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Spark Capital: Bajaj Electricals 4QFY13 Results Review - Engineering segment’s woes to keep outlook muted, Maintain Reduce




Spark Capital Advisors(India) Private Limited


29 May 2013





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Engineering segment’s woes to keep outlook muted, Maintain Reduce Bajaj Electricals (BJE) reported 4QFY13 sales of Rs. 11.1bn, growth of 5.1% yoy, with a muted EBITDA margin of 1.0% and a PAT of Rs. 6mn (98.8% yoy de-growth). Margins were affected by sustained losses in the engineering segment which registered an EBIT level loss of Rs. 507mn during the quarter due to cost over-runs incurred while closing old projects. The management expects to witness reduction in losses in the segment in FY14E as they expect to close majority of the old projects and execute relatively high margin orders. We expect the engineering segment to sustain EBIT level loss of Rs. 256mn in FY14E and see margin recovering gradually to 2.0% in FY15E. On the other hand, robust sales in appliances and Morphy Richards aided consumer durables in maintaining healthy growth (22.4% yoy) but margin was muted at 8% due to inventory write-off and forex losses. The management expects growth in both lighting and consumer durable to sustain at 18–20% and 20–22% respectively, but, margins in both the segments are expected to remain capped due to higher advertisement spending planned by the company. Working capital cycle is expected to remain elevated due to execution delays in the engineering segment, which in turn is expected to lead to higher debt and interest costs levels thereby dragging down PAT for both FY14E and FY15E. Keeping in mind both, medium term strain expected in the engineering segment and healthy growth outlook for the lighting and consumer durable segments, we value BJE at 11x FY15E earnings (on a blended basis) with a target price of Rs. 174. We maintain our ‘Reduce’ rating on the stock. Highlights of the quarter’s performance Bounce back in lighting segment growth to sustain – Revenue growth in the lighting segment, which was muted in the previous two quarters (<10% growth), bounced back to 14.9% yoy growth in 4QFY13. Growth in the segment is expected to be sustained on the back of increased focus by BJE on consumer luminaries division, improved LED sales and higher rural market penetration. We expect the lighting segments to growth by ~16% CAGR over the next two years Recovery in engineering segment to be only gradual – Cost overruns continue to remain unabated in the engineering segment as the management attempts to close old sites which have faced considerable execution/payment delays. With Rs. 4bn worth of old sticky orders remaining unexecuted and ~94% of the total order book (Rs. 10bn) constituting of TLT and RE orders, we expect margins to remain under pressure (Rs. 256mn loss in FY14E) and recover only from FY15 onwards Working capital pressure to prevail – While capital employed in the engineering segment reduced from Rs. 5.7bn to Rs. 4.7bn due to customer advances received for a few orders, steady state working capital levels are expected to remain at elevated levels (76-77days) due to weak pace of execution and payment delays from customers.

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