Bajaj Electricals Ltd

Transcription

1 Consumer Discretionary-Home & Office Products Bloomberg Code: BJE IN India Research - Stock Broking Recovery in Core Businesses to Drive Growth With most of the legacy orders near completion coupled with necessary provisions and write-offs having been taken into account, we expect the E&P segment to report a better performance going forward. Further, the company has a strong order book of Rs Mn which has relatively higher margins. With discretionary spending expected to increase due to rising per capita income, the volumes in the Consumer durable segment are expected to rebound. We expect the consumer durable segment, Engineering and project segment revenues to grow at CAGR of 6.3%/17.2% respectively. Over the last two years, the financial performance of BEL has been slow by muted performance of the Engineering & Projects (E&P) segment on account of low margin legacy orders in the segment and slow down in the Lighting and Consumer durable (CD) segments due to low volumes. Lighting business to lead: The lighting business has clocked impressive 17.2% revenue growth in FY16 and 300bps margin improvement YoY, led by successful rollout of ToC (Theory of Constraints). Revenue growth has also been aided by ramp-up of the LED portfolio, both in lamps and luminaries. EESL orders also helped the surge in revenue growth. We expect the Lighting revenues to grow a CAGR of 11.0% during FY16-18E. Change in strategy and policies to drive growth: Over last two years, performance of the company has been sub-optimal. The profitability of the company was badly impacted due to lower margins in consumer durables, abnormal increase in site expenses on account of cleaning up operation and various other factors including challenging business environment. In consumer durable business, BEL is focusing on improving returns for channel partners by helping them maintaining a low inventory and in the EPC segment, bidding for only good margins projects and clearing off the legacy orders which had a cost overrun. Valuation and Outlook We believe EPC business, which was a major drag on profitability, is set to turnaround and secondly, the consumer durable business could record improved revenue and margins with streamlining of its supply chain. We are optimistic on the stock and recommend BUY for a target price of Rs.256/- representing an upside potential of 15% in months time frame. At CMP of Rs. 222, the stock is trading at EV/EBITDA of 6.6x of FY18E. Exhibit 1: Valuation Summary YE Mar (Rs. Mn) FY14 FY15 FY16 FY17E FY18E Net Sales EBITDA EBITDA Margin (%) Net Profit (53) (140) EPS (Rs.) (0.5) (1.4) RoE (%) (0.7) (2.0) PE (x) NM NM ; *Represents multiples for FY16 are based on historic market price, NM: Not Meaningful For private circulation only. For important information about Karvy s rating system and other disclosures refer to the end of this material. Karvy Stock Broking Research is also available on Bloomberg, KRVY<GO>, Thomson Publishers & Reuters Recommendation (Rs.) Jun 25, 2016 BUY CMP (as on Jun 24, 2016) 222 Target Price 256 Upside (%) 15 Stock Information Mkt Cap (Rs.mn/US$ mn) / wk High/Low (Rs.) 300 / 155 3M Avg. daily volume (mn) 0.3 Beta (x) 0.9 Sensex/Nifty / 8089 O/S Shares(mn) Face Value (Rs.) 2.0 Shareholding Pattern (%) Promoters 63.6 FIIs 8.7 DIIs 5.9 Others 21.8 Stock Performance (%) 1M 3M 6M 12M Absolute (8) 13 4 (19) Relative to Sensex (7) 9 2 (15) Source: Bloomberg Relative Performance* Jun-15 Jul-15 Aug-15 Source: Bloomberg; *Index 100 Analyst Contact Ankit Soni Sep Oct-15 Nov-15 soni.ankit@karvy.com Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Sensex Jun-16 1

2 Company Financial Snapshot (Y/E Mar) Profit & Loss (Rs. Mn) Balance sheet (Rs. Mn) Exhibit 2: Shareholding Pattern (%) FY16 FY17E FY18E Total Assets Net Fixed assets Current assets Other assets Total Liabilities Networth Debt Non current liabilities Current Liabilities Balance Sheet Ratios RoE (%) RoCE (%) Net Debt/Equity Equity/Total Assets P/BV (x) FY16 FY17E FY18E Net sales Optg. Exp (Adj for OI) EBITDA Depreciation Interest Other Income PBT Tax Adj. PAT Profit & Loss Ratios EBITDA margin (%) Net margin (%) P/E (x) EV/EBITDA (x) Dividend yield (%) FIIs 8.7% DIIs 5.9% Company Background is a flagship company under Bajaj Group, one of the oldest conglomerates in India. Bajaj Electricals Ltd., established in 1938, is a pioneer in electrical home appliances, lighting and luminaries business. Over the last 75 years, it has progressively diversified into turnkey project contracts involving Power Distribution and Transmission Line Towers (TLT) by establishing a new SBU (Strategic Business Unit) for Engineering and Projects (E&P). While the power distribution projects are working on rural electrification, the TLT projects cater to connecting power transmission grids across India - connecting power generating plants or sub-stations. The company majorly follows asset light model as it procures products from the market and sell it under the brand name of Bajaj. In November 2002, the company has entered into a technical collaboration and brand licensing agreement with Morphy Richards, United Kingdom, for the sales and marketing of electrical appliances under the brand name of Morphy Richards in India. Cash Flow (Rs. Mn) Exhibit 3: Revenue Segmentation (%) FY16 FY17E FY18E PBT Depreciation Interest (net) Changes in WC 814 (686) (883) Others (808) (547) (1094) CF from Operations Capex (350) (300) (300) Others CF from Investing (122) (6) 23 Interest paid (1014) (1118) (1117) Dividend paid (340) (340) (340) Inc/Dec in borrowings (1150) (250) (207) CF from Financing (2504) (1707) (1664) Change in Cash Engineering & projects 33.6% Promoters 63.6% Others 21.8% Consumer durables 43.4% Lighting 22.9% Others 0.01% Source: BSE, Karvy Research 2

3 Lighting Industry: Jun 25, 2016 Exhibit 4: Indian Lighting Industry (Rs. 000 Cr.) FY13 FY14 FY15 FY16F FY17F FY18F FY19F FY20F CFL LED FTL Others (HID, HPV, Luminaries) Source: Electric Lamp and Component Manufacturers Association of India (ELCOMA), Karvy Research The lighting industry in India can be broadly categorized into incandescent, Compact Fluorescent Lamps (CFLs) and Light-Emitting Diodes (LEDs). According to Electric Lamp and Component Manufacturers Association (ELCOMA), the value of Indian Lighting industry was Rs Bn worth in 2013 which grew at CAGR of 59% during where LEDs are being replaced by incandescent and CFL lamps and is expected to grow to Rs.216 Bn by 2020 representing an exponential growth of 41% CAGR from Rs.19.2 bn in 2013 making LED market ~60% of the total Lighting industry (i.e. Rs bn) in The major players of the lighting industry are Bajaj electrical, Crompton Greaves Ltd. and Philips India Ltd. In Jan 2015, BEL, which already had CFL in its product portfolio, made its mark in the LED segment by growing at a CAGR of 8.4% in FY Government has taken several initiatives to create awareness about LED lighting in India. In the process to do so, government has called for tenders for many of its orders. Bajaj electrical has bagged a government order worth Rs Mn. The government is yet to call tenders for Rs Mn worth orders going forward. Increase in disposable income, changing lifestyle of consumers, improving rural electrification and growth in rural sector are expected to drive the LED market. So, the major challenge that hinders the growth of LED market could be lack of awareness of energy efficient lighting. Exhibit 5: Contribution of lighting segment to total revenues % 25.4% 26% 23.6% 22.9% 24% 21.2% 22% 20% 18% FY12 FY13 FY14 FY15 FY16E Lighting revenue (Rs. Mn) Lighting as a % of sales BEL Lighting segment has consistently contributed in the range of 20% to 25% of total sales. The Lighting business has clocked an impressive growth of 17.2% in FY16 and 300 bps margin improvement YoY led by successful rollout of ToC. Revenue growth has been aided by ramp-up of the LED portfolio, both in lamps and luminaries. EESL order also has helped the surge in revenue growth. What went wrong in E&P business: Most of the transmission tower projects and power distribution projects in India are grossly delayed. This was true for. as well. The industry ascribes the cause of these delays to the necessity of extensive coordination and cooperation between various stakeholders like state owned companies, individual land owners and contractors. This leads to stand-offs on critical issues like RoW (right of way), design, land acquisition, environmental approvals etc. and consequently to unpredictable time overruns. Once projects are delayed, more working capital is needed, increasing the cost of the project. Therefore, Bajaj Electricals had to contend with cost over runs, erosion of profit margin and late delivery penalties for nearly every project. Core conflict: The conflict for the company in both TLT and Power Distribution projects was choosing whether it should maximize billing (or tonnage) or meet immediate site requirements. Since focus was on maximizing billing/tonnage, major items of high value was manufactured or sourced and dumped on site while minor items required for completing the projects were lost from the company s focus. This mismatch of items meant that while the company was able to book sales, the sites could not be closed without considerable delay and cost overruns. 3

4 Recovery in E&P business but at a slower pace: Exhibit 6: Change in strategy and policies to derive growth: Jun 25, 2016 Over last two years, performance of the company has been sub-optimal. The profitability of the company was badly impacted due to lower margins in consumer durables, abnormal increase in site expenses on account of cleaning up operation to ensure that there was good progress towards closure of overrun sites in projects business and various other factors including challenging business environment. During the year under reporting, the company has closed 60 sites of TLT and also completed financial closure of most of them. The company has taken several measures to ensure better management of working capital, monitoring of project performance on continuous basis and completion of projects as per schedule to avoid cost and time over run. Consumer durables market in india: FY12 FY13 FY14 FY15 FY16 E&P business revenue (Rs. Mn) The E&P business is divided into three segments namely High mast, Transmission line towers and special projects. The E&P business has grown at a CAGR of 16.9% during FY The segment contributes around 30% of total revenues. A slowdown in industrial business and stretched working capital cycle resulted to losses in the segment. However, BEL s order book has gained the traction. The order inflow activity of the segment improves the revenue visibility. The current order book stands at Rs Mn with Rs.7350 Mn in transmission lines towers, Rs Mn in power distribution and Rs Mn in illumination. With the company s initiatives to bring E&P business on track by closing 60 sites of TLT and providing provisions in case of losses. The consumer durable market is split into two segments: 1. Consumer electronics which include brown goods such as televisions, laptops, mobiles and cameras. 2. Consumer appliances which include white goods such as Fans, Air conditioners, Microwave ovens and other domestic appliances. The consumer durable sector revenues reached USD 9.7 bn in 2015 and are expected to reach USD 14 bn by The consumer durable market is expected to grow at a CAGR of 13% from FY15 to FY20. Exhibit 7: Consumer durables segment revenues FY12 FY13 FY14 FY15 FY16 CD segment (Rs. Mn) The core business of BEL (CD, lighting contribute ~69% to topline) recorded a subdued FY15 performance. Given the slower growth in GDP, urban & rural income levels were negatively impacted. This, in turn, resulted in dismal CD & lighting revenue growth of ~5%, -6% YoY, respectively, with muted offtake of kitchen appliances, fans and luminaries. However, under the appliances category, BEL s premium brand Morphy Richards (MR) recorded strong growth in FY14 and FY15. BEL plans to revamp its MR product portfolio with new models in the premium segment in steam irons, mixers, food processors, instant water heaters, dry irons, etc. With the entry into the LED lighting segment, BEL will benefit from new government orders and rising trend of LED products in the domestic market. We expect the CD & lighting segment revenue to witness CAGR of 6.5% and 11.0%, respectively, in FY15-17E. Execution of higher margin projects to drive overall margin. Pan-India presence through strong dealer network: BEL, one of the oldest consumer durable companies in the country, has a pan-india presence through a strong dealer and retail network. The company has distributors and dealers across India. Further, Bajaj s lighting solutions are available in over 350,000 retail stores while fans and appliances are available at over 88,000 and 45,000 retail stores across India. In order to leverage its strong brand, BEL has taken the initiative to reach directly to consumers through opening retail chain Bajaj World (pure franchise model) for appliances and lighting products. Currently, the company has 75 exclusive Bajaj World stores. BEL also plans to expand its presence globally through franchise agreements. The company has opened stores in Nepal and plans to open stores in Ghana, Nigeria, Sri Lanka and South Africa. 4

5 Exhibit 8: Business Assumptions Y/E Mar (Rs. Mn) FY15 FY16E FY17E FY18E Comments Revenue Revenue Growth (%) EBITDA EBITDA Margins (%) PAT (normalized) (140) EPS (Rs.) (1.4) EPS Growth (%) NA NA Capex (ex. Acquisition) - cash capex (624) (350) (300) (300) Net CFO Net Debt Free Cash Flow Revenue is expected to grow at CAGR of 11.3% during FY16-18E primarily driven by increased sales from Lighting and LED segments. We expect the EBITDA to almost remain flat on the back of stable raw material prices. PAT is expected to surge at a CAGR of 27.9% during FY16-18E and the margins are expected to reach 2.7% in FY18E from the current levels of 2.1% in FY16. EPS is expected to grow at a CAGR of 12.0% during FY15-18E supported by healthy revenues and increasing profit margins. Exhibit 9: Karvy vs Consensus Revenues (Rs. Mn) Karvy Consensus Divergence (%) Comments FY17E (4.2) We have moderate outlook on volume and realizations growth. Revenue is expected to FY18E (4.6) grow at CAGR of 11.3% during FY16-18E. EBITDA (Rs. Mn) FY17E FY18E (5.3) (9.7) We expect EBITDA to improve on successful rollout of ToC approach and margin improvement in LED and EPC segments but we consider it to be lower than consensus EPS (Rs.) FY17E (16.5) FY18E (12.7) We have assumed taxes at marginal rates. 5

6 Exhibit 10: Revenues to grow at CAGR of 11% % 13.0% 5.7% 8.3% 9.0% 10.0%12.7% FY12 FY13 FY14 FY15 FY16 FY17E FY18E 20% 15% 10% 5% 0% BEL has experienced revenue growth at a CAGR of 11.6% during FY11-15 on the back of Engineering and project segment growing at a CAGR of 16.9% during same period. BEL revenue is expected to grow at a CAGR of 11.3% during FY16-18E led by major contribution to revenues from Lighting and consumer durable segments. Net Sales (Rs. Mn) Growth (%) Exhibit 11: EBITDA and EBITDA margins % 6.0% 5.6% 6.0% 3.3% 2.0% 2.1% FY12 FY13 FY14 FY15 FY16 FY17E FY18E 8% 6% 4% 2% 0% EBITDA (Rs. Mn) EBITDA Margin (%) EBITDA margins plunged sharply in FY14 and FY15 to ~2% largely due to losses in E&P segment. But, in FY16, the company has regained its momentum and has clocked EBITDA margins of 5.6% due to successful rollout of ToC and margin improvement in LED segment. We expect the EBITDA to reach Rs.3429mn with EBITDA margins to reach at 6.0%. Exhibit 12: RoE v/s RoCE 20% 15% 10% 5% 0% -5% 16.8% 13.3% 5.8% 7.0% -0.7% -2.0% 16.3% 14.3% 12.7% 10.1% 14.1% 12.0% -0.5% -1.3% FY12 FY13 FY14 FY15 FY16 FY17E FY18E RoCE (%) RoE (%) BEL s RoE and RoCE are likely to be around 14%-17% and 12%-14% during the next couple of years. In the previous years, the ratios have plunged because of the losses in E&P business. Exhibit 13: PAT and PAT margin % 1.5% 2.1% 2.6% 2.7% -0.1% -0.3% 1179 FY FY13-53 FY FY FY FY17E 1564 FY18E 6% 4% 2% 0% -2% PAT (Rs. Mn) PAT Margin (%) We believe sharp decline in PAT from Rs mn in FY12 to Rs. 512 mn in FY13; and a loss of Rs.140 mn in FY15 which is majorly because of substantial losses in E&P business. However, in FY16, the company has regained its track and clocked PAT of Rs.956 mn with PAT margins of ~2.1%. We expect the recovery in E&P business and sustained margins in consumer durable business to drive BEL s bottomline, going forward. We expect the bottomline of Rs mn with PAT margins to reach at 2.7% by FY18E. 6

7 Exhibit 14 : Company Snapshot (Ratings) Low High Quality of Earnings 33 Domestic Sales 33 Exports 33 Net Debt/Equity 33 Working Capital Requirement 33 Quality of Management 33 Depth of Management 33 Promoter 33 Corporate Governance 33 7

8 Valuation & Outlook We believe EPC business, which was a major drag on profitability, is set to turnaround and secondly, the consumer durable business could record improved revenue and margins with streamlining of its supply chain. We are optimistic on the stock and recommend BUY for a target price of Rs.256/- representing an upside potential of 15% in months time frame. At CMP of Rs. 222, the stock is trading at EV/EBITDA of 6.6x of FY18E. Exhibit 15(a): Comparative Valuation Summary CMP Mcap EV/EBITDA (x) P/E (x) EPS (Rs.) (Rs.) (Rs. Mn) FY14 FY15 FY16E FY17E FY14 FY15 FY16E FY17E FY14 FY15 FY16E FY17E NM NM (0.5) (1.4) Havells India Ltd TTK Prestige Ltd Exhibit 15(b): Comparative Operational Metrics Summary CAGR % (FY15-17E) RoE (%) Price Perf (%) Net Sales (Rs. Mn) Sales EBITDA EPS FY14 FY15 FY16E FY17E 3m 6m 12m FY14 FY15 FY16E FY17E (0.7) (2.0) (19.1) Havells India Ltd TTK Prestige Ltd Peer Comparison Exhibit 16: Revenue Growth (%) 15% Exhibit 17: EBITDA Growth (%) 200% 191.5% 10% 5% 5.7% 8.3% 10.0% 150% 100% 50% 8.8% 17.3% 0% FY15 FY16 FY17E Havells India Ltd TTK Prestige Ltd 0% FY15 FY16E FY17E Havells India Ltd TTK Prestige Ltd Exhibit 18: RoE (%) 25 Exhibit 19: EPS (Rs.) FY15 FY16 FY17E Havells India Ltd TTK Prestige Ltd FY15 FY16 FY17E Havells India Ltd TTK Prestige Ltd 8

9 Key Risks yunorganised market. yintense competition in consumer durable segment. yoverdependence on vendors. ye&p segment s volatile performance. 9

10 Financials Exhibit 20: Income Statement YE Mar (Rs. Mn) FY14 FY15 FY16 FY17E FY18E Revenues Growth (%) Operating Expenses EBITDA Growth (%) (26.2) Depreciation & Amortization Other Income EBIT Interest Expenses PBT (60) (208) Tax (7) (69) Adjusted PAT (53) (140) Growth (%) NA NA NA Exhibit 21: Balance Sheet YE Mar (Rs. Mn) FY14 FY15 FY16 FY17E FY18E Cash & Equivalents Sundry Debtors Inventory Loans & Advances Investments Net Block CWIP Miscellaneous Total Assets Current Liabilities & Provisions Debt Other Liabilities Total Liabilities Shareholders Equity Reserves & Surplus Total Networth Total Networth & Liabilities

11 Exhibit 22: Cash Flow Statement YE Mar (Rs. Mn) FY14 FY15 FY16 FY17E FY18E PBT (60) (208) Depreciation Interest Inc/dec in Net WC (1296) (420) 814 (686) (883) Other non cash items (808) (547) (1094) Cash flow from operating activities (68) Inc/dec in capital expenditure (472) (624) (350) (300) (300) Inc/dec in investments (404) Others Cash flow from investing activities (764) (491) (122) (6) 23 Inc/dec in borrowings (1150) (250) (207) Issuance of equity (0) 0 Dividend paid (234) (175) (340) (340) (340) Interest paid (727) (888) (1014) (1118) (1117) Cash flow from financing activities 869 (562) (2504) (1708) (1664) Net change in cash 38 (171) Exhibit 23: Key Ratios YE Mar FY14 FY15 FY16 FY17E FY18E EBITDA Margin (%) EBIT Margin (%) Net Profit Margin (%) (0.1) (0.3) Dividend Payout Ratio (%) NM NM Net Debt/Equity (x) RoE (%) (0.7) (2.0) RoCE (%) (0.5) (1.3) Exhibit 24: Valuation Parameters YE Mar FY14 FY15 FY16 FY17E FY18E EPS (Rs.) (0.5) (1.4) DPS (Rs.) BV (Rs.) PE (x) NM NM P/BV (x) EV/EBITDA (x) EV/Sales (x) ; *Represents multiples for FY14, FY15 and FY16 are based on historic market price, NM: Not Meaningful 11

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