BUY BAJAJ ELECTRICALS LTD. August 3, Investor s Rationale

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1 BAJAJ ELECTRICALS LTD August 3, 2012 BSE Code: NSE Code: BAJAJELEC Reuters Code: BJEL.BO Bloomberg Code: BJE:IN Bajaj Electricals Ltd (BEL) is expected to grow at the CAGR of 45% between FY12-FY14E backed by robust growth in consumer durable segment and steady growth in other divisions. Further, vast product portfolio, wide distribution network and tie-up with globally reputed brands give an edge over competition. Investor s Rationale BEL remains confident of achieving a sales target of `38 billion supported by strong growth in consumer durables and lighting, despite the challenging external business conditions. The company has guided for 20% revenue growth in its Consumer Durables segment along with 20% revenue growth in its lighting segment and 15% growth in luminaires for FY13. BEL reported an 8.3% growth in its first quarter net profit at `119.8 million compared to `110.6 million in the corresponding period last year, due to subdued performance in E&P (Engineering & Project) segment. While, net sales for Q1 FY13 at stood at `6,661.9 million as against `5,443.6 crore in the first quarter of the previous year, a jump of 22.4% on yoy basis led by robust growth of 29% in the consumer durable segment. BEL s tie-up with leading players including Morphy Richards, Nardi Elettrodomestici Spa, Midea, Walt Disney etc. gives an edge over competition. This helps the company in catering all the price point from low end to high end/premium market. Its Morphy Richards (MR) brand strengthens its portfolio as it is the first to cross the `1,000 million in the Indian small domestic appliances market. Market Data Rating One year Price Chart BUY CMP (`) Target (`) 217 Potential Upside ~20% Duration Long Term 52 week H/L (`) 234.0/132.9 All time High (`) Decline from 52WH (%) 22.6 Rise from 52WL (%) 36.2 Beta 0.5 Mkt. Cap (` bn) 17.9 Enterprise Value (` bn) 19.6 Fiscal Year Ended FY11A FY12A FY13E FY14E Revenue (`mn) 27, , , ,843.3 Net Profit(`mn) 1, , , ,441.5 Share Capital EPS (`) P/E (x) P/BV (x) EV/EBITDA (x) ROE (%) ROCE (%) BEL s E&P divisions profitability is likely to improve from H2FY13 as the company is doing restructuring of E&P projects by closing its long delayed orders and sharply focusing on profitability for new orders. Currently, the company s order book stood over `4.5 billion and expects to reach `7-8 billion by Q2FY13. Despite intense competition and rapidly changing market dynamics, lighting and luminaires business revenues surged impressively by 28.7% YoY and 13.6% YoY respectively in FY12. The CFL drive the growth as its sale has increased by 41% over last year and crossed `2,500 million mark. The growth in the segment would continue on higher demand as the result of awareness among consumers for energy-saving. Shareholding Pattern Jun 12 Mar 12 Diff. Promoters FII (0.96) DII (0.47) Others

2 A ~`30 billion Company, one of the market leader in domestic home appliances BEL, part of the Bajaj Group, is setting up its own R&D centre, which will integrate all the R&D activities across its various verticals under one roof. Bajaj Electricals Ltd (BEL) has diversified interests in Lighting, Luminaires, Appliances, Fans, and Engineering & Projects. The company is the part of the Bajaj Group and has distribution arrangements with Trilux lenze of Germany (for luminaries), Delta controls of Canada (for building management systems), Securiton of Switzerland (for security systems), Morphy Richards of UK and Nardi of Italy (for appliances), Disney of USA and Midea of China (for fans). The company has also invested in Starlite Lighting for manufacture of energy saving lamps. BEL is also in the business of manufacturing, erection and commissioning transmission line towers, telecom towers, mobile telecom towers and wind energy towers. BEL is also setting up its own R&D centre, which will integrate all the R&D activities across its various verticals under one roof. The aim is to save cost and develop innovative end environmental friendly products in future. The company has also entered into technology tie-ups with international players for marketing their products in India. Some appliances are marketed under the Morphy Richards brand name. Most of the lamps are manufactured by their group company, Hind Lamps, in technical collaboration with Philips N.V. of Holland. BEL has a pan India presence with an excellent distribution network of over 5,000 dealers across India coupled with more than 400,000 retailers. Business Segments Lighting Consumer Durables Engineering & Projects 25% of revenue 48% of revenue 27% of revenue

3 Q1FY13 net up 8.3% to `119.8 million; led by subdued performance in E&P BEL reported 8.3% growth in its first quarter net profit at `119.8 million compared to `110.6 million in the corresponding period last year, due to subdued performance in E&P (Engineering & Project) segment. BEL reported an 8.3% growth in its first quarter net profit at `119.8 million compared to `110.6 million in the corresponding period last year, due to subdued performance in E&P (Engineering & Project) segment. Further, the poor market conditions such as commodity prices volatility and exchange rate fluctuations also hampered the bottom-line. While, net sales for Q1 FY13 stood at `6,661.9 million as against `5,443.6 crore in the first quarter of the previous year, a jump of 22.4% on yoy basis led by robust growth of 29% in the consumer durable segment. The consumer durable segment has performed well registering a growth of 28.8% over the previous period and the lighting segment continuing its good work with a revenue growth of 19.6% backed by strong growth in volumes. Further, the growth in the consumer durables segment was led by 13% growth in the fan segment, 29% surge in sales of Morphy Richards brand and 32% rise in sales for Bajaj Appliances. But the strong growth in overall revenue was offset by pressure on margins and continued sluggishness in the engineering and projects business. The performance of the Engineering and Project division continues to perform badly, dragging the overall company's performance, as the overall EBIDTA margin of the company declined by 35bps YoY and 294bps QoQ to 5.19%. Although revenues in E&P division registered an 8.47% YoY growth while, EBIT margins slipped to % on the back of escalating cost due to delay in projects execution. However management is confident to come back strongly in this business from Q3 FY'13 onwards. Segment-wise revenue trend Restructuring of business to augment growth BEL is restructuring the business with separate focus on the consumer products and B2B products in order to augment growth. Restructuring exercise with separate focus on the consumer products and B2B products undertaken by BEL would augment growth in both the divisions. B2B division includes engineering projects and luminaires segment, while consumer products comprises of all the lighting appliances, fans, and Morphy Richards. The company aims to bring in business synergies with this new organizational structure and the realignment of the business verticals. Also, the company has appointed Mr. Anant Bajaj as the Joint MD to lead the organization post this restructuring focusing on high margin products. The consumer products unit would be headed by executive director PS Tandon while the B2B vertical will be managed by executive director Lalit Mehta. Besides, it is setting up a R&D center within a year, which will integrate the entire R&D across its various verticals under one roof to save costs and develop innovative products in future.

4 Consumer durable segment to sustain high growth momentum BEL s appliances BU continues to be on the path of aggressive growth and has achieved a turnover of `8,380 million with a growth of 23% and CAGR of 28% during the financial year BEL maintained its dominant position in the marketing of electrical consumer durable and offers an array of product for both small appliances and fans. The appliances BU continues to be on the path of aggressive growth and has achieved a turnover of `8,380 million with a growth of 23% and CAGR of 28% during the financial year The company maintained its dominance in Small Appliances Industry, with leadership position in Irons, Water Heaters, Toasters & Grillers and Mixers. Further, the company wants to expand through this segment and has plans to set up 60 Exclusive Bajaj Showrooms named Bajaj World in current finance year in major cities across India in order to make Bajaj Appliances and other products to have more visibility. Further to deepen its presence in the rural market, the company has plans to distribute various products through the outlets of BPCL, IOCL, Coremondel and IRC Choupal. Besides, the Fans BU has achieved Sales of `5,460 crore with growth of 6.7% and CAGR of 20.4%, as against the de-growth witnessed by the Industry. The BU has a market share of about 17%. Strong brand positioning with sizeable market share BEL has a pan India presence with an excellent distribution network of over 5,000 dealers across India coupled with more than 400,000 retailers. BEL is one of the market leaders in most of its business segments. For the year gone by the company maintained its dominance in various product categories, markets, quality, etc. by ensuring continuous improvements in products & processes, widening of the product range and entering new categories and geographies. Further, with the growing disposable incomes and increasing preference for brand/quality has resulted in a structural shift from the unorganized sector to the organized segment will boost the growth of its consumer durables and lighting businesses. Pick-up in demand for lighting and consumer business in tier II cities has augers well for company's growth. BEL has a pan India presence with an excellent distribution network of over 5,000 dealers across India coupled with more than 400,000 retailers. Further, the company has plans to open over 70 Bajaj World retail outlets this year, of which 50 will be in small towns, in a move to further deepen its presence. Further, the company expects the exports to reach ` mn by the end of this financial year. Bajaj Electricals maintains FY13 sales target of `38 billion BEL remains confident of achieving a sales target of `38 billion supported by strong growth in consumer durables and lighting. Bajaj Electricals remains confident of achieving a sales target of `38 billion supported by strong growth in consumer durables and lighting, despite the challenging external business conditions. The Consumer Durables segment (~50% of revenues) is expected to continue its growth momentum and may witness improvement in margins on the back of stability in exchange rate and price hikes taken by the company. Further, the company has guided for 20% revenue growth in its Consumer Durables segment along with 10.5% EBIT margin for FY13. Further, the Management has guided for 20% revenue growth with 7.5% EBIT margin for FY13 in its lighting segment and 15% growth in luminaires. Besides, in a bid to reduce the impact of the commodity prices volatility and exchange rate fluctuations, the company is taking price hikes to offset the pressures and expects margins will be back on track by the second quarter. BEL also remains focused towards cost reduction through Research and Development, Value Engineering reduction in working capital deployment by implementation of the principles of Theory of Constraints, improvement in IT infrastructure and systems thereby enhancing business through e-commerce and higher security controls, etc.

5 Tie-ups with leading players to support exponential growth BEL s tie-up with globally reputed brands gives an edge over competition. To propel the future growth, the company made various foreign technical collaborations with world leaders in the respective product groups which ensure quality products. The company has tie-ups with leading players including Morphy Richards, Nardi Elettrodomestici Spa, Midea, Walt Disney etc. Now, the tie-ups enhance the competitive position of the company and enjoy a strong reputation regarding quality and technology for their products and services. BEL has tie-up with leading players including Morphy Richards, Nardi Elettrodomestici Spa, Midea, Walt Disney etc which gives an edge over competition. Morphy Richards (MR) is the No.1 Indian brand in Kettles, Toasters, Coffee Makers and Oven Toaster Grillers. MR is the fastest growing brand and the first to cross the `1,000 million in the Indian small domestic appliances market. It is preparing to launch a new range of sophisticated and versatile food processors in the current financial year and has plans to launch, a range of feature rich and differentiated Induction Cookers with copper coils, a unique selling proposition in the Indian market. During the last financial year, the BU has introduced new products like Microwave Ovens, Induction & Radiant cookers, deep fryers, steam mops and steam cleaners and has plans to enter into new categories like Water Heaters and Fans in the next financial year. MR is also pushing for an increased retail reach to 14,000 retail outlets and distribution coverage in the top 500 urban markets across the country. During FY12, it has achieved sales of `1,430 million, with a growth of 37% and targeting sales of over `2,000 million in FY13E. BEL also tied up with Italy based Nardi Elettrodomestici Spa for gas appliances, cooking etc. With the tie-up, the company targets 25% market share of kitchen appliance. In the fans segment, the company has tied up with Midea (China), the world s largest fan company, for TPW (table, pedestal and wall) fans, and with Walt Disney for children s fans. Bajaj fans have unchallenged leadership in 12 major states in the country and a dominant player in 6 states backed by strong relationships with its vendors located across the states in India. Restructuring of E&P projects to improve performance from H2FY13 BEL is doing restructuring of E&P projects by closing its long delayed orders and sharply focusing on profitability for new orders. BEL is the undisputed leader in turnkey illumination projects and high mast lighting system, including design, supply, installation, testing and commissioning. With foray into E&P segment, BEL turned into a complete electrical solution provider from a pure electrical product supplier. Also, it helps the company in securing large size orders for lighting division. Further, its vast experience in power distribution & transmission-line segment helps the company in getting its first 765-KV transmission line order from Power Grid Corporation of India Ltd. (PGCIL) during FY12. While, the company has reported dismal performance in the E&P segment from the past few quarters as margins have dropped due to increase in competition & sluggish order flow. The market conditions for the E&P segment remain tough with overall slow pace of infra sector growth. During FY12, revenue of the E&P BU was flat at `8.3 billion. It produced 4,655 nos. of Highmasts and 53,279 nos. of Street Lighting Poles as against 4,200 nos. and 45,000 nos. respectively in the previous year. The BU also manufactured 24,035 MT of transmission line towers as against 19,004 MT in the previous year. The company desperately requires high-value orders to sustain growth path. BEL is taking measures for restructuring its order book by closing long delayed orders and sharply focusing on profitability for new orders. The company has 24 sites for transmission line towers (TLT) and expecting 18 to close down by March 2013.

6 Order book and revenue trend of E&P segment The management also expects that in coming quarters the performance would improve on increase in government spending on infrastructure development through various programs like Restructured-Accelerated Power Development and Reform Programme (R-APDRP), new packages under Rajeev Gandhi Gramin Vidyutikaran Yojana to reduce the power deficit by adding around 100,000 MW power generation capacities in the 12th plan. This would result in spending on transmission & distribution, which will offer better opportunity for business to the BU. Currently, the company s order book stood over `4.5 billion comprising of `1,330 million of TLT, `640 million of high mast and poles and `2,530 million of special projects, which translates into robust book-to-bill ratio of over 1.8x of its FY 12 earnings and providing the earning visibility for ensuring months. Further, the company expects order book would increase to `7-8 billion by Q2FY13. Lighting & Luminaires to aid growth led by rising CFL demand Despite intense competition and rapidly changing market dynamics, lighting and luminaires business revenues surged impressively by 28.7% YoY and 13.6% YoY respectively in FY12. BEL markets a wide range of light sources and domestic luminaires. The light sources include general lighting service (GLS) lamps, fluorescent tube lights (FTL), compact fluorescent lamps (CFL) and special purpose lamps. The company entered the CFL market through the acquisition of a 32% stake in Starlite Lighting Ltd. Under luminaires business, it markets a comprehensive range of luminaires (light fittings) covering, commercial, industrial, flood lighting, street lighting and posttop lighting. At present, this BU is developing a new generation of energy saving luminaires with LEDs and induction lamps. Despite intense competition and rapidly changing market dynamics, revenues grew impressively by 21.1% at `7,650 million during FY12. The lighting business revenues surged by 28.7% YoY at `4,070 million and luminaires revenues swelled by 13.6% YoY at `3,580 million. The CFL (Compact Fluorescent Lamps) sale has increased by 41% over last year and crossed `2,500 million mark. This growth is the result of awareness among consumers for energy-saving. Further, both the segments have seen improvement in their margins. In line with the growth plans, the company is focusing on developing energy-efficient consumer luminaire and lighting products based on LED and lighting control technologies which is a global mandate to arrest global warming.

7 Balance Sheet (`million) FY11A FY12A FY13E FY14E Profit & Loss Account (`million) FY11A FY12A FY13E FY14E Share Capital Reserve and surplus 5, , , ,127.8 Total Operating Income 27, , , ,069.4 Net Worth 6, , , ,327.1 Loan funds 1, , , ,029.1 Provisions ,132.7 Other Liabilities 9, , , ,409.6 Capital Employed 17, , , ,898.5 Total Fixed Assets 1, , , ,577.2 Investment Deferred Tax assets Loans & Advances 1, , , ,784.7 Trade Receivables 10, , , ,958.3 Other Current assets 3, , , ,947.6 Capital Deployed 17, , , ,898.5 Expenses 24, , , ,583.2 EBITDA 2, , , ,486.2 Depreciation EBIT 2, , , ,304.7 Interest Exceptional Item Profit Before Tax 2, , , ,390.9 Tax Net Profit 1, , , ,441.5 Key Ratios FY11A FY12A FY13E FY14E EBITDA Margin (%) EBIT Margin (%) NPM (%) ROCE (%) ROE (%) EPS (`) P/E (x) BVPS P/BVPS (x) EV/Operating Income (x) Valuation and view BEL has a varied business interest in consumer durables, lighting and engineering & projects (E&P). With sizable product portfolio, wide distribution network and tie-up with reputed brands, the company has an edge over competitors. Higher demand for appliances due to lifestyle changes augurs well for the consumer businesses of the company. Besides, recent restructuring, implementation of value engineering and increasing volume growth would benefit the company in driving the double-digit growth guided by the management. Considering, the above aspects we recommend BUY on Bajaj Electricals Ltd. At the current market price of `181.0, the stock is trading at a P/E of 9.5x on FY 13E EPS of `19.0 and 7.4x on FY 14E EPS of `24.5. EV/EBITDA (x) EV/EBIT (x)

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