Bajaj Electricals (BJE IN)images.moneycontrol.com/static-mcnews/2020/07/Bajaj... · 2020-07-06 · Bajaj Electricals July 6, 2020 6 BJE well placed to capture uptick in demand BJE’s

Rating: BUY | CMP: Rs384 | TP: Rs500

Bajaj Electricals (BJE IN)

Mass market play in consumer electricals

Amnish Aggarwal [email protected] | 91-22-66322233

Paarth Gala [email protected] | 91-22-66322242

Bajaj Electricals

July 6, 2020 2

Contents

Page No.

BJE - Play on mass market Appliances ................................................................. 4

Story in charts ........................................................................................................ 5

BJE well placed to capture uptick in demand ........................................................ 6

Mass market positioning to capture uptick in demand ........................................ 6

Appliances (60% of CP sales): Distribution expansion & product differentiation key to growth ............................................................................... 7

Fans (26% of CP sales): Grow faster than the market; recoup lost market share ...................................................................................................... 8

Lighting (14% of CP sales): To remain a filler product ....................................... 9

Industry leading distribution network in Appliances .......................................... 10

Strong after-sale service network ..................................................................... 11

Premiumisation through international tie ups ................................................... 12

BJE has less dependence on seasonal products ............................................. 12

Nirlep acquisition yet to be exploited fully ........................................................ 12

Increase ad-spends to improve Brand visibility ................................................ 13

BJE sustains quality focus despite outsourcing ............................................... 13

RREP to improve efficiency, sales and margins .................................................. 14

Outsourcing model to remain at its core .............................................................. 16

EPC drag to remain despite rights issue .............................................................. 17

EPC to drag profitability in near term ............................................................ 18

Financials & Valuations ....................................................................................... 19

Estimate CAGR of 6.9% in Sales over FY20-23 .............................................. 19

Commodity price have bottomed out ................................................................ 20

EBITDA CAGR of 28.8% over FY20-23 ........................................................... 21

Valuations: Strong execution can re-rate the stock .......................................... 23

Annexure: ............................................................................................................ 25

Board of Directors & KMP ................................................................................ 25

July 6, 2020 3

Rating: BUY| CMP: Rs384 | TP: Rs500

Mass market play in consumer electricals

We initiate coverage on Bajaj Electricals (BJE) with BUY rating and a target

price of Rs500 on SOTP basis. We believe BJE is a play on immense growth

opportunity in mass market consumer electricals given 1) strong brand with

wide portfolio in kitchen appliances 2) deep distribution network (covers 94%

of districts in India) 3) leadership position in high potential small kitchen

appliances and 4) expected gains in profitability, reach and working capital

due to RREP implementation. Although near term looks challenging due to

COVID, however, less dependence on seasonal products, mass market

positioning and deep distribution makes BJE ideal candidate to gain from

expected surge in demand from 2HFY21. We believe strengthening of balance

sheet through rights issue (Rs3.5bn), realization of receivables and renewed

focus on profitability & cash flows in EPC bidding are positives.

We estimate Sales/EBITDA to grow at CAGR of 6.9% / 28.8% over FY20-23E

due to improving business mix, operating leverage, gains from RREP &

benign commodity prices. 72% decline in interest burden (improving cash

flows and Rs3.5bn right issue) over FY20-23 will enable EPS to expand from

Rs8.4 in FY21 to Rs25.2 in FY23. We value the stock on SOTP and arrive at a

target price of Rs500 (derived P/E of 22.7x on Sep-22 EPS, Consumer

business valued at 24x). We initiate coverage with BUY rating.

Investment Arguments

Mass market play with deep distribution reach: BJE has a diverse

consumer product portfolio having mass market focus. Post implementation of

RREP program, BJE has one of the largest distribution network in India,

covering 94% of its districts (514+ distributors/ 220,000+ retailers). BJE is well

placed to capitalize on immense opportunity in the mass segment given its 1)

strong brand recall 2) Leadership in low ticket kitchen appliances 3) deep

distribution reach of more than 0.22mn outlets and 4) expected benefits from

improved product focus and RREP benefits.

Rights issue, cash flow focus to strengthen balance sheet: Time bound

execution of large UP project & delay in project closures negatively impacted

operating cash flows (Rs-6bn in FY19) causing debt to balloon 2x to Rs16bn.

As BJE looks to scale down its power distribution business (20% of EPC), we

expect overheads cost & declining revenue to impact its EPC business in

FY21. However, improved balance sheet through rights issue (Rs3.5bn),

realization of receivables, cash flows focus while bidding for EPC are positives.

Valuation & Outlook: We estimate Sales/EBITDA CAGR of 6.9%/ 28.8% over

FY20-23 led by improving business mix, operating leverage and benign input

costs. We estimate that 72% decline in interest cost over FY20-23 on the back

of debt reduction (CFO – Rs5.3bn in FY21 and ~Rs3.5bn rights issue). We

estimate EPS to expand from Rs8.4 in FY21 to Rs25.2 in FY23. At 20x FY22

EPS, BJE trades at a huge discount (20-50%) to its peers. We believe higher

consumer business margins, lower gearing and improved cash flow can re-rate

the stock. Initiate coverage with an BUY rating and target price of Rs500, a

30% upside.

Bajaj Electricals (BJE IN)

July 6, 2020

Company Initiation

Key Financials - Standalone

Y/e Mar FY20 FY21E FY22E FY23E

Sales (Rs. m) 49,771 45,582 54,146 60,865

EBITDA (Rs. m) 2,069 2,367 3,614 4,419

Margin (%) 4.2 5.2 6.7 7.3

PAT (Rs. m) (1) 959 2,205 2,863

EPS (Rs.) 0.0 8.4 19.4 25.2

Gr. (%) NA NA 129.9 29.8

DPS (Rs.) 3.2 - 2.0 5.0

Yield (%) 0.8 - 0.5 1.3

RoE (%) 0.0 6.7 14.0 16.0

RoCE (%) 8.0 11.4 18.5 21.1

EV/Sales (x) 1.0 1.0 0.8 0.7

EV/EBITDA (x) 24.2 19.6 12.4 9.8

PE (x) NA 45.6 19.8 15.3

P/BV (x) 3.2 3.0 2.6 2.3

Key Data BJEL.BO | BJE IN

52-W High / Low Rs. 535 / Rs. 260

Sensex / Nifty 36,021 / 10,607

Market Cap Rs. 44 bn/ $ 586 m

Shares Outstanding 114m

3M Avg. Daily Value Rs. 226.68m

Shareholding Pattern (%)

Promoter’s 63.17

Foreign 7.96

Domestic Institution 12.43

Public & Others 16.44

Promoter Pledge (Rs bn) -

Stock Performance (%)

1M 6M 12M

Absolute (10.4) 10.7 (26.2)

Relative (15.2) 27.4 (18.4)

Amnish Aggarwal

[email protected] | 91-22-66322233

Paarth Gala

[email protected] | 91-22-66322242

Bajaj Electricals

July 6, 2020 4

BJE - Play on mass market Appliances

Bajaj Electricals (BJE) is a leading Consumer Electrical and EPC company with a

legacy of over eight decades. BJE’s business portfolio comprises of mass market

focused Consumer Products (Appliances, Fans, Lighting) and EPC (Illumination,

Power Transmission and Power Distribution). BJE is looking to gradually increase

premium offering through brands like Morphy Richards in home appliances

segment and bring diversification in cookware with Nirlep.

BJE tied up to distribute Morphy Richards branded products in India (2002) to

enter the premium segment. The foray has been a mixed success so far.

In 2018, BJE acquired Nirlep Appliances– a five-decade old non-stick

cookware company for a consideration of Rs385mn with a view to propel its

non-electrical appliances foray into cookware and related segments.

BJE follows an asset-light business model by outsourcing large portion of its

consumer products (~88% of FY20 raw material costs) by long term tie ups

with vendors for sourcing of these products.

The company operates on ethos of ‘customer first’ aimed at strengthening

brand loyalty. It has a distribution network of 20 branch offices, 514 distributors

and 220,000+ retail outlets.

BJE offers a vast portfolio of Appliances (like Kitchen Appliances, Water Heaters,

Air Coolers etc.), fans and consumer lighting products. EPC business is focusing

on power transmission and illumination projects, with increased focus on profitability

and cash flows. We believe BJE is in a sweet spot to capitalize on rising growth

opportunities in non-metros and rural India given strong market share in small

appliances, largest distribution network amongst organized players, revamped

distribution post RREP initiative and value for money focus. We believe that EPC

business will report muted growth in the near term as BJE scales down its power

distribution business. Although FY21 will be under pressure due to COVID

disruption, we estimate 16.7% sale CAGR in consumer products over FY21-23 with

~2X increase in profitability. We believe that the stock offers a decent play on small

appliances segment with VFM focus.

Margins up 250bps post RREP implementation

26 23 22 27 31

4.6% 4.3%4.9%

6.6% 6.8%

0.0%

2.0%

4.0%

6.0%

8.0%

-

10

20

30

40

FY16 FY17 FY18 FY19 FY20

Consumer Products (CP)

Revenue (Rs bn) Margin % (RHS)

Source: Company, PL

Appliances contribute ~60% of CP revenues

13 13 13 16 18

6 6 6 7

8 6 4 4

4 4

-

10

20

30

FY16 FY17 FY18 FY19 FY20

CP Revenue Split (Rs bn)

Appliances Fans Consumer Lighting

Source: Company, PL

Bajaj Electricals

July 6, 2020 5

Story in charts

CP contribution to increase to 67% by FY23

54%

47%

41% 62%

66%

66%

67%

46%

53%

59% 38%

34%

34%

33%

0%

20%

40%

60%

80%

100%

FY17 FY18 FY19 FY20 FY21E FY22E FY23E

Revenue Mix %

Consumer Products EPC

Source: Company, PL

EPC to contribute positively from FY22

41

%

36

%

48

% 12

0%

10

7%

84%

84

%

59

%

64

%

52

%

-20

%

-7%

16

%

16

%

-20%

0%

20%

40%

60%

80%

100%


EBIT Mix %


Source: Company, PL

Revenue CAGR of 15.6% post FY21E

43

47

67

50

46

54

61

-7%

10%

41%

-25%

-8%

19%12%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

-

10

20

30

40

50

60

70

80


Revenue (Rs bn) YoY gr. (RHS)

Source: Company, PL

Consumer Product margins to inch up

4.3%4.9%

6.6% 6.8% 7.3%8.2%

9.0%

7.1%7.8%

5.0%

-1.8%-0.9%

3.0% 3.5%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%



Source: Company, PL

Rising CP sales to boost margins

2,4

28

2,9

34

3,4

83

2,0

69

2,3

67

3,6

14

4,4

19

5.6%6.2%

5.2%

4.2%

5.2%

6.7%7.3%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

-

1,000

2,000

3,000

4,000

5,000


EBITDA (Rs mn) Margin (RHS)

Source: Company, PL

PAT to rise steadily over FY20-23

1,077

1,730 1,671

-1

959

2,205

2,863

-500

-

500

1,000

1,500

2,000

2,500

3,000

3,500


PAT (Rs mn)

Source: Company, PL

Bajaj Electricals

July 6, 2020 6

BJE well placed to capture uptick in demand

BJE’s Consumer Products (CP) business comprises of Appliances, Fans and

Lighting and enjoys meaningful presence across most product categories. Within

appliances, BJE enjoys leadership position with 14-15% organized market share in

the ~Rs80-85bn kitchen appliances segment.

Mass market positioning to capture uptick in demand

BJE has created a wide product portfolio in the Appliances and lighting segments

catering largely to the mass market. With presence across all product segments

(except for Switches and switchgears), BJE’s product depth and breadth is amongst

the best in the industry. Also, majority of its products are small ticket items such as

fans, irons, food preparation/ cooking appliances (mixers, food processors, juicers,

cookers etc), LED bulbs, battens etc which are used on a daily basis.

BJE is present across large range of product categories; matches Crompton; superior than Polycab

Players Fans Lightings Switches Switchgears Water Heaters Home App Kitchen App

Bajaj Electricals Ltd

Crompton Consumer

Finolex Cables Ltd Havells India Ltd

Orient Electric Ltd

Philips India

Polycab India Limited

Surya Roshni Ltd

TTK Prestige Ltd

Usha International Ltd

V-Guard Industries Ltd

Source: PL

With people becoming more self-reliant due to the incidence of Covid-19 pandemic,

there is likely to be a substantial change in the lifestyle and habits of people which

shall lead to increased demand for small appliances. In addition to this, rural

demand for products like fans, lights, mixer grinder, air coolers etc. is increasing

given 1) last mile connectivity due to Rural electrification undertaken by government

2) Improving quality of power supply (Availability) and 3) rising disposable income

on the back of improving agricultural income due to good harvest season.

BJE’s products are present across price points (Classic, Majesty, Morphy Richards)

under each category which enables consumer stickiness. For example, in the

Mixer-Grinder segment (500W - price range Rs1,899-Rs2,995), BJE’s products are

priced 5-20% lower than other players like Havells, Crompton, Phillips, Usha,

Wonderchef etc. for VFM positioning. Industry leader Havells, Philips and

Wonderchef have premium positioning where as USHA, Prestige and Crompton

are at mid-market segment.

Given its presence across small ticket daily use products, wide range of product

offerings and deep distribution network, we believe BJE is well place to capture the

increase in demand for these products.

Bajaj Electricals

July 6, 2020 7

Appliances (60% of CP sales): Distribution expansion & product differentiation key to growth

BJE is amongst the leader in kitchen appliances segment; strong share in water heater and air cooler segment

Product Market size

(Rs bn)* BJE's share (%)

Market Position

Major Competitors Organized Penetration

Level

Kitchen Appliances 80-85 14%-15% #1 Philips, TTK Prestige, Stove Kraft Medium

Water Heater 15-18 18%-20% #1-2 Racold, Havells, Crompton, AO Smith Medium

Air Cooler 15-17 11%-12% #3 Symphony, Kenstar, Voltas, Crompton Low

Source: Company, PL *Organized market

Mixer-grinders, water heaters, irons and air coolers major contributors to appliances segment

Source: Company, PL

Kitchen Appliances: high competition; large regional players

The segment largely includes products like mixer-grinder, gas

stoves, induction cooktops, Toasters, Hand Blenders, rice

cookers, non-stick cookware and other small appliances. The

space is further divided into 1) cooking appliances and 2) other

kitchen aids. 60-65% of market is catered by organized players

largely dominated by BJE and Philips. Other players include

Morphy Richards (BJE), Kenstar and Usha. The category has

seen entry of Prestige, Pigeon and Wonderchef and a host of

other kitchen ware brands. Philips clearly dominates the premium

segment and by acquiring Preethi has consolidated its position in

South India. Also, Wonderchef, riding on the popularity of chef

Sanjeev Kapoor is one of the fast emerging brands in kitchen

appliance segment and has recorded sales of Rs3bn, further

targeting ~Rs8bn in next five years.

Strategy/Outlook: Distribution expansion holds key

BJE is a market leader in cooking and kitchen appliances having

an organized market share of 14-15%. BJE has presence in the

premium segment through Morphy Richards (licensed brand). In

2018, BJE entered the non-stick cookware segment through

acquisition of Nirlep. Initially, BJE was not able to scale up Nirlep’

s distribution as it couldn’t target utensil stores. However, Nirlep

can yield better results with change in distribution strategy.

Availability of power, changing lifestyle, change in cooking

methods, health concerns (non-stick pans) and ease of

availability through e-commerce is expected to result in steady

demand for BJE’s products. Mass market offerings are likely to

continue being the mainstay of business.

Water Heaters: Competitive intensity on the rise

BJE is the second largest player in the ~Rs15-18bn market where

Havells is the leader closely followed by Racold. Crompton and

Orient who are increasing their offerings will gradually increase

competition. Rising disposable income and energy-efficient

products will drive growth

Strategy/Outlook: Product differentiation is key

BJE is largely present in the mass segment. However, in a bid

to cater premium segment, it has launched IoT based Calenta

water heaters. The category offers huge growth potential given

presence of large local/unorganized players and huge scope of

innovation and branding.

Air Cooler: Shift from unorganized to organized segment

Residential air cooler market is largely unorganized. Some

organized players are gaining share by offering technologically

advanced and energy efficient products. Symphony (50% market

share) is the largest player in organized market. Other players

include Orient Electric, V-Guard, Crompton. Voltas & Blue Star

are the new entrants in this space.

Strategy/Outlook: To benefit from first upgrade from fans

BJE is the third largest player in air cooler market. BJE is

focused on offering features like high air delivery, big water tank

and energy efficiency at an economical price. With increasing

demand for air coolers basis rising income levels and need for

cheaper cooling solutions due to rising temperatures, a strong

distribution reach will act positively for BJE.

Bajaj Electricals

July 6, 2020 8

Fans (26% of CP sales): Grow faster than the market; recoup lost market share

Focus on mass market segment; with 8-10% market share BJE’s market position a distant #5

Product Market size (Rs bn)* BJE's share (%) Market Position Competitors Organized Penetration Level

Fans 80-85 10-11% #4-5 Crompton, Havells, Orient High

Source: Company, PL * Organized market

BJE has entered the premium segment through launch of Anti Germ, Designer series

Source: Company, PL

Fans: Industry eying Premiumisation

Crompton leads the overall market with a share of ~25-27%.

Whereas Havells has redefined fans with its premium offering in

an old and laid back category. Nevertheless, Industry dynamics

are changing as all key players like Crompton, orient etc. focus

on premium segment providing multiple offerings.

Fans account for ~26% of BJE’s Consumer Products sales and

with a market share of 10-11% BJE is the 4-5th largest player,

having a mass presence. We expect industry to witness steady

demand as Rural electrification and improved power availability

is a key trigger.

Strategy/Outlook: Regain lost market share; mass focus

With RREP implementation unsettling its distribution network,

BJE’s fans sales de-grew by 4.5% over FY15-18 resulting in

market share loss.

However, with new distribution system now in place (220,000+

retail touchpoints), BJE is focusing on 1) growing faster than the

market to recoup lost share 2) leverage deep distribution reach to

capitalize on growth opportunity in rural India as well as small

towns and 3) launching premium models to tap into high growth

premium segment (Harrier Anti Germ, Ornio etc). Although BJE

stands to benefit from the deep distribution network, but rising

competition can impact sales growth, pricing and limit scope of

margin expansion.

BJE’s portfolio is largely focused on serving the mass segment. With easy access

to electricity, it is likely that demand for certain essentials (like fans) will increase.

Also, by leveraging deeper penetration in rural markets (post RREP

implementation) we expect BJE to capitalize such growth opportunities arising out

of rural India and smaller towns.

Bajaj Electricals

July 6, 2020 9

Lighting (14% of CP sales): To remain a filler product

BJE is a fringe player with a market share of less than 5%

Product Market size (Rs bn)* BJE's share (%) Market Position Competitors, Market Share (%) Organized Penetration Level

LED 100-110 3-4% #7 Philips, Crompton, Bajaj, Wipro, Havells Medium

Source: Company, PL *Organized market

Lighting segment largely dominated by LED bulbs

Source: Company, PL

Competitive Landscape: Intense price based competition

With a market share of ~3-4%, BJE ranks meagre #7 in India’s

lighting industry. Phillips (#1), Crompton, Havells, Syska & Wipro

are the other large players in the market.

Now-a-days LED is a dominant lighting technology across all

applications, as sustained price reduction and Govt push (Ban on

fluorescent lamps and free/subsidised distribution) have resulted

in consumer shift. Innovation, Premiumization and aesthetics act

as a key to offer differentiated value proposition (Eg. Anti-

bacterial bulbs by Crompton) in markets that are flushed with

Chinese imports and easy product imitations.

Strategy/Outlook: To remain a filler product

With LED products, particularly bulbs now being commoditized,

BJE continues to view Lighting segment (entirely B2C) as a

complement to its distribution network. BJE does not intend to

have a special team or advertise in order to promote lighting

sales, but it shall continue to be offered as a filler product.

Rapid technological change in lighting is driving value erosion and need for

continuous re-evolution. With lighting being a low entry-barrier business there is a

constant deluge of new players thereby leading to increased competitive intensity.

BJE shall continue to view this as a filler product with no special team or ad spends

to push sales. Leveraging its vast distribution network, BJE shall try to capitalize

from increased demand due to rural electrification.

Bajaj Electricals

July 6, 2020 10

Industry leading distribution network in Appliances

With a legacy of over 80 years and on successfully implementing RREP program,

BJE has one of the strongest distribution network spanning across both urban and

rural markets amongst all consumer electrical companies.

BJE has Industry leading retail network

1,50,000

1,25,000 1,25,000

1,00,000

2,20,000

Havells Polycab Orient Crompton Bajaj

Retail touchpoints

Source: Company, PL

BJE’s products are currently sold through +514 distributors and +220,000 retail

touchpoints covering 94% of total districts in India. BJE products are also sold

through 88 exclusive Bajaj World showrooms. Havells, with the second largest

distribution network has been an urban centric company focusing on premium and

mass premium segment.

Distributor breadth has increased post RREP

382 400 478 514

1,30,000 1,44,000

2,00,000

2,20,000

-

50,000

1,00,000

1,50,000

2,00,000

2,50,000

-

100

200

300

400

500

600

FY17 FY18 FY19 FY20

No of Distributors Retail touchpoints (RHS)

Source: Company, Company, PL

Apart from General Trade channel (~69% of consumer product sales), BJE also

sells through alternate channels like E-commerce, Modern Format Retail (MFR),

Institutional sales, Canteen Stores Department (CSD), Central Police Canteens

(CPC) and Government E-Marketplace portal (GEM).

Bajaj Electricals

July 6, 2020 11

Alternate channels are 30-35% of sales

69% 65% 69%

31% 35% 31%

FY17 FY19 FY20

Trade Alternate Sales Channel

Source: Company, PL

Alternate channel mix - E-com gaining traction

52%42% 39%

32%30% 29%

10%21% 29%

6% 7% 3%

FY17 FY19 FY20

CSD, CPC, GEM Modern Format Retail

E-Commerce Institutional Sales

Source: Company, PL

Strong after-sale service network

Efficient after-sales service has now become an integral aspect in today’s

consumer-centric world. BJE’s country wide network of dedicated consumer care

centres is one of its major strengths and is second to none in the industry. Over the

last 5 years, BJE’s has almost doubled its authorised service centres. BJE’s home

service facility extends to over 17,400 pin codes thus covering 91% of national pin

codes. All these centres provide timely service to consumers at their doorstep, even

in remote and rural areas.

BJE 536 service centres cover ~91% pin codes in India

287 315

376 400 418

489 504 536

-

100

200

300

400

500

600

FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Authorised Service Centres

Authorised Service Centres

Source: Company, PL

Given its varied mass market centric product portfolio, good after sale service,

strong brand recall and deep penetration in small towns and rural India, BJE is well

set to capitalize on the sustained growth opportunity arising from these pockets.

No of authorised service centres have

almost doubled to 536 over the last 6

year

Bajaj Electricals

July 6, 2020 12

Premiumisation through international tie ups

Although BJE has positioned Bajaj as a mass market brand, it is mindful of the rising

trend of premiumization across products in urban areas. To keep up with the

growing needs of consumers, BJE has forged tie-ups with international brands like

Morphy Richards (MR), Disney & Marvel to tap opportunities arising from premium

markets.

Morphy Richards (MR) is a prominent home and kitchen appliances brand in UK

which entered into an agreement with BJE in 2002 to distribute MR branded

products in India. MR has presence in 22+ categories ranging across kitchen

appliances, air coolers, water heaters and personal care. Positioned as a premium

offering, MR products are priced close to Phillips and Havells. Ever since the tie-

up, MR has been a consistent performer for BJE & accounted for Rs2.1bn, ~12%

of appliances revenues in FY20. BJE is looking at improving the product line and

capitalising on the distribution network of +514 distributors/ 220,000+ dealers in

coming years which will increase sales from premium segment.

BJE has less dependence on seasonal products

Covid-19 led nationwide lockdown is likely to significantly impact 1HFY21 demand.

We don’t rule out demand pressures in near term especially in discretionary

segments, given that MSME sector can result in job losses with consequent

impairment of purchasing power. However, given lesser dependence on seasonal

products and with majority products catering to every day needs of people (fans,

kitchen appliances, LED bulbs etc), we believe BJE is better placed than most of

its peers in the current demand scenario. We expect relatively faster recovery in

demand in its consumer products segment.

Nirlep acquisition yet to be exploited fully

Sensing opportunities in non-electrical kitchen appliances, BJE entered the space

in 2012-13 targeting a market share of 5% by 2014. BJE’s non-electrical portfolio

comprises of pressure cookers, non-stick cookware, gas stoves, induction cooktops

etc. With the distribution network for these products being vastly different from

BJE’s core electrical portfolio, BJE struggled to scale up the business. With a view

to propel its non-electrical appliances foray, in 2018 BJE acquired Nirlep Appliances

– a five-decade old non-stick cookware company for a consideration of Rs385mn.

The acquisition provides BJE access to Nirlep’s 1) brand 2) people 3) distribution

network 4) state of the art manufacturing facility and 5) intellectual property rights.

Acting as an OEM, Nirlep also sells to players like D-Mart, Amazon and IKEA

(exports). With distribution network of these products different to that of BJE’s core

network, post-acquisition BJE was unable to scale up distribution of Nirlep leading

to dip in revenues from Rs447mn in FY18 to Rs392mn in FY19. We believe that

current scenario of increased demand for cookware post COVID-19 is a major test

for BJE. We shall keenly watch the sales trend for next 12-18 months as BJE tries

to get the entire distribution and manufacturing in sync with that of its consumer

appliances business.

Bajaj Electricals

July 6, 2020 13

Increase ad-spends to improve Brand visibility

With a legacy of over 8 decades and mass awareness of the Bajaj brand, BJE’s ad

spends have generally been lower than that of its competitors. However, company

has plans to improve brand visibility in today’s competitive environment. Some

initiatives taken by the management are:

Shift from a ‘Mother Brand’ focus to ‘Product Centric’ focus with clear emphasis

on product USP and features.

Sponsorship of Pro Kabbadi – most watched sport in India after cricket

From inspiring partner for Pinkathon to becoming Presenting/Title partner

Slow innovations and lack of product refresh has impacted demand for BJE’s

products. To fill this need gap and develop new products, BJE has set up a modern

R&D center ‘AB Square’ at Navi Mumbai to focus on product refreshment, new

product development, R&D, design and testing capabilities. Improved products and

advertising will change consumer perception and sales growth.

Increases in ad-spends over the years

1.3%

2.4%

3.3%

2.8%

3.3% 3.4%

4.7%

3.6%

3.0%3.4%

4.5% 4.5%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21EFY22EFY23E

Ad spends as % of CP sales

Source: Company, PL

BJE sustains quality focus despite outsourcing

With majority of products outsourced, BJE has a full-fledged & equipped Quality

team that works across manufacturing locations in India and abroad. It performs

quality checks right from incoming stage as well as works towards enhancing

product quality. In the last couple of years, BJE has undertaken three projects

aimed at improving quality of products which has enabled 16-17% YoY reduction in

market complaints. They are:

Project Lakshya: aimed to improve & upgrade manufacturing process and put

in place mechanism to control quality of raw materials used at vendor’s place.

Project Bajaj Booster: aimed to reduce the chronicle issues as well as the

consumer complaints.

Project Purge: aimed at eradication of the defects in working products such

as motor of mixer grinders, element of water heaters & drivers.

Bajaj Electricals

July 6, 2020 14

RREP to improve efficiency, sales and margins

Earlier, BJE followed the traditional distribution model which focused on driving

primary sales to wholesalers by offering additional discounts/ credit period to those

who later pushed products to dealers. This led to pile up of slow moving products

lowering the channel’s return on investments. These products also attracted higher

discounts in order to clear the inventory which impacted margins. BJE had no

information in which region a product got sold by the wholesaler. Moving away from

the deals driven wholesaler model to a distributor led model (akin to FMCG

company), BJE rolled out the its Range and Reach Expansion Program (RREP) in

April 2016. Under RREP, focus was on secondary sales while increasing the depth

and breadth of distribution network. Key initiatives undertaken are:

A distributor is appointed for a particular district/geography along with 4-5 direct

sales officers (DSO). The DSO’s/distributor periodically visit each retail outlet

in the assigned geography and looks to increase shelf space for BJE products.

Retailers make purchases from the distributor appointed for their geography

for which they are rewarded with loyalty points

Distributor’s sales are synced with BJE’s system every night. This discourages

inventory build-up through timely replenishment of products, resulting into

lower investments and better return on investments (RoI).

RREP implementation has increased retail touchpoints as well shelf-space

Pre RREP Post RREP

Push Sales: Sales driven on the basis of target and giving deals Pull Sales: Sales driven by improving availability and other enablers

Focus on Primary sales Focus on Secondary/ Retail sales

Monthly billing to Distributors/ Wholesalers Regular billing on the basis of replenishment

Higher inventory level in the channel Lower channel inventory and faster turns

Little effort by channel partners to develop secondary market Direct Sales Officer initiates market development

No tracking of secondary sales Tracking of secondary sales

Source: Company, PL

Benefits derived through Range and Reach Expansion Program (RREP):

Expansion of reach via addition of more retail outlets. Distributors have

increased from 382 to 514 and retail touchpoints from 130,000 to 220,000.

The retailers are now keeping wider product range at their outlets which

improves consumer response and sales.

Abolishing volume-led discount and uniform prices Pan-India provides security

and confidence to channel partners to accept wider product range

Doing away with additional discount and reduced credit period to the

distributors since they no longer fund inventory for a longer period.

~70% of retailers are being billed every month

Bajaj Electricals

July 6, 2020 15

RREP is pushing growth higher

5 6 6 6 5 5 6 6 6 6 8 7 8 7 9 7

-8%

-6%

-15

%

-15

%

-14

% -9%

2% 6

%

27

%

25

%

27%

15

%

31

%

9% 1

3%

0.6

%

-20%

-10%

0%

10%

20%

30%

40%

-

2

4

6

8

10

Q1F

Y17

Q2F

Y17

Q3F

Y17

Q4F

Y17

Q1F

Y18

Q2F

Y18

Q3F

Y18

Q4F

Y18

Q1F

Y19

Q2F

Y19

Q3F

Y19

Q4F

Y19

Q1F

Y20

Q2F

Y20

Q3F

Y20

Q4F

Y20

Revenue (Rs bn) YoY gr % (RHS)

Source: Company, PL

Improvement in margins

25

2

11

5

37

7

24

7

33

28

7

39

1

37

6

42

0

36

9

55

2

46

0

54

5

35

5

70

7

47

6

5%

2%

6%

4%

1%

6%7%

6%7%

6%

7%6%

7%

5%

8%

6%

0%

2%

4%

6%

8%

10%

- 100 200 300 400 500 600 700 800

Q1F

Y17

Q2F

Y17

Q3F

Y17

Q4F

Y17

Q1F

Y18

Q2F

Y18

Q3F

Y18

Q4F

Y18

Q1F

Y19

Q2F

Y19

Q3F

Y19

Q4F

Y19

Q1F

Y20

Q2F

Y20

Q3F

Y20

Q4F

Y20

EBIT (Rs mn) Margin (%) (RHS)

Source: Company, PL

After showing a dip in sales in FY17 and FY18, consumer product sales have shown

a strong bounce back in FY19 and FY20. We believe that BJE is yet to fully capture

the gains from distribution expansion and revamp as retail sales/outlet (0.14m/outlet

versus Rs0.18mn/outlet in FY17) are still 21% lower than pre RREP levels even as

the distributor sales are now at par. Consequently, we expect Consumer Products

segment sales to grow at a CAGR of 10% over FY20-23E (16.7% over FY21-23)

and margins to expand by 225bps to 9%

Revenues to grow by 10% over FY20-23E

23

22 27 31 30 36 41

-11%

-4%

23%

13%

-3%

19%15%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

-

5

10

15

20

25

30

35

40

45


Consumer Products (Rs bn) YoY gr. (RHS)

Source: Company, PL

Margins to expand by 225bps over FY20-23E

990

1,0

87

1,8

01

2,0

82

2,1

76

2,9

02

3,6

80

4.3%4.9%

6.6% 6.8%7.3%

8.2%9.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

-

1,000

2,000

3,000

4,000


Consumer Products EBIT (Rs mn) Margin (RHS)

Source: Company, PL

Bajaj Electricals

July 6, 2020 16

Outsourcing model to remain at its core

BJE follows an asset-light business model as it outsources a large portion of its

consumer products (traded goods at ~88% of FY20 RM costs). BJE manufactures

a small percentage of fans in-house while most of the LEDs are sourced through

its affiliate/ associate company. Other products (incl majority of fans) are procured

from vendors (incl dedicated vendors) largely based in India and China (~15% of

sourcing), many of whom have a strong long-term relationship with BJE.

BJE relies heavily on vendors for sourcing Consumer products

Product In-House manufacturing Sourcing Arrangements

Fans BJE India, China

Appliances Starlite, Nirlep India, China

Consumer Lighting Products Starlite, Hind Lamps India, China

Illuminations BJE -

High Masts, Poles & Towers BJE India, China

Source: Company, PL

Purchases from related parties

Particulars (Rs mn) FY16 FY17 FY18 FY19

Starlite Lighting 1,185 510 818 1,114

Hind Lamps 297 280 287 581

Nirlep - - - 253

Total 1,482 790 1,105 1,948

% of traded goods purchased 5% 3% 4% 4%

Source: Company, PL

In order to have better control over supply chain and working capital, BJE has

always endeavoured to increase local sourcing of products evident from its limited

movement in imports (from 8% in FY11 to 10% in FY19).

Substantial portion of products outsourced

95%

93%

95%

94% 94%

95%

93%

89%

95%

88%

86%

88%

90%

92%

94%

96%

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Traded Goods as % of RM cost

Source: Company, PL

Imports % stable on increased local sourcing

8%

11%12%

11%

10%

11%

13%12%

10%

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

Imports as a % of RM Cost

Source: Company, PL

Outsourcing provides flexibility in lean demand periods, lowers fixed costs and

helps in avoiding complexities related to various laws (incl labour law). This allows

BJE to focus on its core competencies of distribution, marketing and product

innovation. Although BJE’s margins are lower than Peers and industry average,

outsourcing model will still remain a cornerstone of its strategy in the medium term.

Bajaj Electricals

July 6, 2020 17

EPC drag to remain despite rights issue

The EPC business undertakes projects in Power Distribution (PD)/Rural

Electrification (RE), Transmission Line Tower (TLT) and Illumination. BJE’s order

book stands at Rs17.3bn of which PD accounts for 48% of total order book followed

by TLT (41%) and Illumination (11%).

Between FY13-15, BJE’s EPC business suffered losses due to 1) aggressive

bidding resulting in low margin orders 2) delayed execution and 3) slowdown in

power transmission sector. After 3 years of losses in FY16 BJE successfully turned

this business profitable as it undertook several mitigating steps including

implementation of Theory of Constraints.

Order book (Rs bn)

7 7 7 14 8 7

1 1 2 2

1 2

25 17

28

73

17 8

33 25

37

89

26 17

FY15 FY16 FY17 FY18 FY19 FY20

TLT Luminaries Power Distribution

Source: Company, PL

To focus on TLT & Illumination, Luminaries

74% 67%77% 82%

64%48%

22% 27%19% 16%

32%41%

4% 6% 5% 2% 4%11%

FY15 FY16 FY17 FY18 FY19 FY20

Power Distribution TLT Luminaries

Source: Company, PL

After 3 years of losses, EPC business turned profitable in FY16

8 8 7 12 13 20 20 25 39 19

9%

3%

-18%

-9%-7%

8% 7% 8%5%

-2%

-20%

-10%

0%

10%

20%

-

10

20

30

40

50

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Revenue (Rs bn) EBIT margin %

Source: Company, PL

BJE aggressively bid for rural electrification tenders in UP, under centrally

sponsored Saubhagya Scheme. Against the expectation of bagging 4-5 orders, in

April 2018 BJE received orders worth Rs59.7bn to be executed within 15 months,

which was a tall order for the company. Execution of such a large order in a time

bound manner led to increase in execution costs (unavailability of cheap manpower

and raw materials) which impacted margins and profitability. Also, delay in

payments and order closure led to rise in working capital requirements which

negatively impacted cash flows & balance sheet. The scope of work was later

reduced to Rs23bn of which majority has been executed and balance Rs4.2bn is

likely to be completed by H1FY21.

Bajaj Electricals

July 6, 2020 18

Stress on CFO during FY18/19

3 4

-1

-6

2 3

4 5

-8

-6

-4

-2

-

2

4

6

FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

CFO (Rs bn)

Source: Company, PL

Working cap requirements leads to rise in debt

22.0 22 25

41

32

27 25 25

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

Borrowings (Rs bn)

Source: Company, PL

In March 2020 BJE raised ~Rs3.5bn via rights issue. Of the total amount raised,

BJE has already repaid debt of Rs3.3bn bringing debt/equity ratio below 1x.

EPC to drag profitability in near term

With a large chunk of UP order being executed in FY19 and no subsequent new

orders, EPC has seen a substantial dip in FY20 sales. BJE is in the midst of scaling

down its Power Distribution business. We expect higher overhead costs and

declining revenues to continue impacting the EPC business for next 2-3 quarters.

Going ahead TLT and illumination projects (short-cycle, lesser challenges, better

margins and lower capital intensity) will remain at the core of EPC business.

Although Illumination/luminaires business will likely be negatively impacted by

Covid-19 due to reduced private sector spends, it still has good long term prospects.

With Covid-19 likely to further impact project closures and receivables payment, we

expect EPC margins to remain under pressure for majority of FY21. BJE plans to

focus on completing existing projects and reducing capital employed. Additionally,

it shall be selectively bidding for new orders with strong focus on profitability and

cash flows.

We estimate EPC business revenues to remain around the Rs16-20bn levels over

FY20‐23E. Rights issue, realization of receivables and focus on projects with strong

profitability & flows will help strengthen the balance sheet and cash flows.

Bajaj Electricals

July 6, 2020 19

Financials & Valuations

Estimate CAGR of 6.9% in Sales over FY20-23

We expect Sales CAGR of 6.9% over FY20-23. We expect Consumer Products to

continue outperforming the industry growth rates and grow at 10% CAGR (16.7%

over FY21-23) while EPC revenues to remain stable around Rs16-20bn

Consumer Products: Benefitting from the RREP implementation, we expect

Consumer Products to grow at 10% CAGR over FY20-23 (16.7% over FY21-

23) with Appliances/Fans/Consumer lighting growing at 10.9%/10.5%3.8%

respectively.

EPC: With BJE selectively bidding for projects with a strong focus on

profitability and cash flows, we expect EPC segment revenues to be stable at

around Rs16-20bn

Revenues to grow at CAGR of 6.9% over FY20-23

22

27

31

30

36

41

25

39

19

16

19

20

10%

41%

-25%

-8%

19%

12%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

-

5

10

15

20

25

30

35

40

45

FY18 FY19 FY20 FY21E FY22E FY23E

Consumer Products EPC YoY gr. (RHS)

Source: Company, PL

CP revenue to grow at 10% CAGR over FY20-23

22 27 31 30 36 41

-4%

23%

13%

-3%

19%15%

-10%

0%

10%

20%

30%

-

10

20

30

40

50


Consumer Products (Rs bn) YoY gr. (RHS)

Source: Company, PL

EPC revenue to grow at 1.8% CAGR over FY20-23

25 39 19 16 19 20

25%

58%

-52%

-18%

19%8%

-60%

-40%

-20%

0%

20%

40%

60%

80%

-

10

20

30

40

50


EPC (Rs bn) YoY gr. (RHS)

Source: Company, PL

Bajaj Electricals

July 6, 2020 20

Commodity price have bottomed out

Coupled with rising share of EPC segment revenues with aggressive project

timelines, BJE has been impacted by sharp commodity price inflation over the past

few years. Key commodity prices – Copper/Aluminum/Brent Crude have increased

at a CAGR of 9%/11%/14% over FY16-19 thereby impacting gross margins by

415bps. However, commodity price pressure had abated in 9MFY20 and the

incidence of Covid-19 pandemic led to a further softening of commodity prices. With

resumption of economic activities, commodity prices have inched back near pre-

Covid levels. However, pace of recovery in demand & INR/USD rates will determine

the trend in the prices of key inputs like Copper, Aluminum, Paints & Plastics. We

expect BJE’s gross margins to expand by 220bps over FY20-23 given 1) increase

in share of consumer products 2) gains from cost optimizing initiatives and 3) benign

commodity price inflation

Copper prices have risen to pre-Covid levels

2,00,000

2,50,000

3,00,000

3,50,000

4,00,000

4,50,000

5,00,000

5,50,000

Jun-1

7

Aug-1

7

Oct-17

Dec-

17

Feb

-18

Apr-

18

Jun-1

8

Aug-1

8

Oct-18

Dec-

18

Feb

-19

Apr-

19

Jun-1

9

Aug-1

9

Oct-19

Dec-

19

Feb

-20

Apr-

20

Jun-2

0

Copper Spot (INR/MT)

Source: Company, PL

Aluminium price back to pre-Covid levels

60,000

80,000

1,00,000

1,20,000

1,40,000

1,60,000

1,80,000

Jun-1

7

Aug-1

7

Oct-17

Dec-

17

Feb

-18

Apr-

18

Jun-1

8

Aug-1

8

Oct-18

Dec-

18

Feb

-19

Apr-

19

Jun-1

9

Aug-1

9

Oct-19

Dec-

19

Feb

-20

Apr-

20

Jun-2

0

Aluminium Spot (INR/MT)

Source: Company, PL

Crude price down by 39% over Dec-19 high

-

20

40

60

80

100

30-J

un-1

7

31-A

ug-1

7

31-O

ct-1

7

31-D

ec-

17

28-F

eb-1

8

30-A

pr-1

8

30-J

un-1

8

31-A

ug-1

8

31-O

ct-1

8

31-D

ec-

18

28-F

eb-1

9

30-A

pr-1

9

30-J

un-1

9

31-A

ug-1

9

31-O

ct-1

9

31-D

ec-

19

29-F

eb-2

0

30-A

pr-2

0

30-J

un-2

0

Brent Crude (US$/barrel)

Source: Company, PL

INR has depreciated by 5% since Feb20

60

65

70

75

80

30-0

6-2

017

31-0

8-2

017

31-1

0-2

017

31-1

2-2

017

28-0

2-2

018

30-0

4-2

018

30-0

6-2

018

31-0

8-2

018

31-1

0-2

018

31-1

2-2

018

28-0

2-2

019

30-0

4-2

019

30-0

6-2

019

31-0

8-2

019

31-1

0-2

019

31-1

2-2

019

29-0

2-2

020

30-0

4-2

020

30-0

6-2

020

USD/INR

Source: Company, PL

Bajaj Electricals

July 6, 2020 21

EBITDA CAGR of 28.8% over FY20-23

We estimate EBITDA CAGR of 28.8% over FY20-23 led by improving revenue mix

based on high contribution from Consumer Products segment and various cost

efficiency measures. We estimate margins to improve by 310bps over FY20-23.

We estimate PBT to grow 17x to R3.8bn over FY20-23 helped by improving mix

and lower interest burden. Although PAT recovery is likely to be subdued in FY21

due to impact of Covid-19, we estimate PAT to grow by 73% CAGR over FY21-23

BJE raised ~Rs3.5bn via rights issue in March 2020. BJE has repaid debt close to

Rs3.3bn taking the debt/equity ratio below 1.

Revenue/EBITDA to grow at CAGR of 6.9%/28.8% over FY20-22E

Particulars (Rs mn) FY19 FY20 FY21E FY22E FY23E

Revenue from Operations 66,731 49,771 45,582 54,146 60,865

YoY gr. 41.5% -25.4% -8.4% 18.8% 12.4%

Gross Profit 15,155 13,351 12,763 15,432 17,666

Margin 22.7% 26.8% 28.0% 28.5% 29.0%

Other Expenses 11,672 11,282 10,396 11,817 13,247

% of sales 17.5% 22.7% 22.8% 21.8% 21.8%

EBITDA 3,483 2,069 2,367 3,614 4,419

Margin 5.2% 4.2% 5.2% 6.7% 7.3%

YoY gr. 18.7% -40.6% 14.4% 52.7% 22.3%

Other Income 654 526 635 662 720

Depreciation 385 680 734 772 830

Interest 1,159 1,692 986 556 482

PBT 2,594 224 1,283 2,948 3,827

Tax 924 225 323 743 964

Adj PAT 1,671 -1 959 2,205 2,863

Margin 2.5% 0.0% 2.1% 4.1% 4.7%

Exceptional item 0 0 0 0 0

Reported PAT 1,671 -1 959 2,205 2,863

Adj EPS (Rs) 16.3 0.0 8.4 19.4 25.2

YoY gr. -3.8% NA NA 129.9% 29.8%

Source: Company, PL

Consumer products sales to grow by 10% over FY20-23

Particulars (Rs mn) FY19 FY20 FY21E FY22E FY23E

Revenue

Consumer Products 27,408 30,846 30,015 35,603 40,890

YoY gr. 23.0% 12.5% -2.7% 18.6% 14.8%

EPC 39,319 18,918 15,560 18,536 19,968

YoY gr. 58.1% -51.9% -17.7% 19.1% 7.7%

EBIT

Consumer Products 1,801 2,082 2,176 2,902 3,680

Margin 6.6% 6.8% 7.3% 8.2% 9.0%

YoY gr. 65.7% 15.6% 4.5% 33.3% 26.8%

EPC 1,953 -346 -140 556 699

Margin 5.0% -1.8% -0.9% 3.0% 3.5%

YoY gr. 0.4% NM NM NM 25.7%

Source: Company, PL

Bajaj Electricals

July 6, 2020 22

Quarterly snapshot: In 4QFY20, Revenues declined by 26.7%; reported no profit/loss

Particulars (Rs mn) 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20

Revenue from Operations 11,399 15,984 21,618 17,729 12,978 10,918 12,815 12,996

YoY gr. 11.7% 70.9% 88.8% 10.4% 13.8% -31.7% -40.7% -26.7%

Gross Profit 3,057 3,631 4,567 3,900 3,566 2,981 3,706 3,034

Margin 26.8% 22.7% 21.1% 22.0% 27.5% 27.3% 28.9% 23.3%

Other Expenses 2,438 2,834 3,189 3,207 2,816 2,743 3,023 2,700

% of sales 21.4% 17.7% 14.8% 18.1% 21.7% 25.1% 23.6% 20.8%

EBITDA 619 797 1,378 694 750 238 684 335

Margin 5.4% 5.0% 6.4% 3.9% 5.8% 2.2% 5.3% 2.6%

YoY gr. 36.8% 85.7% 96.0% -48.6% 21.1% -70.1% -50.4% -51.8%

Other Income 272 60 55 263 179 116 100 194

Depreciation 92 94 100 99 161 167 170 182

Interest 177 230 333 419 495 446 394 358

PBT 623 533 1,000 439 273 -259 220 -11

Tax 218 192 361 153 99 71 66 -11

Adj PAT 405 341 639 285 174 -330 155 0

YoY gr. 97.7% 79.6% 73.6% -70.5% -57.1% NA -75.8% -100.0%

Source: Company, PL

Quarterly snapshot: In 4QFY20, Consumer products revenue grew by 0.6%; margins at 6.4%

Particulars (Rs mn) 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20

Revenue

Consumer Products 5,969 6,423 7,606 7,410 7,834 6,977 8,579 7,457

YoY gr. 27.1% 24.9% 26.7% 15.0% 31.2% 8.6% 12.8% 0.6%

EPC 5,430 9,559 14,012 10,318 5,143 3,938 4,235 5,538

YoY gr. -3.0% 126.9% 157.1% 7.3% -5.3% -58.8% -69.8% -46.3%

Other 1 3 1 1 1 3 2 1

YoY gr. 120.0% 92.3% 75.0% -53.3% -9.1% 24.0% 171.4% 57.1%

Total 11,399 15,984 21,618 17,729 12,978 10,918 12,815 12,996

YoY gr. 10.7% 70.9% 88.8% 10.4% 13.8% -31.7% -40.7% -26.7%

EBIT

Consumer Products 420 369 552 460 545 355 707 476

Margin 7.0% 5.7% 7.3% 6.2% 7.0% 5.1% 8.2% 6.4%

YoY gr. 1181.1% 28.7% 41.2% 22.1% 29.8% -3.9% 28.1% 3.5%

EPC 333 397 790 434 208 -182 -138 -234

Margin 6.1% 4.1% 5.6% 4.2% 4.0% -4.6% -3.3% -4.2%

YoY gr. -16.2% 171.5% 146.4% -59.9% -37.6% NA NA NA

Others -1 1 -2 -2 -1 1 1 -3

Margin -90.9% 56.0% -271.4% -271.4% -120.0% 41.9% 47.4% -227.3%

YoY gr. NA NA NA NA NA -7.1% NA NA

Source: Company, PL

Quarterly Sales Distribution: 1Q and 4Q contribute 50-55% of annual sales

Particulars (Rs mn) 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20

Consumer Products 21.1% 23.1% 26.9% 28.9% 21.8% 23.4% 27.8% 27.0% 25.4% 22.6% 27.8% 24.2%

EPC 22.5% 16.9% 21.9% 38.7% 13.8% 24.3% 35.6% 26.2% 27.2% 21.2% 22.4% 29.3%

Total 21.8% 19.8% 24.3% 34.1% 17.1% 24.0% 32.4% 26.6% 26.1% 22.1% 25.7% 26.1%

Source: Company, PL

Bajaj Electricals

July 6, 2020 23

Valuations: Strong execution can re-rate the stock

With time bound execution of UP project and delay in receivables putting pressure

on margins and cash flow, BJE saw a de-rating. It reported a PAT CAGR of 4.4%

over FY16-19 as consumer products segment revenues were impacted due to

overhaul of distribution network. We estimate Sales/EBITDA CAGR of 6.9% 28.8%

over FY20-23 led by improving business mix, operating leverage and benign input

costs. With reducing interest burden on the back of debt reduction (improving cash

flows and ~Rs3.5bn rights issue), we estimate EPS to expand from Rs8.4 in FY21

to Rs25.2 in FY23. At 20x FY22 EPS, BJE trades at a huge discount (20-50%) to

its peers. However, margin expansion led by improving CP business mix will enable

rerating.

We initiate coverage on BJE with a BUY rating and a SOTP derived target price of

Rs500. Our implied target multiple of 22.7x (Sept-22 earnings) is at a 31% discount

to the industry leader Havells and 24% discount to Crompton Consumer.

Valuation summary: At 20x FY22 earnings; BJE trades at 20-50% discount to its peers

Name Sales growth (%) PAT growth (%) RoE (%) EPS (Rs) P/E (x)

FY21E FY22E FY23E FY21E FY22E FY23E FY21E FY22E FY23E FY21E FY22E FY23E FY21E FY22E FY23E

Amber Enterprises -6.7 29.2 9.4 -32.1 82.7 15.1 9.3 14.8 15.2 36.6 65.4 71.9 40.5 22.7 20.6

Bajaj Electricals* -8.4 18.8 12.4 NA 129.9 29.8 6.7 14.0 16.0 8.4 19.4 25.2 45.6 19.8 15.3

Blue Star -7.1 17.4 6.4 -23.7 74.7 25.6 14.5 21.9 24.8 11.4 19.9 25.0 43.8 25.1 20.0

Crompton Consumer* -3.3 17.9 11.9 -5.6 35.3 14.6 24.6 26.9 25.8 6.6 8.9 10.2 35.9 26.6 23.2

Dixon Technologies 10.7 25.8 19.3 8.6 51.2 29.9 21.4 25.5 26.6 110.5 171.4 222.3 54.2 34.9 26.9

Finolex Cables -6.8 14.1 22.8 -25.7 25.8 6.8 10.6 12.2 12.6 20.3 25.7 29.2 14.4 11.4 10.0

Havells* -1.2 18.8 12.5 -10.1 39.5 15.5 14.2 17.4 18.0 10.5 14.7 17.0 55.1 39.5 34.2

KEI Industries -4.0 15.5 10.0 -16.6 40.6 5.3 13.4 15.9 15.6 24.6 34.0 35.2 14.5 10.5 10.1

Orient Electric -1.6 20.4 13.8 -8.0 70.5 35.0 18.2 27.5 33.5 3.8 6.3 7.8 50.2 30.8 24.7

Polycab -7.4 17.9 3.5 -21.0 31.9 13.1 14.5 16.4 14.7 40.5 53.2 60.2 20.8 15.9 14.0

Symphony -10.2 23.2 12.2 -17.3 38.2 23.2 21.9 25.7 27.2 21.8 29.6 36.6 41.4 30.4 24.6

TTK Prestige -1.8 16.5 15.3 -19.2 33.6 14.0 12.3 14.2 14.3 131.8 156.2 176.2 41.6 35.1 31.1

V-Guard -3.3 14.2 1.5 -8.1 29.5 0.9 15.5 18.1 16.4 4.0 5.2 5.2 42.7 33.0 32.7

Voltas* -3.0 18.7 10.1 -11.6 41.7 14.9 11.3 14.5 14.9 15.2 21.5 24.7 36.8 26.0 22.6

Whirlpool -5.0 18.9 7.0 -3.7 35.7 12.8 16.1 19.7 20.4 35.9 48.4 55.3 60.0 44.6 39.0

Source: Company, Bloomberg, PL * PL Estimates

SOTP – Implied P/E of 22.7x

Sept - 22 EPS Basis Multiple Per Share Value (Rs) Valuation %

Consumer Products P/E 24.0 20.5 492 98%

EPC P/E 5.0 1.7 8 2%

Target Price 500 100%

Source: Company, PL

Bajaj Electricals

July 6, 2020 24

RoE to improve from FY21

19.0%16.5%

0.0%

6.7%

14.0%16.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%


RoE %

Source: Company, PL

RoCE to stage gradual recovery

20.3%

17.4%

8.0%

11.4%

18.5%

21.1%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%


RoCE %

Source: Company, PL

D/E ratio comfortably below 1

0.8

1.5

0.5

0.3 0.2 0.1

-

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6


D/E (x)

Source: Company, PL

Debt to reduce substantially over FY19-22

25

41

32

27 25 25

-

5

10

15

20

25

30

35

40

45


Borrowings (Rs bn)

Source: Company, PL

Improvement in cash flows

-1

-6

2 3

4 5

-8

-6

-4

-2

-

2

4

6


CFO (Rs bn)


Consistent dividend payouts

32%

25%

26%

0%

24%

26%

2.8

3.5 3.5

-

2.0

5.0

-

1.0

2.0

3.0

4.0

5.0

6.0

0%

5%

10%

15%

20%

25%

30%

35%


Payout Ratio (%) DPS (Rs)


Bajaj Electricals

July 6, 2020 25

Annexure:

Board of Directors & KMP

Board of Directors

Name Management Role

Family Member Representation on Board of Directors

Shekhar Bajaj Chairman & Managing Director Yes

Madhur Bajaj Non-Independent, Non-Executive Director

Rajiv Bajaj Non-Independent, Non-Executive Director

Pooja Bajaj Non-Independent, Non-Executive Director

Other Board of Directors

Anuj Poddar Executive Director Yes

Harsh Vardhan Goenka Independent Director

Dr Indu Shahani Independent Director

Munish Khetrapal Independent Director

Dr Rajendra Prasad Singh Independent Director

Siddharth Mehta Independent Director

Source: Company, PL

Auditors list

Name

S R B C & Co LLP Auditors

R Nanabhoy & Co Cost Auditors

Anant B Khamankar & Co Secretarial Auditors

Source: Company, PL

Bajaj Electricals

July 6, 2020 26

Financials

Income Statement (Rs m)


Net Revenues 49,771 45,582 54,146 60,865

YoY gr. (%) (25.4) (8.4) 18.8 12.4

Cost of Goods Sold 36,420 32,819 38,715 43,199

Gross Profit 13,351 12,763 15,432 17,666

Margin (%) 26.8 28.0 28.5 29.0

Employee Cost 3,834 3,555 3,790 4,200

Other Expenses 5,027 4,360 4,720 5,258

EBITDA 2,069 2,367 3,614 4,419

YoY gr. (%) (40.6) 14.4 52.7 22.3

Margin (%) 4.2 5.2 6.7 7.3

Depreciation and Amortization 680 734 772 830

EBIT 1,389 1,633 2,842 3,588

Margin (%) 2.8 3.6 5.2 5.9

Net Interest 1,692 986 556 482

Other Income 526 635 662 720

Profit Before Tax 224 1,283 2,948 3,827

Margin (%) 0.4 2.8 5.4 6.3

Total Tax 225 323 743 964

Effective tax rate (%) 100.6 25.2 25.2 25.2

Profit after tax (1) 959 2,205 2,863

Minority interest - - - -

Share Profit from Associate - - - -

Adjusted PAT (1) 959 2,205 2,863

YoY gr. (%) NA NA 129.9 29.8

Margin (%) - 2.1 4.1 4.7

Extra Ord. Income / (Exp) - - - -

Reported PAT (1) 959 2,205 2,863

YoY gr. (%) NA NA 129.9 29.8

Margin (%) - 2.1 4.1 4.7

Other Comprehensive Income - - - -

Total Comprehensive Income (1) 959 2,205 2,863

Equity Shares O/s (m) 114 114 114 114

EPS (Rs) 0.0 8.4 19.4 25.2

Source: Company Data, PL Research

Balance Sheet Abstract (Rs m)


Non-Current Assets

Gross Block 7,502 7,934 8,463 9,057

Tangibles 7,412 7,804 8,293 8,847

Intangibles 90 130 170 210

Acc: Dep / Amortization 3,460 3,916 4,411 4,947

Tangibles 3,398 3,827 4,284 4,772


Net fixed assets 4,042 4,018 4,053 4,110

Tangibles 4,014 3,977 4,009 4,074


Capital Work In Progress 109 66 66 66

Goodwill - - - -

Non-Current Investments 6,091 5,610 5,127 4,891

Net Deferred tax assets 453 447 432 413

Other Non-Current Assets 2,008 2,042 2,085 2,288

Current Assets

Investments - - - -

Inventories 6,908 6,869 6,676 6,670

Trade receivables 20,490 17,068 16,692 17,663

Cash & Bank Balance 1,047 1,101 1,490 2,624

Other Current Assets 4,364 4,513 4,873 5,174

Total Assets 45,585 41,808 41,573 43,984

Equity

Equity Share Capital 228 228 228 228

Other Equity 13,565 14,524 16,502 18,796

Total Networth 13,793 14,752 16,730 19,024

Non-Current Liabilities

Long Term borrowings 799 799 - -

Provisions 956 957 1,056 1,141

Other non current liabilities 714 729 758 791

Current Liabilities

ST Debt / Current of LT Debt 6,576 2,963 2,572 2,435

Trade payables 9,003 8,092 7,425 7,693

Other current liabilities 13,729 13,492 13,006 12,870

Total Equity & Liabilities 45,585 41,808 41,573 43,984


Bajaj Electricals

July 6, 2020 27

Cash Flow (Rs m)

Y/e Mar FY20 FY21E FY22E FY23E Year

PBT 224 1,283 2,948 3,827

Add. Depreciation 680 734 772 830

Add. Interest 1,692 986 556 482

Less Financial Other Income 526 635 662 720

Add. Other (357) (25) 80 (86)

Op. profit before WC changes 2,239 2,977 4,356 5,053

Net Changes-WC 4,486 2,617 (485) (1,002)

Direct tax (451) (323) (743) (964)

Net cash from Op. activities 6,274 5,271 3,128 3,086

Capital expenditures (284) (667) (807) (888)

Interest / Dividend Income 49 - - -

Others (228) (1) (9) 73

Net Cash from Invt. activities (462) (668) (815) (815)

Issue of share cap. / premium 3,482 - - -

Debt changes (6,532) (3,613) (1,190) (137)

Dividend paid (432) - (228) (569)

Interest paid (1,426) (986) (556) (482)

Others - - - -

Net cash from Fin. activities (4,908) (4,599) (1,974) (1,188)

Net change in cash 904 4 339 1,084

Free Cash Flow 5,990 4,604 2,321 2,198


Quarterly Financials (Rs m)

Y/e Mar Q1FY20 Q2FY20 Q3FY20 Q4FY20

Net Revenue 12,978 10,918 12,815 12,996

YoY gr. (%) 13.8 (31.7) (40.7) (26.7)

Raw Material Expenses 9,412 7,938 9,109 9,962

Gross Profit 3,566 2,981 3,706 3,034

Margin (%) 27.5 27.3 28.9 23.3

EBITDA 749 238 684 334

YoY gr. (%) 21.1 (70.1) (50.4) (51.8)

Margin (%) 5.8 2.2 5.3 2.6

Depreciation / Depletion 161 167 170 182

EBIT 588 71 513 153

Margin (%) 4.5 0.6 4.0 1.2

Net Interest 495 446 394 358

Other Income 179 116 100 194

Profit before Tax 273 (259) 220 (11)

Margin (%) 2.1 (2.4) 1.7 (0.1)

Total Tax 99 71 66 (11)

Effective tax rate (%) 36.3 (27.5) 29.8 100.0

Profit after Tax 174 (330) 155 -

Minority interest - - - -

Share Profit from Associates - - - -

Adjusted PAT 174 (330) 155 -

YoY gr. (%) (57.1) (196.8) (75.8) (100.0)

Margin (%) 1.3 (3.0) 1.2 -

Extra Ord. Income / (Exp) - - - -

Reported PAT 174 (330) 155 -

YoY gr. (%) (57.1) (196.8) (75.8) (100.0)

Margin (%) 1.3 (3.0) 1.2 -

Other Comprehensive Income - - - -

Total Comprehensive Income 174 (330) 155 -

Avg. Shares O/s (m) 102 102 102 114

EPS (Rs) 1.7 (3.2) 1.5 -


Key Financial Metrics


Per Share(Rs)

EPS 0.0 8.4 19.4 25.2

CEPS 6.0 14.9 26.2 32.5

BVPS 121.2 129.7 147.1 167.2

FCF 52.7 40.5 20.4 19.3

DPS 3.2 - 2.0 5.0

Return Ratio(%)

RoCE 8.0 11.4 18.5 21.1

ROIC 0.0 6.5 12.2 15.1

RoE 0.0 6.7 14.0 16.0

Balance Sheet

Net Debt : Equity (x) 0.5 0.2 0.1 0.0

Net Working Capital (Days) 135 127 107 100

Valuation(x)

PER NA 45.6 19.8 15.3

P/B 3.2 3.0 2.6 2.3

P/CEPS 64.4 25.8 14.7 11.8

EV/EBITDA 24.2 19.6 12.4 9.8

EV/Sales 1.0 1.0 0.8 0.7

Dividend Yield (%) 0.8 - 0.5 1.3


Bajaj Electricals

July 6, 2020 28

Notes:

Bajaj Electricals

July 6, 2020 29

Notes:

Bajaj Electricals

July 6, 2020 30

Notes:

Bajaj Electricals

July 6, 2020 31

Price Chart

Analyst Coverage Universe

Sr. No. Company Name Rating TP (Rs) Share Price (Rs)

1 Asian Paints Accumulate 1,722 1,689

2 Avenue Supermarts Reduce 1,658 2,398

3 Britannia Industries BUY 3,744 3,510

4 Colgate Palmolive Reduce 1,224 1,313

5 Crompton Greaves Consumer Electricals BUY 267 199

6 Dabur India Hold 422 431

7 Emami Hold 287 205

8 Future Retail Under Review - 332

9 GlaxoSmithKline Consumer Healthcare Hold 9,377 9,247

10 Havells India Reduce 485 511

11 Hindustan Unilever Hold 2,017 2,195

12 ITC BUY 251 195

13 Jubilant FoodWorks Hold 1,392 1,530

14 Kansai Nerolac Paints BUY 487 389

15 Marico Hold 318 284

16 Nestle India Reduce 13,127 17,462

17 Pidilite Industries Hold 1,317 1,391

18 Titan Company Hold 936 997

19 Voltas Accumulate 564 539

PL’s Recommendation Nomenclature

Buy : >15%

Accumulate : 5% to 15%

Hold : +5% to -5%

Reduce : -5% to -15%

Sell : < -15%

Not Rated (NR) : No specific call on the stock

Under Review (UR) : Rating likely to change shortly

267

369

471

573

675

Jul -

17

Jan

- 1

8

Jul -

18

Dec -

18

Jun

- 1

9

Dec -

19

Jun

- 2

0

(Rs)

Bajaj Electricals

July 6, 2020 32

ANALYST CERTIFICATION

(Indian Clients)

We/I, Mr. Amnish Aggarwal- MBA, CFA, Mr. Paarth Gala- B.Com Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.

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The research analysts, with respect to each issuer and its securities covered by them in this research report, certify that: All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and No part of his or her or their compensation was, is or will be directly related to the specific recommendation or views expressed in this research report.

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