Bajaj Electricals: ‘Lighting up’

CMP Rs183, Target Rs228, Upside 24.4%

Bajaj Electricals (BJE), amongst the top 3 players in electrical space, is set to gain from the secular growth in consumption spend. Vast product portfolio, wide distribution network and tie-up with globally reputed brands offer BJE an edge over competition, with the company growing at ~2.5x GDP. Healthy financials with 41% ROE and 40% ROCE (average 4 years) corroborates its sound business profile. However over the past six months, the stock has underperformed Nifty on the back of dismal performance of its Engineering and Projects (E&P) segment. This was on account of execution of older projects wherein costs were still to be incurred without much income recognition. We believe market is pricing in distant negative; whereas we expect margins for the E&P segment to normalize in FY13 backed by completion of residual orders. Current attractive valuations offer opportunity to enter into the stock. We Initiate with a ‘BUY’ rating and 9-month price target of Rs228.

Focus on brand building è sweet spot in the value chain

The company has witnessed revenue CAGR of 26% over the last four years as a result of a) strong brand building, b) efficient distribution network and c) tie-up with internationally reputed brands. The company outsources the product manufacturing to vendors – both domestic and overseas. This allows BJE to focus on network expansion and brand building. We believe, this positions the company in a sweet spot in the value chain and thereby capture high and stable margins.

Lucrative valuations in view of sound fundamentals

Post dismal performance in 9m FY12, we expect E&P business to recover in FY13 backed by reduction in the active sites and execution from fresh orders. Constant increase in the consumption spending coupled with strong tie-ups and network distribution is expected to result in 16% revenue CAGR for Lighting and electrical consumer divisions combine. Overall, we expect 14% revenue CAGR over FY12-14E. On the margin front we foresee 210bps contraction in FY12 followed by 120bps expansion in FY13 OPM on the back of recovery in E&P division. In view of the sound business profile and strong financials (healthy return ratios and negligible net debt) we assign 13x to FY13 EPS to arrive at a fair valuation for the company. Initiate coverage on BJE with BUY rating and 9-month price target of Rs228.