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  • Stock Recommendation | BAJAJ ELECTRICALS LTD - ACCUMULATE - Target price : Rs 545

    Publish date: OCTOBER 03, 2018

    We note that BAEL stock has fallen sharply post Q1FY19 result and current valuations looks reasonable vis-à-vis potential growth in earnings going ahead. In view of upside from current levels, we upgrade our recommendation to 'ACCUMULATE' from 'SELL' earlier; maintain target price at Rs 545.

    □ In our earnings model, we build 1/ cautious view on sales and margin come back in the consumer business post RREP implementation and 2/ deterioration in working capital requirement and debt accretion on balance sheet driven by higher proportion of E&P business.
    □ RREP roll out has been encouraging so far and company would likely report recovery from the current year onwards. Currently BAEL has covered nearly 85-90% of its distribution under RREP.

    We still maintain BAEL valuation discount vis-à-vis the peer group due to 1/ lower margin/return ratios and 2/ company's presence in capital intensive E&P business. We maintain SOTP based target price of Rs 545. Due to upside to our target price we change rating to 'Accumulate' on company's stock.

    We project revenue growth at 19% CAGR between FY18-10 on back of 20% CAGR growth in lighting and consumer durable business, in the same period. We build higher margin in consumer business in FY20, driven by operating leverage.
    In E&P business, we build revenue growth at 18% CAGR between FY18-20 driven by current order book at Rs 76.5 Bn. We project EBIT margin at 6% in FY19/20 for the segment.
    BAEL management has stated that the loss making legacy orders in E&P business are over and current orders enjoys superior margins. E&P order book at the end of Q1FY19 stood at Rs 76.5 Bn. USD 4.2 mn power distribution turnkey order in Africa (Zambia) and c. Rs 50 Bn in UP (rural power distribution project) it won in FY18.
    BAEL launched RREP (Retail reach expansion program) in FY16 to reach out to dealers more efficiently as against traditional wholesaler based model of selling. The RREP programs (TOC-Theory of constraints based model) is currently under implementation and has had diminishing effect on company's primary sales over the last few quarters. Management has earlier highlighted that TOC model would start yielding benefits (partially) form FY18 onwards. However, full benefits from TOC based distribution model are expected to materialize from FY18.
    Management believes that TOC based RREP model would provide benefits in terms of 1) improved engagement with dealers, 2) establish efficient feedback mechanism, 3) expand product reach for premium/newly launched products and 4) achieve lower inventory levels.
    Under RREP (where supply chain is highly centralized) company is optimistic of seeking benefits from 1) improved purchases in terms of bulk buying, 2) savings from lower investment in ideal inventory (slow moving products) and 3) reduction in discounts offered to large wholesalers.
    As a second step under TOC based selling, company would aim at increasing sales and expect recovery from FY18 onwards. We suspect that the company has lost market share in the past few quarters (reflected in company's poor sales in last few quarters' vis-à-vis competitors). As of now, TOC covers nearly 90% of distributors.
    We note that in the past, some of the other competitors have also made attempts to realign the distributor discounts. For instance, in FY16 Havells too has averted the practice of offering additional discounts to the large distributors and had experiences temporary fall in sales. However, we fail to identify any major players who have completely done away with wholesalers' based selling. Most of the players, we believe have resorted to a combination (40-60 or 50-50) of wholesalers and direct selling model. We therefore believe that the company would have to be swift and efficient in ramping up sales (by means of aggressive advertising campaigns to create demand pull) post full commencement of RREP and regain lost market share. We believe that the successful rollout of RREP is critical for the company and remain watchful of the developments and progress made in this direction.
    We still maintain BAEL valuation discount vis-à-vis the peer group due to 1/ lower margin/return ratios and 2/ company's presence in capital intensive E&P business. We maintain SOTP based target price of Rs 545. Due to upside to our target price we change rating to 'Accumulate' on company's stock.
    Bajaj Electricals business is spread across - consumer Products, exports, luminaires and EPC (Illumination, Transmission Towers and Power Distribution). . Within consumer products, it deals in a wide range of products from fans, mixers, heaters, oven, toasters etc and enjoys reasonable market share of 15-18% in each vertical. Moreover company keeps on adding new revenue streams on constant basis by introducing new product lines in the consumer business. Bajaj Electricals has pan India presence which is being supported by a chain of distributors, authorized dealers, retail outlets, and exclusive showrooms called 'Bajaj World'. BAEL also have a presence in the hi-end range of appliances with brands like Platini and Morphy Richards in India.

    Definitions of ratings

    BUY - We expect the stock to deliver more than 12% returns over the next 12 months
    ACCUMULATE - We expect the stock to deliver 5% - 12% returns over the next 12 months
    REDUCE - We expect the stock to deliver 0% - 5% returns over the next 12 months
    SELL - We expect the stock to deliver negative returns over the next 12 months
    NR - Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only.
    SUBSCRIBE - We advise investor to subscribe to the IPO.
    RS - Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon.
    NA - Not Available or Not Applicable. The information is not available for display or is not applicable
    NM - Not Meaningful. The information is not meaningful and is therefore excluded.
    NOTE - Our target prices are with a 12-month perspective. Returns stated in the rating scale are our internal benchmark.


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