E&P To Stay Strong; Consumer Segment To Revive

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1 Management Meet Update Institutional Equities Bajaj Electricals 30 August 2017 Reuters: BJEL.BO; Bloomberg: BJE IN E&P To Stay Strong; Consumer Segment To Revive We had a meeting with the management of Bajaj Electricals (BJE) recently to get the latest business update. The management is optimistic about revival in profitability and resumption of volume growth in the consumer products segment post completion of RREP roll-out. In the engineering & projects (E&P) segment, healthy growth momentum is likely to sustain driven by execution of healthy order book while capital efficiency and margin profile are likely to improve. We have retained Buy rating on BJE with a target price of Rs400. We have assigned a P/E of 23x FY19E EPS to BJE s consumer products business (peers are trading at 30x) and 15x to E&P business. Following are key takeaways from the meeting: Consumer product segment in transition phase: The performance of BJE in the consumer product segment has been below industry standards over the past couple of years as it is in a transition phase of altering its distribution strategy by eliminating the wholesale channel. Under the RREP model, the new sales channel will be BJE => distributor => retailer compared to the earlier channel where the wholesaler was an intermediary between BJE and the distributor. BJE has undertaken a bold reform by eliminating the wholesale channel as it was the largest pie of its sales, traditionally accounting for 50%-60% of total sales. Raising incentives for distributors and retailers: BJE intends to improve the incentives it gives to distributors and retailers compared to the earlier structure as well as industry standards. The benefits for distributors are multifold under RREP like: (a) Uniform pricing for all distributors. (b) A sharp increase in RoI from 15% earlier to 40% now. (c) Channel finance at a competitive sub-9% rate. To further incentivise retailers, BJE intends to hike their margin by 2% to 3% by redistributing the commission which was previously paid to the wholesalers. Considering the higher incentives than the industry, BJE intends to have a large share of exclusive distributors as well as a much enhanced network of retailers. Over the past three years, BJE has increased its retail presence from 45,000 outlets to 85,000 outlets. In the next three years, it plans to increase it further to 1,60,000 outlets. Currently, under RREP, BJE has 460 distributors while it aims to have 800 distributors over the next few years. Net revenues 42,625 45,903 42,617 48,165 54,895 EBITDA 884 2,642 2,428 2,979 3,821 PAT (140) 1,103 1,077 1,519 2,160 EPS (Rs) (1.4) EPS growth (%) NA NA (2.4) EBITDA margin (%) P/E (x) NA P/BV (x) EV/EBITDA (x) Dividend yield (%) RoCE (%) RoE (%) (2.0) We are participating in AsiaMoney s Brokers Poll We would be pleased if you vote for us as the feedback helps us align our equity research offerings to meet your requirements. Click Here BUY Sector: Capital Goods CMP: Rs337 Target Price: Rs400 Upside: 19% Chirag Muchhala Research Analyst chirag.muchhala@nirmalbang.com Key Data Current Shares O/S (mn) Mkt Cap (Rsbn/US$mn) 34.2/ Wk H / L (Rs) 388/202 Daily Vol. (3M NSE Avg.) 241,173 One-Year Indexed Stock Performance Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Price Performance (%) BAJAJ ELECTRICAL Nifty 50 1 M 6 M 1 Yr Bajaj Electricals Nifty Index (2.2) Source: Bloomberg

2 Future outlook of growth and margin in consumer segment Owing to the transition phase of distribution network under the RREP model, BJE s primary sales are impacted and as a result it reported 11% YoY decline in revenues to Rs23.1bn in FY17. Even in 1QFY18, the sales fell 14% YoY to Rs4.7bn, partly also impacted by GST-destocking (15% impact on sales). The management expects to resume volume growth from 2HFY18 driven by cities where RREP is already rolled out. Currently, RREP covers 236 districts in 26 cities which comprise 60% of turnover value-wise. The target of RREP roll-out by end-fy18 is 500 districts which will be 80% of the turnover value-wise. Once the RREP roll-out is complete, BJE management hopes to scale up its profitability with EBIT margin at 9%-10% level, in a couple of years post the roll-out, compared to the FY17 EBIT margin of 4.3%. The management believes that the sharp reduction in capital employed in the consumer products segment offers initial indication that RREP is working. The total capital employed reduced sharply to Rs1.3bn as of 1QFY18-end, down 55% YoY from Rs3bn. Working capital cycle of consumer products has come down considerably to 17 days. Strong order book of E&P segment provides healthy visibility The E&P segment has seen healthy transformation over the past couple of years (FY16 and FY17) achieving EBIT margin above 7% compared to the losses sustained in the three preceding years (FY13 to FY15) because of legacy projects. Owing to strong focus of the government on improving power T&D infrastructure, the sector is witnessing healthy order placement activity. BJE has a strong order book currently amounting to Rs33.8bn as of 1QFY18 (1.7x FY17 sales); driven by segments such as power distribution (Rs26.2bn), power transmission (Rs5.9bn) and high masts (Rs1.7bn). In the power distribution (rural electrification) space, BJE is undertaking EPC projects predominantly in Bihar and Madhya Pradesh while orders for supply of materials are taken from other states as well. With plenty of opportunities, BJE is being selective about choosing the right project on the basis of relative certainty of execution and is not looking at diversifying in any other sectors such as railways. The rural electrification and transmission line business has an execution cycle of 24 to 36 months. While BJE has an in-house tower manufacturing capacity of 30,000MT, it outsources other components like conductors, transformers, cables, electronics etc. The high mast is a short cycle business with an execution timeframe of three to six months. Focus on improving capital efficiency and margin profile BJE s current focus is on reducing its cash conversion cycle and improving current margin profile. The E&P segment s capital employed stands at Rs10.2bn as of 1QFY18, up 13% YoY, which it intends to reduce further to an ideal level of 3 to 3.5 months. BJE s debt has reduced from Rs8.2bn in FY16 to Rs5.4bn in FY17, while the management aims to reduce it further by Rs2bn over the next year. The industry norm of payment structure for an E&P project is 70% payment on supply of material, 20% on erection and 10% retention money. The retention money is released after six months of defect liability period. BJE has not faced any issues with receivables in rural electrification projects so far. Out of its total receivables worth Rs14bn in the E&P segment, only Rs3bn is due for more than a year. With strong capex outlay planned in the T&D segment and improving fiscal discipline of states under the UDAY scheme, the prospects of healthy and profitable order inflow remain bright. The management has given guidance of 20% YoY growth in FY18 with a margin range of 7%-8% in the E&P segment. We are factoring in 18% revenue growth (to Rs23.4bn) and 30bps YoY rise in EBIT margin to 7.4% in FY18 driven by execution of strong order book. Outlook and valuation Over FY17-FY19E, we expect BJE to post 13.5% revenue CAGR. However, revival in profitability in consumer product segment is likely to lead to 130bps expansion in EBITDA margin to 7% in FY19E. Further, moderating interest cost and rising other income is likely to lead to 42% earnings CAGR over FY17-FY19E on a suppressed base. Considering healthy rise in return ratios (RoCE likely to rise from 15% in FY17 to 22.6% in FY19E) and strong earnings growth, the stock is available at a reasonable valuation of 16x FY19E EPS. We have a Buy rating on the stock with a target price of Rs400 providing 19% upside from CMP. We have assigned a P/E of 23x FY19E EPS to BJE s consumer products business (peers are trading at 30x) and 15x to E&P business (in line with peers). 2 Bajaj Electricals

3 Exhibit 1: Segment-wise break-up of E&P order book as of 1QFY18 Power transmission 17% High masts 5% Power distribution 78% Exhibit 2: Consumer product segment Revenue and EBIT margin trend (Rsmn) (%) 30, , ,000 15,000 10, , FY16 FY17 FY18E FY19E Revenue EBIT margin 0 Exhibit 3: E&P segment Revenue and EBIT margin trend (Rsmn) (%) , , , ,000 10,000 5,000 - FY16 FY17 FY18E FY19E Revenue EBIT margin Bajaj Electricals

4 Exhibit 4: Peer comparison Peer comparison Net sales (Rsmn) EBITDA margin (%) PAT (Rsmn) CAGR FY17-FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E Sales EBITDA PAT Bajaj Electricals 42,617 48,165 54, ,077 1,519 2, Crompton Consumer 39,759 43,956 50, ,907 3,576 4, Havells India 61,353 87, , ,969 7,288 9, V-Guard Industries 21,506 24,218 28, ,518 1,705 2, KEC International 85,844 98, , ,048 3,966 5, Peer comparison P/E (X) EV/EBITDA (X) P/BV (X) RoE (%) RoCE (%) FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E Bajaj Electricals Crompton Consumer Havells India V-Guard Industries KEC International Source: Nirmal Bang Institutional Equities Research 4 Bajaj Electricals

5 Financial statements Exhibit 5: Income statement Net sales 42,625 45,903 42,617 48,165 54,895 % growth (7.2) Raw material costs 32,820 33,837 30,511 34,342 38,975 Staff costs 2,263 2,851 3,289 3,757 4,282 Other overheads 6,658 6,573 6,390 7,087 7,817 Total expenditure 41,742 43,260 40,190 45,186 51,074 EBITDA 884 2,642 2,428 2,979 3,821 % growth (8.1) EBITDA margin (%) Other income Interest costs 1,044 1, Depreciation Profit before tax (208) 1,769 1,680 2,301 3,272 Tax (69) ,113 Net profit (140) 1,103 1,077 1,519 2,160 PAT margin (%) (0.3) EPS (Rs) (1.4) % growth NA NA (2.4) Exhibit 7: Balance sheet Share capital Reserves 6,668 7,361 8,512 9,522 10,955 Net worth 6,870 7,563 8,714 9,724 11,157 Short-term loans 2,150 7,251 5,286 4,286 3,986 Long-term loans 1, Total loans 3,859 8,209 5,455 4,455 4,155 Total liabilities 10,729 15,772 14,170 14,179 15,312 Gross block 4,326 4,537 5,172 5,701 6,201 Depreciation 1,549 1,773 2,072 2,409 2,766 Net block 2,777 2,764 3,100 3,292 3,435 Capital work-in-progress Investments Inventories 4,746 5,067 5,712 5,928 6,300 Debtors 12,896 16,711 16,538 18,078 19,852 Cash ,294 Other current assets 6,314 3,002 3,361 3,661 4,446 Total current assets 24,332 25,335 26,264 28,571 31,893 Creditors 11,674 5,714 6,304 7,527 8,756 Other current liabilities & provisions 5,820 8,109 10,332 11,570 12,672 Total current liabilities 17,494 13,823 16,635 19,096 21,429 Net current assets 6,838 11,512 9,628 9,475 10,465 Deferred tax asset (net) Total assets 10,729 15,772 14,170 14,179 15,312 Note: FY15 financials as per IGAAP while FY16 and FY17 financials are as per Ind-AS. Our forecasts (FY18 & FY19) are as per Ind-AS. Exhibit 6: Cash flow EBIT 593 2,369 2,129 2,642 3,464 (Inc.)/dec. in working capital 91 (4,496) 1, (600) Cash flow from operations 684 (2,127) 4,110 3,048 2,863 Other income Depreciation Tax paid (-) 69 (665) (604) (782) (1,113) Net cash from operations 1,286 (2,037) 4,161 3,005 2,562 Capital expenditure (-) (581) (436) (507) (500) (500) Net cash after capex 705 (2,474) 3,654 2,505 2,062 Interest paid (-) (1,044) (1,081) (804) (743) (646) Dividends paid (-) (182) (340) (341) (509) (727) Inc./(dec.) in short-term borrowing 13 5,100 (1,965) (1,000) (300) Inc./(dec.) in long-term borrowing 403 (751) (789) - - Inc./(dec.) in total borrowings 416 4,350 (2,754) (1,000) (300) Inc./(dec.) in investments 79 (203) (7) - - Cash from financial activities (730) 2,726 (3,906) (2,252) (1,673) Others (142) (75) Opening cash balance Closing cash balance ,294 Change in cash balance (166) Exhibit 8: Key ratios Y/E March FY15 FY16 FY17 FY18E FY19E Per share (Rs) EPS (1.4) Book value Valuation (x) P/E NA P/BV EV/EBITDA EV/sales Return ratios (%) RoCE RoE (2.0) RoIC Profitability ratios (%) EBITDA margin EBIT margin PAT margin (0.3) Turnover ratios Total asset turnover ratio (x) Debtor days Inventory days Creditor days Solvency ratios (x) Debt-equity Interest coverage Bajaj Electricals

6 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Institutional Equities Rating track Date Rating Market price (Rs) Target price (Rs) 7 May 2014 Buy May 2014 Buy August 2014 Buy October 2014 Buy November 2014 Buy December 2014 Buy January 2015 Buy February 2015 Buy April 2015 Buy May 2015 Buy July 2015 Buy August 2015 Buy October 2015 Buy November 2015 Buy January 2016 Buy February 2016 Buy April 2016 Buy May 2016 Buy July 2016 Buy August 2016 Buy October 2016 Buy November 2016 Buy January 2017 Buy February 2017 Buy April 2017 Buy June 2017 Buy July 2017 Buy August 2017 Buy August 2017 Buy Rating track graph Not Covered Covered 6 Bajaj Electricals

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