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Hold Bajaj Electricals; target of Rs 525: ICICI Direct

June 25
22:25 2019

ICICI Direct’s research report on Bajaj Electricals

Bajaj Electricals’ (BEL’s) performance was largely marred by the engineering & project business (EPC) wherein the topline grew a mere 7% YoY whereas profitability declined ~700 bps YoY to 4.2% in Q4FY19. However, the consumer durable (CD) business recorded decent topline growth of ~15% YoY with marginal increase in EBIT margin by 40 bps YoY to 6.2%. Hence, BEL’s topline growth of ~10% YoY (I-direct estimate: ~14% YoY) was largely driven by CD business. EBITDA margin declined sharply by ~450 bps YoY at ~4% (I-direct estimate: 5%) due to lower profitability in the EPC business. Higher interest cost (up ~171% YoY) was largely due to a sharp increase in working capital requirement of EPC business. The management expects a decline in working capital requirement in FY20E with completion of UP projects, thus reducing overall debt, going forward. We believe the EBITDA margin will remain higher at ~7% (compared to five year average of 5%) led by higher profitability in the CD business that would also help drive overall PAT at a CAGR of 16% in FY19-21E.

Outlook

Though we are positive on BEL’s CD business (strong brand with reach of about ~200,000 touch points) the lumpiness of EPC business is weighing on overall profitability on BEL with higher debt level. On an SOTP basis, we value BEL’s CD segment MCap at 1.4x FY21E sales (~40% discount to peers) and E&P segment at 6x FY21E EV/EBITDA. We maintain our HOLD rating.

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