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Spark Capital: Bajaj Electricals 1QFY14 Results Review - Moderating growth in consumer business adds to engg. segment’s woes, Maintain Reduce




Spark Capital Advisors(India) Private Limited


07 Aug 2013





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Moderating growth in consumer business adds to engg. segment’s woes, Maintain Reduce Bajaj Electricals (BJE) reported 1QFY14 sales of Rs. 7.8bn, growth of 17.7% yoy, with a muted EBITDA margin of 2.4% and a PAT of Rs. 7mn (94.5% yoy de-growth). Growth in the lighting and consumer segments was muted at 3.3% and 11.8% respectively dragged by weak sales in luminaries (1% de-growth), Murphy Richards (4.2% growth) and fans (7.8% growth). While the management is confident of sales growth picking up in the upcoming quarters (driven by festive season) and expects ~20% yoy growth in both segments, given moderating demand environment, we expect lighting and consumer durable segments to grow by 10-11% and 15-16% yoy. Margins were affected by sustained losses in the engineering segment which registered an EBIT level loss of Rs. 259mn due to cost over-runs incurred while closing old projects. The management expects impact of old orders to continue in 2QFY14 and sees margin recovering in 2HFY14. We expect the engineering segment to incur EBIT level loss of Rs. 275mn in FY14E and register 3.0% margin in FY15E. Working capital cycle is expected to remain elevated due to payment / execution delays in the engineering segment, which in turn is expected to lead to higher debt/interest costs levels. Keeping in mind both, medium term strain expected in the engineering segment and moderating growth outlook for the lighting and consumer durable segments, we value BJE at 10x FY15E earnings (on a blended basis) with a target price of Rs. 165. We maintain our ‘Reduce’ rating on the stock. Highlights of the quarter’s performance Growth outlook for lighting and consumer segments moderates – Revenue growth in both lighting (3.3% yoy) and consumer durable (11.8% yoy) segments were below expectation due to lukewarm demand and high base in 1QFY13. Price increase of 3-5% (blended basis across products) in April contributed to revenue growth and aided in sustaining margins. Going forward, given moderating demand environment and increasing difficultly in price increases (due to competition), we expect lighting and consumer segments to grow by 10-11% and 15-16% in FY14E and FY15E respectively Recovery in engineering segment to be only gradual – Engineering segment continued to register cost overruns as the project team closes old sites which have faced considerable execution/payment delays. With ~Rs. 3-4bn worth of old sticky orders remaining unexecuted and ~90% of the total order book (Rs. 9.2bn) constituting of TLT and special project orders, we expect EBIT margins to remain under pressure (Rs. 275mn loss in FY14E) and recover only from FY15 onwards Working capital position to remain stretched – Capital employed in the engineering segment increased from Rs. 4.7bn to Rs. 4.9bn sequentially. Working capital position is expected to remain at elevated levels (73-74days) due to payment delays from customers in the engineering segment and maintain pressure at PAT level owing to higher debt/interest costs.

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