idirect bajajelectricals ic - share market | stock market
TRANSCRIPT
September 19, 2013
Initiating Coverage
ICICI Securities Ltd | Retail Equity Research
Consumption to light up growth! Bajaj Electricals (BEL) is a dominant play in the consumer durable (CD) and lighting segments with over 4100 dealers and a 400,000 strong retail network for lighting and 86,000 and 45,000 respectively for fans and appliances across India. BEL recorded last six years sales CAGR of 25% and 17% in the CD and lighting categories, respectively, whereas the performance of the E&P category was dismal (last six year sales CAGR of 13%) with rising competition and cost overrun. Although BEL has a dominant presence in the small appliances market with market share ranging between 15% and 30% (organised market), its premium product (Morphy Richards) contributes ~15% to total CD sales. We believe sales and earning will see CAGR of ~18% and ~65% for FY13-15E led by strong performance of the CD & lighting segments while E&P segment will narrow down losses in FY14. We initiate coverage on the stock with a BUY rating.
CD, lighting segments to drive topline BEL is a strong brand in the appliances and lighting segments with revenue contribution of ~80% to the topline. With a strong dealer network, we believe the CD and lighting segments will record sales CAGR of ~18% and ~17%, respectively, for FY13-15E, supported by rapid urbanisation and a growing middle class. BEL has largely focused on dealer push strategy with lower advertisement expenditure unlike Havells India’s consumer pull strategy. We believe E&P sales will record a CAGR of ~19% in FY13-15E led by the company’s strategy to reduce the project execution cycle. Lower headwinds to aid in EBITDA as BEL exits lower margin projects BEL’s main concern is a higher working capital cycle (~7% of sales in FY13) compared to other branded players (Havells’ working capital cycle is ~4% of sales in FY13). Significant cost overrun coupled with almost flattish revenue growth in the E&P segment took its toll on overall EBITDA margins (declined ~430 bps YoY) in FY13. However, BEL has endeavoured to rationalise the working capital requirement (20% of sales in FY10 to ~7% of sales in FY13) by reducing debtors’ days. We believe the stretched working capital of BEL would relax, going forward, with an improvement in project execution cycle, finally resulting in EBITDA margin recovery. E&P turnaround to drive stock re-rating At CMP of | 165, BEL is trading at a PE multiple of 24x FY14E & 12x FY15E earnings. On EV/EBITDA multiple, it is trading at ~10x FY14E and ~6x FY15E EBITDA. We expect the E&P segment to narrow its losses in FY14 and start contributing to EBITDA in FY15 by executing high margin projects. It will help reduce working capital requirements with improving return ratios, going forward. Our SOTP valuation suggests a fair value of | 195. We initiate coverage on the stock with a BUY rating and target price of | 195.
Exhibit 1: Key financials (Year-end March) FY11 FY12 FY13 FY14E FY15ENet Sales (| crore) 2,739.4 3,094.2 3,380.9 4,038.0 4,737.4 EBITDA (| crore) 231.2 225.5 101.2 173.6 270.0 Net Profit (| crore) 143.8 117.9 51.2 68.6 138.6 EPS (|) 14.4 11.8 5.1 6.9 13.9 P/E (x) 12.4 14.5 53.6 24.0 11.9 Price / Book (x) 2.7 2.4 2.3 2.1 1.9 EV/EBITDA (x) 7.4 7.9 17.3 10.3 6.6 RoCE (%) 30.5 24.0 9.8 16.3 24.0 RoE (%) 23.5 16.8 7.0 8.9 15.7
Source: Company, ICICIdirect.com Research
Bajaj Electricals (BAJELE) | 165
Rating Matrix Rating : Buy
Target : | 195
Target Period : 12-15 months
Potential Upside : 18%
YoY Growth (%)
YoY Growth FY12 FY13 FY14E FY15ENet Sales 12.9 9.3 19.4 17.3EBITDA -2.5 -55.1 71.6 55.5Net Profit -18.0 -56.5 34.0 102.0
Current & target multiple FY12 FY13 FY14E FY15E
P/E (x) 14.5 53.6 24.0 11.9Target P/E (x) 17.1 63.2 28.3 14.0EV/EBITDA (x) 7.9 17.3 10.3 6.6Mcap/Sales (x) 0.5 0.5 0.4 0.3RoE (%) 16.8 7.0 8.9 15.7RoCE (%) 24.0 9.8 16.3 24.0
Stock Data Bloomberg/Reuters Code BJE.IN/BJEL.BOSensex 19962Average Volume 79117Market Cap (| crore) 1646.052 Week H/L 234/150Equity Capital (| crore) 20.0Face Value (|) 2Promoters Stake (%) 66.1FII Holding (%) 10.9DII Holding (%) 5.9
Comparative return matrix (%) 1M 3M 6M 12M
Bajaj Electricals 3.4 0.9 -8.2 -12.9Havells India 1.4 -17.5 -3.6 3.9V-Guard 12.0 2.6 -2.3 22.5
Price movement
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50
100
150
200
250
Sep-13Jun-13Mar-13Dec-12Oct-12
4,8005,0005,2005,4005,6005,8006,0006,2006,400
Price (R.H.S) Nifty (L.H.S)
Analyst’s name
Sanjay Manyal [email protected] Hitesh Taunk [email protected]
Page 2ICICI Securities Ltd | Retail Equity Research
Company background Incorporated in 1938, Bajaj Electricals (BEL) was incorporated as Radio Lamp Works Ltd. It was later renamed Bajaj Electricals in 1960. The company is largely known for its consumer appliance business. BEL operates mainly in three business segments, namely, lighting & luminaries, consumer durables (CD) and engineering & project (E&P). The company follows an asset light model strategy wherein it largely outsources (revenue from outsourced product contributes ~95% in the topline) the manufacturing of its kitchen and home appliance products and lightings. Under its kitchen and home appliances, BEL offers a wide range of brown goods including water heaters, mixer grinder, food processors, steam & dry iron, air coolers and water purifiers. The CD segment contributes ~55% to the topline and recorded a CAGR of ~25% in FY08-13. Bajaj lighting & luminaries (contributes ~25% to the topline) recorded CAGR of 17% in FY08-13. This business unit markets a wide range of light sources and domestic luminaries. The range includes general lighting service (GLS), fluorescent tube lights (FTL), compact fluorescent lamps (CFL), special purpose lamps and consumer luminaries. Its luminaries product range covers commercial, industrial, flood lighting, street lighting and post-top lighting besides special luminaries for flame proof and increased safety applications. The E&P segment (contributes ~20% to topline) includes three sub segments viz. special projects, transmission line tower and high masts.
Exhibit 2: Business segments (revenue FY13)
Bajaj Electricals LtdSales FY13: | 3381 crore
Lighting & fixturesSales FY13: | 860 croreTopline Contribution:25%
Consumer durableSales FY13: | 1837 crore Topline Contribution: 55%
Engineering & ProjectsSales FY13: | 685 croreTopline Contribution:20%
Source: Company, ICICIdirect.com Research
Exhibit 3: Segment wise revenue contribution
13 12 12 12 13 15
17 16 12 12 12 11
26 26 26 28 31 36
18 17 17 19 1818
27 30 33 30 27 20
0
20
40
60
80
100
120
FY08 FY09 FY10 FY11 FY12 FY13
(%)
Lighting Luminaires Appliances Fans Engineering & Projects
Source: Company, ICICIdirect.com Research
Exhibit 4: Order book of engineering & project business
790
930
750 750
610
1070963
1107
0
200
400
600
800
1000
1200
FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E
(| c
rore
)
Source: Company, ICICIdirect.com Research
Shareholding pattern (Q1FY14)
Share Holding Pattern Holdings (%)Promoters 66.1Institutional Investors 16.8Others 17.2
Institutional holding trend (%)
10.7 11
.4
11.5
10.9
6.2
5.6
4.5 5.
9
02468
101214
Q2FY
13
Q3FY
13
Q4FY
13
Q1FY
14
(%)
FII DII
Page 3ICICI Securities Ltd | Retail Equity Research
Exhibit 5: Company milestone
- Name changed to Bajaj Electricals Ltd (BEL)-Matchwell Electricals (India) Ltd, manufacturer of electric fans became a subsidiary of BEL
Commenced fan and die-cast component manufacturing unit at Chakan (Pune)
Incorporated in Lahore to manufacture electric fans, die cast components and marketing of electrical goods
-Amalgamated 'Matchwell' with BEL-JV with US' Black & Decker Corp to manufacture and market power tools, household appliances
Commenced fabrication unit and a galvanising plant at Ranjangaon (Pune) to manufacture high masts, lattice towers
Entered into a distribution agreement with Trilux Lenze of Germany for high end technical lighting
1938 1984-1994
Black & Decker Bajaj became a 100% subsidiary of BEL and was renamed as Bajaj Ventures Ltd
-Company divested 50% of its shareholding in Bajaj Venture Ltd-Technical collaboration and brand licensing agreement with Morphy Richards-Discontinued making of die-cast components
Acquired 32% of the share capital of Starlite Lighting Ltd, a company engaged in the manufacture of CFLs.
2012-2013
Completely divested stake and association with Black & Decker Corporation, US
20071960-1964 1998 1999-2000 2000-2001 2002-2003 2005
Source: Company, ICICIdirect.com Research
Exhibit 6: Business segments, products and tie-ups for various product categories Segment Product Assoication/JV/ Technical tie up Competitors
Lamps: GLS lamps, fluorescent tubelights, compact fluorescent lamps -Starlite Lighting (India)
Others: Domestic luminaires, ballasts & starters, LED torches -Hindustan Lamps (India)
Luminaires: Industrial, commercial, decorative, street light, floodlight, LED, lighting electronics, lighting control Trilux International (Germany)
HID Lamps: Mercury & sodium vapour lamps, halogen lamps, metal halide & fluorescent lamps Delta Control (Canada)
Appliances
Mixers grinders, juicers, food processors, water heaters, air coolers, iron, ovens toasters grillers (OTG), room heaters, toasters & S/W makers, hand blenders, water filters microwave ovens gas stove purifiers & filters, ovens, stoves, electric kettles, coffee/tea makers
Morphy Richards (UK), Nardi Elettrodomestici (Italy), Securiton
(Switzerland)
Philips, Kenstar, Usha, Maharaja, Preeti, Prestige,Kenwood
Domestic: Ceiling, table, pedestal & wall mounted fans, personal fans, Bajaj-Disney children’s fans Midea (China), Disney
Industrial: Industrial exhaust fans, commercial air industrial fans, circulators, cooler kits and pumps
Special Projects: Turnkey lighting projects, factory lighting, airport lighting, sports lighting, rural electrification, etc
Philips, GE, Crompton, IVRCL, NCCL, ICOMN, KBL, Kalpataru
High Mast & Poles: High mast lighting, signage, transmission lines, energy-efficient illumination
Phillips,Crompton, BP Projects, GE, Utkal Galvaniser
Towers: Design, supply, erection and commissioning of transmission lines and telecommunication towers, monopolies, etc.
KEC, Kalpataru, Jyoti, L&T
Abacus (sport lightings) (UK)
Philips, Crompton, Surya, Havells, Wipro, Osram
Phillips, Crompton, Wipro, Thorn
Crompton, Usha, Orient, Khaitan, Polar, Havells
Symphony, Kenstar
E&P
Fans
Luminaries
Lighting
Source: Company, ICICIdirect.com Research
Page 4ICICI Securities Ltd | Retail Equity Research
Investment Rationale Dominant play in appliances and lighting segment BEL is a well established national brand in the kitchen & domestic appliances (KDA) and lighting segments. These two segments contribute ~80% to the topline recording sales CAGR of ~22% in FY08-13. The company has successfully leveraged its brand to create a huge retail network of 45,000 for appliances, 86,000 for fans and over 400,000 for lighting across India. In order to use its expertise in different product lines, BEL has entered into various JVs in the appliances and lighting segments (discussed in exhibit 6). Among major brands, Morphy Richards (leading brand in the UK) is a well accepted brand in India marketed by Bajaj. The JV started in 2003 mainly to tap the market for premium products. Revenues of Morphy products recorded CAGR of 32% in FY08-13 from | 46 crore to | 182 crore. The company outsources its lighting products domestically while luminaries are sourced from domestic and international vendors. With a strong dealer network, we believe the CD & lighting segment will witness sales CAGR of ~18% and ~17%, respectively, in FY13-15E, supported by an underpenetrated rural market, rapid urbanisation & a growing middle class.
Exhibit 7: Consumer durable still contributes over 55% to topline
Engineering & Project
20%
Consumer Durable
55%
Lighting25%
Source: Company, ICICIdirect.com Research
Exhibit 8: Annual sales of appliances (rural +urban)
3 4 6 8 10 12
29
40
57
7278
86
3 5 8 11 13 15
0102030405060708090
2006 2011 2016 2021 2026 2031
(in m
n)
Electric Water Heater Fans Air Cooler
Source: World bank 2008, ICICIdirect.com Research
Exhibit 9: Ownership of consumer durables (percentage of household)
46
80
53
88 89
56 54
34
128
38
6976
48
19 17 19
3
0102030405060708090
100
Refri
grat
ors
Pres
. coo
ker
Bicy
cle
Wris
t Wat
ch
Ceili
ng F
an
Mix
er/G
rinde
r
Colo
ur T
V
Mot
or C
ycle
Car
(%)
Urban Rural Lower penetration in rural India to be big opportunity for consumer durables
Source: CCI, ICICIdirect.com Research
Exhibit 10: India’s urbanisation rate (%)
28.328.6
28.929.2
29.629.9
30.330.6
30.931.3
26
27
28
29
30
31
32
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: World Bank, ICICIdirect.com Research
Bajaj’s appliances and lighting segments together
contribute ~80% to the topline. Bajaj has a strong retail
network of 30,000 for appliances, 86000 for fans and
400,000 for the lighting segment, respectively. We have
built in sales CAGR of ~18% and ~17% for CD and
lighting segments, respectively
Page 5ICICI Securities Ltd | Retail Equity Research
Over the years, the company has forayed into new product categories as well as new geographies across India. We believe per capita spend on consumer durables is extremely low in India, especially in rural India, which throws up an opportunity for the company to grow at a more rapid pace in future. Besides, per capita electricity consumption has increased at a mere 4% CAGR to 813 kwhr (provisional) in the last 10 years, which is still lower compared to developed countries. In the long term, an improvement in per capita electricity consumption will help boost the consumption of electrical products in India. However, in the short-term, good monsoons during the year coupled with a rise in minimum support prices of agri commodities (ranges between 5% and 52% of various categories of kharif and rabi crops in FY13) would boost rural income levels. We believe BEL being the major player in the entry level CD product category would benefit from a rise in rural disposable income. This will also help to partially offset the slow growth in volume from urban India. We believe sales growth for the company will remain intact (CAGR of 18% for FY13-15E), supported by established product sales and launch of new products.
Exhibit 11: Movement in one year forward price/earning (x) with major events
0
5
10
15
20
25
30
35
40
45
1-Ap
r-05
1-Au
g-05
1-De
c-05
1-Ap
r-06
1-Au
g-06
1-De
c-06
1-Ap
r-07
1-Au
g-07
1-De
c-07
1-Ap
r-08
1-Au
g-08
1-De
c-08
1-Ap
r-09
1-Au
g-09
1-De
c-09
1-Ap
r-10
1-Au
g-10
1-De
c-10
1-Ap
r-11
1-Au
g-11
1-De
c-11
1-Ap
r-12
1-Au
g-12
1-De
c-12
(x)
Launch of Morphy Richards products in India and start of TLT manufacturing unit at Ranjangoan
Inked distribution agmt with Trilux Lenze (Gmny) for high end technical lighting
Financial crisis coupled with margin erosion in engineering & project
Recorded strong sales CAGR of ~25% in FY09-11 led by strong performance by consumer durable (~30% CAGR) during same period
Margin contraction due to sharp losses in E&P segment. This led to sharp rise in working capital requirement and contraction in return ratios
Source: Company, ICICIdirect.com Research
Page 6ICICI Securities Ltd | Retail Equity Research
Dominant play with over 15-30% market share in various CD categories The consumer durable segment includes appliances and fan divisions and contributes ~55% to the topline with sales CAGR of ~25% in FY08-13. BEL is one of the largest players in the small appliances market with a market share of over ~15-30% (organised category) in various kitchen and domestic appliances categories. In the appliances and fan segments, the appliances division recorded sales CAGR of 27.5% in FY08-13 while the fan division recorded CAGR of ~20% in the same period. Alongside, in 2002, BEL introduced UK’s Morphy Richards brand (part of the 66-year-old Glen Dimplex group) in the domestic home appliances market in the premium category. Sales from Morphy Richards products recorded CAGR of ~32% between FY08 and FY13. On the macro front, the private final consumption expenditure (PFCE) in refrigerator, cooking and washing appliances has registered 14% CAGR in the last 20 years supported by ~12% CAGR in per capita disposable income during the same period. The main driver for this consumption growth is low penetration of the home and kitchen appliances products in the rural India (see exhibit 9).
Exhibit 12: Appliances volume, realisation growth trend
40.228.7
22.4 18.0 20.0 25.918.0 18.0
-0.3 -1.9
2.8 12.2 3.92.2
2.1 2.1
-10
0
10
20
30
40
50
FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E
(%)
Volume Realisation
Source: Company, ICICIdirect.com Research
Exhibit 13: Appliances to record 20% sales CAGR in FY13-15E
364 46
0 578 76
5 954 12
28 1479
1783
0
500
1000
1500
2000
FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E
(| c
rore
)
CAGR 27.5%
CAGR 20%
Source: Company, ICICIdirect.com Research
Exhibit 14: Rise in per capita disposable income with population growth
0
200
400
600
800
1000
1200
1400
1992
-93
1995
-96
1998
-99
2001
-02
2004
-05
2007
-08
2010
-11
(Pop
ulat
ion
milli
on)
0
10000
20000
30000
40000
50000
60000
70000
(|)
Population (Million)Per capita/disposable income (|)
Source: RBI, ICICIdirect.com Research
Exhibit 15: Private final consumption expenditure
Refrigerator,Cooking, Washing Appliances
6073 8904
17518
46860
29670
10000
20000
30000
40000
50000
1990-91 1995-96 2000-01 2005-06 2010-11
(| c
rore
)
CAGR 14%
Source: CMIE, ICICIdirect.com Research
Products include kitchen and domestic appliances:
Mixers grinders, juicers, food processors, water heaters,
air coolers, iron, ovens toaster grillers (OTG), room
heaters, toasters & S/W makers, hand blenders, water
filters microwave ovens gas stoves purifiers & filters,
ovens, stoves, electric kettles, coffee/tea makers
Page 7ICICI Securities Ltd | Retail Equity Research
Fan segment: growth driven by volume BEL is one of the oldest branded fan manufacturers in India with a current market share of ~12% of | 5,000 crore fan market (includes unorganised) in India. The company’s fan manufacturing capacity is located in Chakan (near Pune) with a total installed capacity of 0.8 million fans/annum. BEL’s fan division has grown at ~20% CAGR in FY08-13 to ~| 611 crore driven by ~18% volume CAGR in the same period. The volume growth can largely be attributed to a shift to the branded category from the unorganised segment at affordable prices. This is coupled with sustained demand from rural India and partially from replacement demand. Bajaj fans are currently available in over 86,000 retail outlets (constitute ~55% of all fan selling counters in the country of which 25% are in rural areas and small towns with a population less than 50,000) against 40,000 outlets in 2008 across India. In the fan segment, BEL has close competition from other listed players like Crompton, Havells India and Orient fans. Earlier, the company was largely present in the economy segment but has recently entered the premium category by launching six new models in the domestic market. BEL has also entered into a joint venture with China’s leading fan and air conditioner manufacture GD Midea Holding Ltd in 2000. The company is also present in the air cooler segment with ~15% market share in the domestic market. We have modelled ~13% sales CAGR supported by volume growth at ~9% CAGR considering sustained demand from tier-II, tier-III cities. Our estimate of volume growth is below the Planning Commissions’ estimate of 11% volume growth in ceiling fan categories for 2007-20.
Exhibit 16: Fan volume growth expected at ~9% CAGR in FY13-15E
24.316.9
27.134.6
5.0 8.2 8.0 10.0
3.2
2.4
-0.1
1.0
1.63.5 3.5 3.5
-505
10152025303540
FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E
(%)
Volume Realisation
Source: Company, ICICIdirect.com Research,
Exhibit 17: Fan segment sales expected at ~13% CAGR in FY13-15E 24
7.5
296.
5 376.
4 511.
6
545.
6
611.
0
683.
0 777.
6
0100200300400500600700800900
FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E
(| c
rore
)
CAGR 19.8%
CAGR 12.8%
Source: Company, ICICIdirect.com Research
Exhibit 18: Twelfth Plan projections
2007 (Market size in mn)Expected annual growth rate (%)
(2007- 2020)Ceiling Fans (super -efficiency) 4 11Ceiling Fans (higher -efficiency) 6 11
Source: Planning commission, ICICIdirect.com Research
Exhibit 19: Market share of leading players in Indian fan industry (FY13) Company % Market share (in terms of value)Crompton Greaves 20.0Orient Fans 14.9Havells India 13.5Bajaj Electricals 12.2V-Guard 1.6
Source: Company, ICICIdirect.com Research
Product includes domestic and industrial fans:
Domestic: Ceiling, table, pedestal & wall mounted fans,
personal fans and Bajaj-Disney children’s fans
Industrial: Industrial exhaust fans commercial air
industrial fans, circulators, cooler kits and pumps
Page 8ICICI Securities Ltd | Retail Equity Research
Lighting & luminaries: leveraging brand and strong dealer network The lighting business unit of BEL alone contributes ~15% to topline with CAGR of 23.5% over the last five years. The size of the domestic lighting industry (excluding luminaries includes high mast and solid state lighting and LED) is ~| 5500 crore wherein Bajaj Electrical holds ~9% of market share. The wide range of lighting product includes general lighting service lamps (GLS), fluorescent tube lights (FTL), compact fluorescent lamps (CFL) and special purpose lamps. Among all lighting categories, sales of BEL’s CFL recorded stunning CAGR of 33% in FY09-13 backed by various government initiatives to promote power efficient products in India. This along with rising affordability in rural India to buy efficient lighting products like CFL (due to saving on power cost compared to incandescent bulbs with longevity of the product) have boosted CFL sales volume (overall Industry) at 16% CAGR in FY09-12. The company outsource CFL and other lighting products from its sister concern in India, Starlite Lighting and Hindustan Lamp in which BEL holds a substantial stake of 50% and 32%, respectively. BEL has continuously improved its reach by expanding retail network to more than 400,000 outlets in FY13 (which increased from 225,000 in 2008) both in urban and rural areas. It has continued to strengthen distribution network to increase the reach in tier-III and tier-IV towns.
In order to leverage the strong retail network, the company has also forayed into the premium lighting segment with a new range of home decorative lighting and portable LED glow lanterns. We have built in lighting sales CAGR of ~22% in 2013-15E backed by volume growth at ~15% CAGR for the same period. We believe the CFL segment will register strong growth due to rising adoption of energy saving lamps.
Exhibit 20: Volume growth to remain intact due to sustained CFL demand
12.5 15.7 12.7 11.8
22.6 20.115.0 15.0
17.20.8
11.48.3
5.05.0
6.0 6.0
05
101520253035
FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E
(%)
Volume Growth Realisation Growth
Source: Company, ICICIdirect.com Research
Exhibit 21: Lighting segment to grow at 22% CAGR in FY13-15E
178 208 26
1 316 40
7 513 62
5
762
0100200300400500600700800900
FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E
(| c
rore
)
CAGR 23.5%
CAGR 22%
Source: Company, ICICIdirect.com Research
Exhibit 22: Lighting industry records 11% sales CAGR in 2010-12
44505516
0
1000
2000
3000
4000
5000
6000
2010 2012
(| c
rore
)
CAGR 11%
Source: ELCOMA, ICICIdirect.com Research
Exhibit 23: CFL volume contribution to rise ~47% by FY15E
7456
42
19
15
11
730
47
0
20
40
60
80
100
120
2005 2012 2015E*
(%)
Incandescent Lamps Fluorescent Lamps
Compact Fluorescent Lamps
Source: ELCOMA, ICICIdirect.com Research
BEL’s CFL sales recorded stunning sales CAGR of 33%
during FY09-13 backed by various government initiatives
to promote power efficient products in India. We have
built in lighting sales CAGR of ~22% in 2013-15E backed
by volume growth at ~15% CAGR for the same period
Page 9ICICI Securities Ltd | Retail Equity Research
Luminaries: Slower construction activity hit translates into moderate growth BEL’s luminaries segment is divided into luminaries, high intensity discharge (HID) lamps and contributes ~11% to overall topline in FY13. The luminaires segment comprises consumer luminaires, indoor commercial luminaires, industrial luminaires & outdoor luminaires for street lighting and flood lighting. The HID lamp includes mercury & sodium vapour lamps, halogen lamps, metal halide lamps, etc. The segment has recorded ~10% CAGR in FY08-13 driven by 11% volume CAGR. However, rising competition & increased discount led to the pressure in realisation (decline of 1.7% in FY13 from peak of FY08) in the same period. The volume growth can largely be attributed to demand in sophisticated interior lighting devices in offices, homes, restaurants, hotels and various industrial purposes (includes street light, stadium, airports, etc). The size of the overall domestic luminaires industry is ~| 2500 crore (organised) with organised markets constituting ~65-70% in the pie and BEL holding ~15% market share in the organised category. We have built in luminaries segment revenue CAGR of ~9.2% in FY13-15E with volume, realisation CAGR of 6%, 3%, respectively. We believe the main growth drivers for the industry will be rapid urbanisation, growth in retail stores, shopping malls/showrooms, IT parks, leisure, hospitality and government spending on infrastructure.
Exhibit 24: Volume growth to remain muted
21.917.3
12.3 14.4 11.32.3 6.0 6.0
-2.1
3.1
-12.8
0.32.0
0.0
3.0 3.0
-15-10-505
10152025
FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E
(%)
Volume Growth Realisation Growth
Source: Company, ICICIdirect.com Research, Sales from outsourcing
Exhibit 25: Luminaries sales to grow at 9.2% CAGR
232 28
1
275 31
5 358
366 40
0 436
0
100
200
300
400
500
FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E
(| c
rore
)
CAGR 9.6%
CAGR 9.2%
Source: Company, ICICIdirect.com Research
Exhibit 26: Major clients in luminaries segments Industrial Patrons Government Clients IT/ITES clients Banks
Major clients
Tata Steel, Tata Motors, TEC, Religare, L&T, Aditya Birla group, Siemens ,Ranbaxy, etc
Airports Authority of India, Container Corporation of India, NTPC, municipal corporations & councils, naval dockyards, HUDA, etc
TCS, Infosys, Dell, Cognizant
SBI, Axis, PNB, BoB
Source: Company, ICICIdirect.com Research
Exhibit 27: Major overseas tie-ups to bring expertise in domestic market
Company SegmentTrilux Lenze (Germany) Premium technical lighting RUUD lighting (US) LED lightingsDisano, (Italy) Street lightSecuriton (Switzerland) Fire alarm systemsDelta Controls (Canada) Access controls & Building Management System
Tie ups
Source: Company, ICICIdirect.com Research
BEL holds ~15% market share (organised category) in
the luminaries categories. We have built in luminaries’
segment revenue CAGR of ~9.2% for FY13-15E with
volume, realisation CAGR of 6%, 3%, respectively
Page 10ICICI Securities Ltd | Retail Equity Research
Engineering & project segment BEL entered lighting project services in 1960 with the aim of providing lighting packages for power plants and other industrial facilities. The division got its present name in 1994-95 with the emphasis shifting to design and execution of electrical projects. In 2001-02, BEL commenced its high mast and transmission line tower (TLT) manufacturing unit at Ranjangaon near Pune. The idea behind launching this business was to diversify the business from being a lighting and consumer durable player to a strong contender in the engineering and project segments to leverage the strong brand of Bajaj. The business unit is divided into three segments, namely high masts, TLT and special projects. The E&P segment revenue increased four fold from | 178 crore in FY05 to | 690 crore in FY13 while the segment contributes ~20% to the FY13 topline. The segment recorded revenue CAGR of ~13% in FY08-13 while a slowdown in the industrial business and stretched working capital cycle resulted in a decline in EBIT margin from 12.9% in FY08 to -18.1% in FY13. However, BEL’s order book size has increased 67% YoY in FY14 while it is also L1 bidder for orders worth | 500 crore. We believe this, coupled with the company’s plan to execute all low margin projects by Q2FY14 would help in expanding operating margins in H2FY14 onwards.
Exhibit 28: Engineering & project business segment and order book size by end of FY13
Engineering & projects (E&P)Order book: | 1071 crore
Special projectsOrder book: | 613 crore
Order book contribtion:58%
TLTOrder book: | 369 crore
Order book contribtion: 34%
High masts & poleOrder book: | 90 crore
Order book contribtion:8%
Turnkey illumination projects, industrial lighting, airport Lighting, sports lighting, Rural Electrification R-APDRD projects, sub-stations etc
Design, supply, erection and commissioning of transmission lines, and telecommunication towers, monopoles, etc
Design, supply, erection and commissioning of high-masts signages, street light poles, FRP and polysteel structures, etc
Source: Company, ICICIdirect.com Research
Exhibit 29: Segment wise revenue contribution
33% 37% 36% 36% 36% 37%
39% 26% 23% 24% 27% 29%
28% 37% 40% 40% 37% 34%
0%
20%
40%
60%
80%
100%
120%
FY08 FY09 FY10 FY11 FY12 FY13
Towers High Masts Spe Projects
Source: Company, ICICIdirect.com Research
Exhibit 30: E&P segment to grow at 19.3% CAGR in FY13-15E
381.
7 542.
4 736.
8
831.
4
829.
5
687.
9 850.
7 978.
4
0
200
400
600
800
1000
1200
FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E
(| c
rore
)
CAGR 12.5% CAGR 19.3%
Source: Company, ICICIdirect.com Research
The company has galvanising capacity of 40,000 MTPA
and fabrication capacity (including TLT) of 36000 MTPA. In
addition, BEL has high mast fabrication facility of 6000
masts/per annum and 60000 poles
Page 11ICICI Securities Ltd | Retail Equity Research
Special projects
BEL’s special projects division competency exists in three major segments, namely power plant lightings, sports lightings and rural electrification programmes. The company commands ~70% market share in power plant lighting and sports lighting projects. Under the power plant lighting segment, BEL has executed large orders for major companies like NTPC and Bhel. For sports lighting projects, the company has executed some prominent projects, which includes lighting of Mumbai’s Wankhede stadium along with Bangalore’s Chinnaswamy stadium and Jaipur’s Sawai Man Singh (SMS) stadium. BEL has also tied up with UK’s Abacus for sport lightings. The company is also working with all leading consultants like MECON, TCE, MN Dastur, Howe India, EIL Design Ltd & P&D consultants.
This segment contributes ~57% of the total FY14 E&P order book (34% revenue contribution in FY13) and the company is largely focusing on the government’s flagship social programme of electricity to all rural households under the Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY). This scheme was started in 2005 with the target of illuminating ~6 lakh villages (according to census 2001) with capital subsidy allocation of | 4500 crore in the Tenth Plan, | 25,413 crore in the Eleventh Plan and | 23,397 crore in the Twelfth Plan, respectively. In spite of intense competition from major players like GE, Crompton and Kalpataru in the projects business BEL’s special project revenue recorded 17% CAGR in FY08-13. We believe this segment continues to witness order book growth considering the government’s endeavour to electrify rural India and expenses towards modernisation of sport stadia in India.
Exhibit 31: Capital subsidy provided by Government of India under RGGV schemes
15003000 3913
5500 5000 50006000
23397
0
5000
10000
15000
20000
25000
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-17E
Capital subsidy of | 25,413 crore relased by govt under 11th Five Year Plan
Capital subsidy of | 4500 crore relased by govt under 10th Five Year Plan
Capital subsidy of | 23397 crore planned by govt under 12th Five Year Plan
Source: MoP, ICICIdirect.com Research
Exhibit 32: Highlight of major special projects
Source: Company, ICICIdirect.com Research
The company commands ~70% market share for power
plant lighting and sports lighting projects. Under the power
plant lighting segment, BEL’s major clients are NTPC and
Bhel. For sports lighting projects, BEL has executed
projects for Mumbai’s Wankhede stadium along with
Bangalore’s Chinnaswamy stadium and Jaipur’s SMS
stadium
Page 12ICICI Securities Ltd | Retail Equity Research
Transmission line tower business BEL has entered the transmission line tower (TLT) business in the year 2002 and accepts turnkey projects, which include design, supply, erection and commissioning of transmission lines and telecommunication towers. The plant manufactures a range of towers of 110, 132, 220, 400, 765 kilovolt (kv) single/double circuit power transmission lines. BEL has executed various projects for Power Grid Corporation of India (PGCIL) (see exhibit 32). The TLT business contributes ~37% to the E&P topline with 15%revenue CAGR in FY08-13. In this segment, BEL faces intense competition from various established players like KEC, Kalpataru, Jyoti and L&T. We believe the government’s endeavour to add ~17683 ckm of transmission line under the Twelfth Plan with Power Grid’s capex plan of | 22500 crore by the end of FY16 will help in driving BEL’s topline for FY14E-15E.
Exhibit 33: Transmission line towers growth
5203
4
7945
5
1157
42
1463
71 1903
51 2427
99
2604
82
0
50000
100000
150000
200000
250000
300000
6th plan 7th plan 8th plan 9th plan 10thplan
11thplan
12thplan
(Ckm
s)
Source: CEA, ICICIdirect.com Research
Exhibit 34: PGCIL capex plans
20037
2215022450 22500 22550
18500190001950020000205002100021500220002250023000
FY13 FY14E FY15E FY16E FY17E
(| c
rore
)
Source: PGCIL, ICICIdirect.com Research
High masts & poles division The high masts & pole division includes turnkey projects of design, development, manufacturing and site erection of high masts & signage boards. The company is the market leader in the segment executing major projects such as street light project on the Western Express Highway (for Reliance Infrastructure) and Bandra Worli Sea Link Mumbai and NH-45 in Tamil Nadu. High masts projects are for RIL, Jamnagar, BORL Bina- Bina refinery and signages for HPCL, BPCL, and IOCL. The high masts and pole division recorded 6% CAGR over FY08-13. We believe the company will benefit from the government’s social spending (like JNNURM) in developing road and rural infrastructure (street lighting and signage board).
Exhibit 35: Number of projects and approved cost under JNNURM
SectorNumber of
Projects Approved cost (| crore)Number of
ProjectsApproved cost (|
crore)
Water Supply 158 20562 453 8901
Sewerage 112 14993 89 2833
Drainage 73 8404 67 790Solid Waste Management 45 2092 56 342
Roads & Fly overs 101 8482 120 1082
MRTS 21 5212 - -
Others 44 2508 22 73
Total 554 62253 807 14021
UIG UIDSSMT
Source: JNNURM, ICICIdirect.com Research
As on June 2012, 554 projects at a total cost of | 62253
crore have been sanctioned under Urban Infrastructure
and Governance (UIG) with | 14021 crore under urban
infrastructure development for small and medium towns
scheme (UIDSSMT) for total 807 projects
Page 13ICICI Securities Ltd | Retail Equity Research
Exhibit 36: E&P segment details
Projects Major customers Brand Position Major Orders CompetitorsPower plant lighting: More than 20 power plants of NTPC, Bhel, Reliance Infra, BSES Dahanu, etc.Sports Lightings: National Games-2009 at Ranchi, Balewadi-Common wealth youth games,Cricket stadium: Chennaswamy stadium- Bangalore, Green park stadium- Kanpur, SMS Stadium- Jaipur, National Games 2002- Hyderabad, National Games 2007 Guwahati
Rural Electrification: Rajiv Gandhi Vidyutikaran Yojana
High mast & polesStreet light: PWD Delhi, MACD-Nagpur, Cidco Mumbai, NH45 Tamil Nadu, Reliance Infra-Western Express Highway Mumbai
High masts/area lighting: BORL Bina- Bina refinery, Bhilai steel plant, REL Krishnapatanam, RIL Jamnagar
Signages: HPCL, BPCL, Indian oil, Reliance etc
For TLT-PGCIL, Tata, SEBs, etc
For TCT- GTL, Ericson, Nortel, Bharti, BSNL, Reliance
Philips, Crompton, BP Projects, GE, Utkal
Galvaniser
Reliance Group, Siemens, BPCL, HPCL, IOCL, NHAI, PWD, CPWD, municipal corporations, port trusts, L&T
Leader in high masts lightings
TowersNew entrant in this segment
PGCIL- Almati, PGCIL-400 kv, Koldam, PGCIL-765 kv PK-A5, PGCIL-765 kv PK-A7, MSETCL PK- 801 A, MSETCL PK- 801 B,
KEC, Kalpataru, Jyoti, L&T
NTPC, Bhel, SEBs, AAISpecial Projects
Leader in sports lighting projects and power plant lighting (70% by BEL)
Philips, GE, Crompton, IVRCL, NCCL, ICOMN,
KBL, Kalpataru
Source: Company, ICICIdirect.com Research
Pan-India presence through strong dealer network Bajaj Electricals, being one of the oldest consumer durable companies in the country has a pan-India presence through a strong dealer and retail network. The company has 2200+ distributors and 4100+ dealers across India. Further, Bajaj’s lighting solutions are available in over 400,000 retail stores while fans and appliances are available at over 86,000 and 45,000 retail stores across India. In order to leverage its strong brand, BEL has taken an initiative to reach directly to the consumer through opening retail chain ‘Bajaj World’ (pure franchise model) for appliances and lighting products. Currently, the company has 40 exclusive Bajaj showrooms i.e. Bajaj World across major cities in India. BEL plans to increase the number of stores to over 75 by the end of FY14. The company also plans to go international through franchise agreements. BEL has recently opened one store in Nepal and plans to open Bajaj World in Ghana, Nigeria, Sri Lanka and South Africa in the coming future.
Exhibit 37: Strong dealer network across India
Distribution Network 2009 2013Branches 19 19Distributors 600 2200Dealers - 4100Service Centres 240 250Retailers Lighting 400000Retailers Appliances 45000Retailers Fans 86000
300000
Source: Company, ICICIdirect.com Research
Page 14ICICI Securities Ltd | Retail Equity Research
Lower advertisement expenses compared to competitors BEL’s advertisement expenses (excluding E&P segment) over the years remained lower as compared to its close competitors like Havells India and V-Guard Industries. The lower advertisement expenditure can largely be attributed to the company’s focus on maintaining its EBITDA margin (since the company is largely into the trading business) through managing variable cost. We believe the near competitor (considering the scale of business) Havells India’s standalone advertisement expenses have recorded a CAGR of ~29% during FY07-13 against BEL’s advertisement expense of ~16% CAGR during the same period. However, in order to improve visibility, the company has decided to increase the advertisement allocation by 74% YoY to | 75 crore for FY14 on the occasion of 75th anniversary. We believe higher advertisement expenditure would be partially offset by an improvement in earnings from E&P.
Exhibit 38: Lower advertisement expenditure (excluding E&P segment) compared to peer
2.02.6
2.3
3.6
2.53.1 3.4
2.4 2.1 1.9 2.2 1.9 1.8 1.6
5.45.7
5.1 5.1
3.8 4.14.5
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
FY07 FY08 FY09 FY10 FY11 FY12 FY13
(%)
Havells (Standalone) Bajaj Electricals V-Guard
Source: Company, ICICIdirect.com Research
Asset light model: outsourcing manufacturing BEL follows an asset light model strategy through outsourcing more than ~95% of its consumer and lighting products (both categories together contribute ~80% to total topline) from either domestic or international markets (China). Under the imported products category, Bajaj imports 40% of MRL’s revenue, ~20% of appliances’ revenue and ~10% each of fan and lighting’s revenue. However, the company’s international outsourcing of fan has declined from 60% last year to 30% current year. Further, BEL plans to allocate a significant chunk (~65%) of total capex (| 60-65 crore) into R&D expenses to introduce new product categories such as induction LED products, cook top, invertors, stabilisers and pumps along with generator. With low capex, outsourced categories earn much higher RoCE. Going forward, it does not have any major plans to add to its own capacities (FY15 capex | 20-25 crore). This would help the company to maintain overall return ratios of the company in future.
Exhibit 39: BEL’s sourcing destinations Segments Own Outsourced Outsourcing destinationsFans √ √ Hyderabad, Himachal Pradesh, ChinaAppliances - √ Noida, Delhi, Himachal Pradesh, ChinaElectrical lamps & tubes* - √ Uttar PradeshCFL* - √ NashikLuminaires - √ Daman, Himachal Pradesh, ChinaHigh Masts, Poles & Towers √ - -
Source: Company, ICICIdirect.com Research, *manufactured by sister concern,
In order to improve visibility, the company has decided to
increase the advertisement allocation by 74% YoY to | 75
crore for FY14 on the occasion of 75th anniversary
BEL follows an asset light model strategy through
outsourcing more than ~95% of its consumer and lighting
products. The company outsources majority of its products
from domestic markets. Import contributes ~13-14% to the
overall topline in FY13
Page 15ICICI Securities Ltd | Retail Equity Research
E&P segment shadows working capital BEL’s main concern is a higher working capital cycle (~7% of sales in FY13) compared to other branded players (Havells’ working capital cycle is ~4% of sales in FY13). Slower project execution cycle, cost overruns coupled with almost flattish revenue growth in the E&P segment (due to a slowdown in the transmission and distribution industry) took a toll on overall EBITDA margins (declined ~430 bps YoY) of FY13. However, BEL has put in place efforts to rationalise the working capital requirement (20% of sales in FY10 to ~7% of sales in FY13) by reducing debtors’ days (from 123 days in FY11 to 101 days in FY13). We believe the stretched working capital of BEL would get eased, going forward, with an improvement in the project execution cycle, which will finally result in a recovery in the EBITDA margin.
Exhibit 40: Net working capital as percentage of sales
11.3
6.3
2.0 1.9 2.44.3
16.214.1
22.1
27.7
19.3 20.219.6
15.8
20.0
8.49.9
6.8
0
5
10
15
20
25
30
FY08 FY09 FY10 FY11 FY12 FY13
(%)
Havells V-Guard Bajaj Electricals
Source: Company, ICICIdirect.com Research
By the end of FY13, BEL’s order book stood at | 1071 crore for 89 projects. These 89 projects include 15 old projects (of FY13), which are low margin or loss making projects. BEL believes it will complete ~76 projects (including old projects) by the end of FY14E (including old projects), which also includes higher margin projects from PGCL. We believe the company’s EBIT loss will get minimised in FY14 as losses from old projects (constitutes ~40% of order book) would be partially offset by gains from good margin projects (constitutes ~60% of order book).
Exhibit 41: Order book position by end of FY12
High Masts21%
TLT30%
Special Projects49%
Source: Company, ICICIdirect.com Research
Exhibit 42: Order book position by end of FY13
Special Projects58%
TLT34%
High Masts8%
Source: Company, ICICIdirect.com Research
BEL’s main concern is higher working capital cycle mainly
due to higher debtor days in the E&P segment. However,
the company is aiming to improve its working capital cycle
by exiting lower margin projects, which would help in
reducing debtor days
Page 16ICICI Securities Ltd | Retail Equity Research
Key Financials Consumer segment growth intact, E&P to drive topline BEL has recorded strong sales CAGR of 19.7% in FY08-13 led by 24.6% revenue CAGR in the consumer durables segment followed by lighting business CAGR of 16.5% during the same period. The E&P segment revenue recorded sales CAGR of 12.5% during FY08-13, lower than the other two segments largely due to lower project execution rate and increased competition. We have modelled lighting segment sales CAGR of 16.8% for FY13-15E largely driven by sustained demand for energy saving products like CFL. Under the consumer durables segment, we have built in segment revenue CAGR of ~18%, supported by demand from tier-III cities and rural India. For the E&P segment we have modelled sales revenue CAGR of ~19% for FY13-15 (higher than historical growth of 12.5% during FY08-13) backed by the company’s plan to improve its execution cycle by completing old pending projects by the end of Q2FY14.
Exhibit 43: Net sales to grow at ~18% CAGR in FY13-15E
1373
.2
1764
.1 2227
.2 2739
.4
3094
.2
3380
.9 4038
.0 4737
.4
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E
(| c
rore
) CAGR 19.7
CAGR 18.4
Source: Company, ICICIdirect.com Research
Exhibit 44: Company’s leading segment performance and future growth projection
(| crore) FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E CAGR FY08-13 CAGR FY13-15ELighting 410.2 488.4 535.9 631.1 764.6 879.1 1025.0 1198.7 16.5 16.8Consumer Durable 611.4 756.0 954.4 1276.9 1500.1 1838.5 2162.3 2560.4 24.6 18.0Engineering & Project 381.7 542.4 736.8 831.4 829.5 687.9 850.7 978.4 12.5 19.3
Source: Company, ICICIdirect.com Research,
The topline is expected to grow at a CAGR of 18% during
FY13-15E to | 4737 crore in FY15E from | 3381 crore
during FY13 led by growth in the CD segment
Page 17ICICI Securities Ltd | Retail Equity Research
E&P performance to aid in revival of depressed margin EBITDA margins plunged sharply in FY13 to ~3% largely due to losses in the E&P segment. The company recorded an EBIT loss of | 124 crore in the E&P segment during FY13. In addition, purchase of traded goods increased sharply by 17% YoY during FY13 (increased ~500 bps YoY as percentage of sales). We believe sustained growth in revenue from consumer durable and lighting segment will maintain the margin while recovery in E&P segment (due to timely execution of new projects) will aid margins. We have modelled EBITDA margin of 4.3% and 5.7% for FY14E, FY15E, respectively, considering improved project execution cycle and focus of higher margin projects going forward. However, our margin estimates are still below FY12 level, considering BEL’s plan to increase advertisement outlay in FY14E-15E.
Exhibit 45: Exiting lower margin projects to help drive margins
10.510.0 10.1
8.47.3
3.0
4.3
5.7
0
2
4
6
8
10
12
FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E
(%)
Source: Company, ICICIdirect.com Research
Recovery in margin leads to growth in profit We believe the sharp dip in PAT by ~57% during FY13 can largely be attributed to a reduction in margin on account of BEL’s E&P business. However, a recovery in margin coupled with a leash on interest outgo (due to reducing working capital requirement) for FY14E and FY15E would help drive BEL’s bottomline, going forward. We believe the bottomline of the company will grow at ~34% YoY in FY14E and ~102% YoY in FY15E, respectively.
Exhibit 46: Net profit to grow at ~6% CAGR in FY12-15E
73.1
89.4
117.
1
143.
8
117.
9
51.2
68.6
138.
6
0
20
40
60
80
100
120
140
160
FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E
(| c
rore
)
Source: Company, ICICIdirect.com Research,
We expect operating margins to have bottomed out in
FY13 and expect the EBITDA margin to recover in FY14E-
15E. However, the recovery in margin would be below its
five year average margin (FY08-12)
We expect the net profit to grow at a CAGR of 6% in
FY12-FY15E
Page 18ICICI Securities Ltd | Retail Equity Research
Improved operating cash flow to drive return ratio BEL’s return ratios remained under pressure post FY10 due to higher working capital requirement for the E&P business. We believe the company’s return ratios have bottomed out in FY13, when the company took major steps to complete the project by taking a hit in earnings. Further, capex funding through internal accrual with improvement in cash flow from operation would help keep BEL’s debt requirement low.
Exhibit 47: Strong return ratio on the back of sustained earning growth
33.2 33.530.5
24.0
9.8
16.3
24.0
41.9
23.7 23.5
16.8
7.0 8.9
15.7
36.6
36.5
05
1015202530354045
FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E
(%)
RoCE RoNW
Source: Company, ICICIdirect.com Research,
Exhibit 48: D/E at comfort level
1.4
0.9
0.30.2
0.3 0.2 0.2 0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E
(x)
BEL raised | 161 crore through QIP route and entire amount have been utilized in repayment of debts
Source: Company, ICICIdirect.com Research
We believe the improved free cash flow for the company
would result in higher dividend payout. In turn, this would
improve the return ratios of the company
BEL’s debt/equity declined significantly during FY10 after
company raised ~| 161 crore through QIP route to de-
leverage the balance sheet. Henceforth, company
managed to keep its debt/equity at comfort zone despite
muted performance by E&P segment
Page 19ICICI Securities Ltd | Retail Equity Research
Risk & concerns Highly competitive industry Although Bajaj Electrical has remained a strong brand in the consumer durable segment for the last 75 years, the industry has faced regular competition from the unorganised sector due to a low entry barrier. Further, BEL’s entry into newer segments, which are highly competitive in nature, poses a risk of overcapacity. This could lead to a contraction in margins, going forward.
Currency risk The company’s imports content contributes ~13% to the topline, which includes 40% of Morphy Richards, 20% of appliances, 10% each of lighting and fans. Rupee depreciation over an extended duration could put pressure on margins in the near term.
Slowdown in E&P business A slowdown in the power transmission and distribution industry and slower rate of project execution has hit the company’s segment revenue. This led to stretched working capital requirement and finally hit margin. However, the company is expected to complete loss making projects by the end of Q2FY14. There is also stiff competition in the segment due to the presence of major players like Kalpataru Power and Jyoti Structures. We believe any cut in government expenditure under RGGVY and transmission line towers would hurt the company’s performance.
Exhibit 49: Net working capital days
45
3036
4248
36
0
10
20
30
40
50
60
FY08 FY09 FY10 FY11 FY12 FY13
(day
s)
Source: Company, ICICIdirect.com Research
Exhibit 50: Free cash flow (| crore)
47.7
100.7
-31.3
90.7
22.3
115.0
-40
-20
0
20
40
60
80
100
120
140
FY08 FY09 FY10 FY11 FY12 FY13
(day
s)
Source: Company, ICICIdirect.com Research
Page 20ICICI Securities Ltd | Retail Equity Research
Valuation Bajaj Electricals, despite being a dominant play in the lighting and consumer durable segment (contributes ~80% of topline) with a strong dealer network, has paid the price for poor execution in the E&P business. The slowdown in the E&P segment has hit margins, which have shrunk from their peak of 10.5% in FY08 to 3% in FY13 in the last five years. Poor EBITDA margins with rising working capital requirement (due to a delay in execution of E&P projects) resulted in a sharp multiple contraction. Compared to its close competitor like Havells, BEL is trading at ~30% discount (~12x of FY15E earnings) to its earnings. This is on account of the company’s large presence in the economic product category and focus on distribution push strategy than consumer pull strategy. The stock has traded at a mean earning multiple of 14x one year forward in the last eight years. At the current price, the stock has been trading at a PE multiple of 24x FY14E and 12x FY15E earnings. On EV/EBITDA multiple, it is trading at ~10x FY14E and ~7x FY15E EBITDA. We believe the stock is trading at attractive multiples considering the strong performance of the consumer durable & lighting business and recovery in the E&P segment. We have valued the company on a sum of the parts (SOTP) basis by valuing the lighting, CD and E&P business separately. The company has successfully leveraged its brand to create a huge retail network of 45,000 for appliances, 86,000 for fans and over 400,000 for lighting across India. Hence, we have valued the consumer durable business at 10x FY15E EBITDA, at ~20% discount to Havells’ CD segment and lighting business at 4x FY15E EBITDA at ~30% discount to Havells lighting business. On the E&P front, we believe BEL will narrow its losses to ~| 138 crore and | 50 crore in FY14E and FY15E, respectively, by executing high margin projects. This will help reduce the company’s working capital requirement with an improvement in return ratios, going forward. We have valued the E&P business at 3x FY15EV/EBITDA, at ~15% discount to Jyoti Structure. We are initiating coverage on the stock with a BUY rating.
Exhibit 51: SOTP valuation
(| crore) EBITDA EV/EBITDA EV
Lighting 66.3 4 232.1
Consumer Durable 190.2 10 1807.2
EPC 13.5 3 40.5
Enterprise Value 2079.7
Debt 160.0
Cash 28.8
MCAP 1948.5
No of shares 10.0
Target price/share 195
CMP 165
Upside/(Downside) (%) 18 Source: Company, ICICIdirect.com Research
Exhibit 52: Competitor’s valuation matrix (in | crore)
FY12 FY13 FY14E FY15E FY12 FY13 FY14E FY15E FY12 FY13 FY14E FY15E FY12 FY13 FY14E FY15E FY12 FY13 FY14E FY15E FY12 FY13 FY14E FY15EBajaj Elec 1646 3094 3381 4038 4737 225.5 101 174 270 118 51 69 139 14 32 24 12 8 17 10 7 17 7 9 16V Guard 1483 994 1360 1655 2006 94 110 145 176 51 63 83 105 29 24 18 14 17 15 11 9 24 24 25 26Havells 8061 6518 7248 7736 8690 657 669 744 874 370 581 436 547 27 22 14 18 15 13 13 11 39 40 25 27Jyoti Str 181 2592 2802 3125 3522 280 283 315 334 86 66 73 75 2 3 2 2 3 3 3 4 13 9 9 9Kalpataru Pow 967 3019 3286 3952 4247 329 322 383 420 165 137 165 197 6 7 6 5 4 5 4 4 9 7 8 9
ROEEBITDA Net Profit PE EV/EBITDAPeer group
Mcap (in crore)
Sales
Source: Bloomberg, ICICIdirect.com Research
Page 21ICICI Securities Ltd | Retail Equity Research
Exhibit 53: One-year forward P/E (x)
0
50
100
150
200
250
300
350
26-M
ar-0
4
26-S
ep-0
4
26-M
ar-0
5
26-S
ep-0
5
26-M
ar-0
6
26-S
ep-0
6
26-M
ar-0
7
26-S
ep-0
7
26-M
ar-0
8
26-S
ep-0
8
26-M
ar-0
9
26-S
ep-0
9
26-M
ar-1
0
26-S
ep-1
0
26-M
ar-1
1
26-S
ep-1
1
26-M
ar-1
2
26-S
ep-1
2
26-M
ar-1
3
(Pric
e) 25x
20x15x
10x
Source: Company, ICICIdirect.com Research
Exhibit 54: One-year forward EV/EBITDA (x)
0
500
1000
1500
2000
2500
3000
3500
4000
Apr-0
9
Jul-0
9
Oct-0
9
Jan-
10
Apr-1
0
Jul-1
0
Oct-1
0
Jan-
11
Apr-1
1
Jul-1
1
Oct-1
1
Jan-
12
Apr-1
2
Jul-1
2
Oct-1
2
Jan-
13
Apr-1
3
Jul-1
3
Oct-1
3
Jan-
14
10x
8x
6x
4x
Source: Company, ICICIdirect.com Research
Exhibit 55: One year average P/E
05
1015202530354045
1-Ap
r-05
1-Oc
t-05
1-Ap
r-06
1-Oc
t-06
1-Ap
r-07
1-Oc
t-07
1-Ap
r-08
1-Oc
t-08
1-Ap
r-09
1-Oc
t-09
1-Ap
r-10
1-Oc
t-10
1-Ap
r-11
1-Oc
t-11
1-Ap
r-12
1-Oc
t-12
(x)
38x
14x
2x
Source: Company, ICICIdirect.com Research
Page 22ICICI Securities Ltd | Retail Equity Research
Exhibit 56: Income statement (| Crore)
(Year-end March) FY11 FY12 FY13 FY14E FY15ENet Sales 2,739.4 3,094.2 3,380.9 4,038.0 4,737.4 ExpensesRaw Material Expenses 173.6 222.4 169.2 173.6 208.4 (Increase)/Decrease in stocks (77.2) (47.7) (45.5) - - Purchase of traded goods 1,996.9 2,175.3 2,544.2 2,947.8 3,458.3 Employee Expenses 124.6 149.5 167.3 201.9 232.1 Marketing Expenses 60.4 85.3 93.8 161.5 142.1 Other expenses 230.0 284.0 350.7 379.6 426.4 Total Operating Expenditure 2,508.2 2,868.7 3,279.7 3,864.4 4,467.4 EBITDA 231.2 225.5 101.2 173.6 270.0 Other Income 18.0 19.2 23.6 18.3 23.6 Interest 36.6 63.1 69.0 71.6 66.3 PBDT 212.6 181.6 55.8 120.4 227.3 Depreciation 10.8 12.5 14.5 17.9 20.4 PBT before Exceptional Items 201.8 169.1 41.4 102.4 206.9 Less: Exceptional Items (16.8) (6.8) (27.6) - - PBT 218.6 175.9 69.0 102.4 206.9 Total Tax 74.8 58.1 17.8 33.8 68.3 PAT 143.8 117.9 51.2 68.6 138.6 EPS 14.4 11.8 5.1 6.9 13.9
Source: Company, ICICIdirect.com Research
Exhibit 57: Balance sheet
X
(| Crore)
(Year-end March) FY11 FY12 FY13 FY14E FY15EEquity Capital 19.8 19.9 20.0 20.0 20.0 Reserve and Surplus 591.3 679.9 708.7 754.4 860.3 Total Shareholders funds 611.1 699.8 728.6 774.4 880.3 Total Debt 112.2 187.2 160.0 180.0 160.0 Liability side total 723.3 887.1 888.7 954.5 1,040.4 AssetTotal Gross Block 227.5 270.9 323.5 393.5 423.5 Less Total Accumulated Depreciation 74.3 86.9 97.0 114.9 135.4 Net Block 153.1 184.0 226.4 278.5 288.1 Total CWIP 0.2 3.0 5.9 5.9 5.9 Total Fixed Assets 153.3 187.0 232.3 284.4 294.0 Other Investments 36.6 44.1 29.8 34.8 44.8 Inventory 294.6 355.2 421.2 503.1 590.6 Debtors 911.2 921.8 937.9 1,051.0 1,233.0 Loans and Advances 67.9 92.4 140.6 167.9 197.0 Cash 48.5 53.7 50.1 40.7 28.8 Total Current Assets 1,322.2 1,423.2 1,549.8 1,762.7 2,049.3 Creditors 770.0 832.6 982.3 1,173.2 1,376.5 Provisions 73.1 79.7 78.2 81.0 95.0 Total Current Liabilities 1,042.4 1,064.5 1,268.6 1,502.8 1,763.1 Net Current Assets 279.8 358.7 281.2 259.9 286.2 Deferred Tax Assets 2.0 1.9 7.9 7.9 7.9 Assets side total 723.3 887.1 888.7 954.5 1,040.4
Source: Company, ICICIdirect.com Research
The topline of the company is expected to grow at a
CAGR of ~18% during FY13-15E to | 4737 crore in FY15E
from | 3381 crore during FY13 supported by the CD and
lighting segment
We expect operating margins to have bottomed out in
FY13 and EBITDA margin to recover in FY14E-15E.
However, the recovery in margin would be below its five
year average margin (FY08-12)
BEL plans to allocate a significant chunk (~65%) of total
capex (| 60-65 crore) into R&D expenses to introduce
new product categories such as induction LED products,
cook top, invertors, stabilisers, pumps and generators
Page 23ICICI Securities Ltd | Retail Equity Research
Exhibit 58: Cash flow statement
(| Crore)(Year-end March) FY11 FY12 FY13 FY14E FY15EProfit after Tax 143.8 117.9 51.2 68.6 138.6Depreciation 10.8 12.5 14.5 17.9 20.4CF bef working capital changes 191.2 193.4 134.6 158.1 225.3
Net Increase in Current Assets (135.9) (95.7) (130.3) (222.3) (298.6)Net Increase in Current Liabilities 350.8 22.1 204.1 234.2 260.3Net CF from operating activities 406.1 119.8 208.5 170.1 187.1
(Purchase)/Sale of Fixed Assets (59.8) (46.2) (59.8) (70.0) (30.0)Long term loans and advances (97.2) (11.8) 36.4 10.0 10.0Other non current assets (154.4) (32.0) (78.5) (40.0) (50.0)Other Investments (0.0) (7.5) 14.3 (5.0) (10.0)Deferred Tax Assets (1.5) 0.1 (6.0) 0.0 0.0Net Cash flow from Investing Activities (315.5) (97.4) (93.5) (105.0) (80.0)
Inc / (Dec) in Equity Capital 0.3 0.2 0.0 0.0 0.0Inc / (Dec) in Loan Funds (39.7) 75.0 (27.2) 20.0 (20.0)Total Outflow on account of div (32.3) (32.7) (23.4) (23.4) (32.7)Net CF from financing activities (103.4) (17.2) (118.5) (74.5) (119.0)
Net Cash flow (12.7) 5.2 (3.6) (9.4) (12.0)Cash & Cash Equi at the beg. 61.2 48.5 53.7 50.1 40.7Closing Cash/ Cash Equi 48.5 53.7 50.1 40.7 28.8
Source: Company, ICICIdirect.com Research
Exhibit 59: Ratio analysis
(Year-end March) FY11 FY12 FY13 FY14E FY15EPer Share DataEPS 14.4 11.8 5.1 6.9 13.9 Cash EPS 15.5 13.1 6.6 8.7 15.9 BV 61.3 70.2 73.1 77.6 88.2 DPS 2.8 2.8 2.0 2.0 2.8
Operating RatiosEBITDA Margin 8.4 7.3 3.0 4.3 5.7 PAT Margin 5.2 3.8 1.5 1.7 2.9
Return RatiosRoE 23.5 16.8 7.0 8.9 15.7 RoCE 30.5 24.0 9.8 16.3 24.0 RoIC 52.3 39.7 17.6 28.9 41.9
Valuation RatiosEV / EBITDA 7.4 7.9 17.3 10.3 6.6 P/E 12.4 14.5 53.6 24.0 11.9 EV / Net Sales 0.6 0.6 0.5 0.4 0.4 Sales / Equity 4.5 4.4 4.6 5.2 5.4 Market Cap / Sales 0.6 0.5 0.5 0.4 0.3 Price to Book Value 2.7 2.4 2.3 2.1 1.9
Turnover RatiosAsset turnover 4.0 3.8 3.8 4.4 4.7 Debtors Turnover Ratio 3.0 3.4 3.6 3.8 3.8
Creditors Turnover Ratio 3.6 3.7 3.4 3.4 3.4
Solvency RatiosDebt / Equity 0.2 0.3 0.2 0.2 0.2 Current Ratio 1.3 1.3 1.2 1.2 1.2 Quick Ratio 1.0 1.0 0.9 0.8 0.8
Source: Company, ICICIdirect.com Research
We believe the improved free cash flow for the company
would result in higher dividend payout. In turn, this would
improve the return ratios of the company
We believe execution of low margin businesses during
FY14 would reduce the working capital requirement and,
hence, help in improving return ratios, going forward