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Spark Capital: Bajaj Electricals - 4QFY14 Results Review




Spark Capital Advisors(India) Private Limited


02 Jun 2014





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Lackluster performance across all segments, Maintain Reduce Bajaj Electricals (BJE) reported 4QFY14 sales of Rs. 12.7bn, growth of 15.4% y-o-y, with EBITDA margins of 0.3% and a loss of Rs. 106mn. Engineering segment continued to register losses (Rs. 205mn at an EBIT level) on the back of cost over-runs in legacy orders. With majority of the loss making orders closed in the engineering segment (according to the management), margins in the segment are expected to recover from 1QFY15. We expect the segment to register 4.5-5.5% margin in FY15-FY16E, but carry downside risk given the nature of these orders. Growth in both lighting (4.5% y-o-y growth) and consumer durable (flat y-o-y) segments was subdued with segmental margins contracting to <4% in both the segments. Fans segment grew by a muted ~2% y-oy during the year. Going forward, the management is confident of sales growth picking up in the upcoming quarters and expects 15% y-o-y growth in both the segments. We expect general improvement in demand environment and a low base effect to result in lighting and consumer durable segments to grow by ~12% and 14% CAGR in FY14-FY16E respectively. With risk of cost over-runs in the engineering segment continuing to prevail and considering the pressure on margins in appliances business (EBIT margins in consumer durables segment dropped from 13% in FY10 to 7.7% in FY14), our outlook remains cautious. We value BJE on a SOTP basis (Rs. 271/share based on 15x for consumer and Rs. 26/share for Engineering segment based on 7x) to arrive at a target price of Rs. 297. Maintain our ‘Reduce’ rating. Highlights of the quarter’s performance Subdued performance in lighting and consumer durable segments – Lighting (4.5% y-o-y growth) and consumer durables (flat y-o-y) segments continued to register muted growth for the second consecutive quarter. EBIT margins were also lackluster at 3.0% (489bps y-o-y decrease) and 3.6% (454bps decrease) respectively due to lack of operating leverage. We expect lighting and consumer segments to grow on a low base of FY14 Margin pressure in engineering segment continues to prevail – Engineering segment registered an EBIT level loss of Rs. 205mn during the quarter as the company closed old sites which have faced considerable execution delays. The management expects no further losses to be incurred as majority of the legacy orders have been closed. We expect margins to improve from 2HFY15 but remain cognizant of the downside risk to margin given the nature of the current order book Capital employed in engineering segment remains high – Capital employed in the engineering segment has increased from Rs. 4.7bn in F13 to Rs. 6.3bn currently on the back of higher execution in the engineering segment. It is expected to remain at elevated levels given the strong execution (~25% y-o-y growth) expected in this segment

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