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Spark Capital: Bajaj Electricals 2QFY13 results review : Multiple uncertainties in engg. segment to keep growth prospects hazy, Downgrade to Sell




Spark Capital Advisors(India) Private Limited


26 Oct 2012





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Multiple uncertainties in engg. segment to keep growth prospects hazy, Downgrade to Sell Bajaj Electricals (BJE) reported 2QFY13 sales of Rs. 7.3bn, growth of 4.9% yoy, with a muted EBITDA margin of 3.2% and an adjusted PAT of Rs. 72mn (excluding the Rs. 246mn extra ordinary income from sale of Bajaj Ventures). Weak revenue growth in the lighting segment (6.6% yoy) was due to delays in festive season and slack demand for luminaries. The management expects strong sales in 3Q to compensate for this temporary weakness and sustain overall revenue growth in FY13E (we expect 17% growth). Similarly, while the pace of growth in consumer durables weakened during the quarter, festive demand and traction from new products (induction cooker) is expected to result in revenue growth of ~20% in FY13E. However, headwinds in the engineering segment continue unabated as cost overruns due to completion of old TLT orders has led to Rs. 268mn loss in 2QFY13. While the management expects the losses to be mitigated over the next two quarters, given that Rs. 1bn worth of unexecuted old TLT orders exist, we expect risk of execution delays and cost overruns to persist in the in the medium term. Considering the uncertainty over execution and margins in the engineering segment, continued reliance on debt due to high working capital requirement and capped margins in consumer durable and lighting segments, we reduce our FY13E and FY14E estimates by 38.4% and 7.9%. Keeping in mind the 17% run-up in stock price in the past 3 months and our SoTP (Lighting, Consumer & Engineering valued at 8x, 12x & 3x FY14E earnings respectively) of Rs. 186, we downgrade the stock from ‘Add’ to ‘Sell’. Highlights of the quarter’s performance Delay in festive season affects lighting and consumer durable sales – Growth in the lighting and consumer durable segments was affected due to delay in festive season by a month during this year. While weak demand for luminaries aggravated the muted performance in the lighting segment, tepid sales growth in Morphy Richards (13.3% yoy) due to price hikes kept overall consumer durable segment’s growth (17.5%) under check Engineering segment’s woes to continue – Cost overruns continue to remain unabated in the engineering segment as the management attempts to close old TLT sites which have faced considerable execution delays (aims at closing 18 out of 24 old TLT site by FY13 end). With Rs. 1bn worth of old orders remaining unexecuted and ~40% of the total order book (Rs. 8.9bn) constituting of TLT orders, we expect execution risk and margin pressure to persists Working capital position to remain tight – Weak execution in the engineering segment has kept working capital high at 89 days. While the management is aiming at reducing capital employed in the engineering segment to

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