bajaj Electricals will stand to benefit.

Strength in consumer business

Bajaj Electricals derives 75 per cent of its revenues from the consumer durables and lighting business. In the former, the company’s revenues have grown at a compounded rate of 25 per cent in the last five years to Rs 1,837.7 crore.

This was helped by not just the changing demographic trends with increasing number of nuclear families but also the company’s timely expansion of its distribution network. Bajaj Electricals today has more than 700 distributors and 4,000 retail outlets selling its appliances.

Also, it has 40 company-owned showrooms and 280 service centres. Bajaj Electricals’ fans are available in 55 per cent of all stores that sell the appliance in the country. The company has a market share of about 17 per cent in the fans business.

In lighting, the company’s comprehensive range of energy-efficient luminaire has helped it grow at 16 per cent annually in the last five years.

Tie-ups with international brands such as Trlilux (for lighting), Walt Disney (for children fans) and Morphy Richards (for high-end kitchenware) have also been helping the company grow.

Profit margin in the appliances segment has been maintained at 9-10 per cent levels even during tough times in the economy, thanks to pricing power the company enjoys on its brand’s strength. In the first half of FY-14, the company recorded revenue growth of 14 per cent in consumer durables and 24 per cent in lighting.

Operating margins in these businesses were at 9 per cent (unchanged over last year) and 6.6 per cent (up one percentage point over last year) respectively.

In appliances, though the sharp correction in rupee led to increase in cost of imported components, the company made up for it by hiking prices.

Going ahead though revenue growth in the consumer durables space may be a tad lower due to an expanded base, the company riding on its strong brand should grow at a pace faster than the industry.

Bajaj Electricals’ wide distribution network and presence in both medium and premium segment kitchenware will help.

The company is also working towards a launch of a new brand in the value category, in both appliances and fans for the rural markets.

Reverting to profits

The E&P segment, which accounts for a quarter of Bajaj Electricals’ revenues undertakes manufacture and erection of high masts, poles and transmission line towers, and also lighting of airports, stadium and power plants.

Revenues here grew at an annual rate of 21 per cent between FY-07 and FY-12, but there was a setback in the business in FY-13.

Slackness in project execution resulted in delay in hading over the project and increased labour and other costs for the company.

Also, as working capital was locked in the existing projects, the company kept away from bidding for new orders.

In the last two quarters however, the company has fastened the pace of work execution by appointing a special task force to monitor it.

Most sites have already been handed over to clients. This is quite visible from the significant 73 per cent jump in revenues in the recent September quarter. In its transmission line tower project for PGCIL currently, the company is actually four-five months ahead of schedule.

Bajaj Electricals has also resumed bidding for new orders and has recently won a large order for transmission line towers.

In the next couple of quarters, the E&P business unit is expected to revert to profits. The new orders are expected to have margins of at least 8-10 per cent. In long term projects where price escalation clause is not there, the company claims to have factored the possible increase in raw material costs in the price itself.

Financial strength

Bajaj Electricals’ debt-to-equity stands at a comfortable 0.2 times. As it returns to profits in the next quarter, it will service its finance costs without troubles.

Going ahead, the turnaround in the E&P business will bring down working capital borrowings and reduce interest costs.