Hold Bajaj Electricals; target of Rs 470: ICICI Direct
ICICI Direct’s research report on Bajaj Electricals
Bajaj Electricals recorded strong to pline growth of ~89% YoY in Q3FY19 led by ~157% YoY growth in engineering & project (E&P) division due to fast execution of EPC orders from Uttar Pradesh. Consumer durable (CD), which includes appliances and lighting business grew ~27% YoY led by ~40% YoY growth in appliances category. However, lighting segment sales were muted owing to continued pricing pressure in the LED segment. Within the appliances category, Morphy Richards recorded ~33% YoY EBITDA margins slightly increased 24 bps YoY to 6.4% during Q3FY19. EBIT margin of CD business increased 75 bps YoY to 7.3% led by higher operating leverage while EBIT margin of E&P segment recorded a marginal decline of 25 bps YoY at 5.6% owing to higher raw material cost. Despite higher interest cost (increase in debt level resulted in ~2x jump in interest outgo), the company recorded PAT growth of ~74% YoY in Q3FY19 We introduce FY21E estimates with revenue CAGR of ~14% in FY18-21E led by CD revenue CAGR of 17%.
We believe Bajaj being a strong brand in the consumer product category would gain market share from unorganised players post implementation of GST with increase in dealer network, resulting in segment revenue CAGR of ~17% in FY18-21E. However, the future outlook of E&P segment remained cloudy over cost escalation and delay in payment post elections, which may drag operating margins of the segment. This, along with rising working capital debt level, would keep the profitability of the segment under check. We introduce FY21E estimate with revenue, earning CAGR of 14%, 45%, respectively. We roll over our valuation on FY21E and cut target price to Rs 470/share with a HOLD rating.
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