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Spark Capital: Bajaj Electricals 3QFY13 Results Review - Growth in consumer durables remains strong but Engg. segment’s woes to continue




Spark Capital Advisors(India) Private Limited


07 Feb 2013





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Growth in consumer durables remains strong but Engg. segment’s woes to continue Bajaj Electricals (BJE) reported 3QFY13 sales of Rs. 8.7bn, growth of 10.0% yoy, with a muted EBITDA margin of 4.0% and a PAT of Rs. 116mn (64.6% yoy de-growth). Weaker than expected revenue growth in the lighting segment (10.6% yoy) was due to slack demand for luminaries which grew by a paltry 2% yoy. On the other hand, robust sales in appliances and Morphy Richards aided consumer durables in maintaining healthy growth (21.9% yoy) in spite of flat growth in fan sales. The management expects fan sales to bounce back in 4QFY13 and expects lighting and consumer durable segments to register ~20% growth going forward. However, headwinds in the engineering segment continued unabated as cost overruns and higher provisioning (tighter provisioning guidelines) due to completion of old TLT orders led to Rs. 401mn EBIT level loss in 3QFY13. While the management is confident of completing Rs. 3bn worth of old orders by 1HFY14 and expects the segment’s revenues and margins to stabilize beyond that, we believe risk of execution delays and cost overruns would continue and expect revenue growth of 15% yoy (over a low base) and 4% EBIT margin in FY14E for the engineering segment which is well below historical levels. Capital employed position is also expect to remain at elevated levels due to weak execution pace and payment delays from customers. Keeping in mind both, medium term strain expected in the engineering segment and also the robust outlook for the consumer durable segment, we value BJE at 12x FY14E earnings (on a blended basis) with a target price of Rs. 201. Also, considering the recent correction in stock price in the past 1 month, we revise our rating from ‘Sell’ to ‘Reduce’ Highlights of the quarter’s performance Luminaries affect lighting growth, consumer durables remain robust – Growth in the lighting segment was affected due to weak sales in luminaries (2.% yoy) on the back of muted commercial/industrial demand. Consumer durables segment maintained strong growth driven by sustained traction in appliances (27.8% yoy) and bounce back in Morphy Richards sales (43.4% yoy). We expect the lighting and consumer durable segments to growth by 15% and 20% respectively in FY14E 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/payment delays. With Rs. 3bn worth of old orders remaining unexecuted and ~27% of the total order book (Rs. 9.7bn) constituting of TLT orders, we expect execution risk and margin pressure to persists in the medium term and expect margins to recover only from 2HFY14 Working capital position to remain tight – Weak execution and payment delays from customers in the engineering segment has kept capital employed high at Rs. 5.7bn. While the management is aiming at reducing capital employed to ~Rs. 5bn by FY13 end, given slow pace of execution, we expect working capital /debt position to remain at elevated levels

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