Inside Companies: Bajaj Electricals eyes retail expansion

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Nachiket Kelkar
moneycontrol.com

Recently, competition has increased in the home appliances market in India and Bajaj Electricals doesn't want to be left behind. It is launching a whole range of products across various price points and may even look at exclusive brand for rural markets in the future in its bid to consolidate its position as market leader. It will also look at innovative products to grow its lighting business.

The company has a capital expenditure plan of around Rs 25 crore per year, which will be used across the business.

The company is expanding its lighting business with a big thrust on LED rechargeable lanterns, LED solar lanterns, and LED torches especially targeted at electricity starved rural areas. It is also adding new products in the appliances space, like induction cookers, pressure cookers, gas stoves and chimneys, which it feels will drive growth going ahead.

Bajaj Electricals has also become quite aggressive in newer segments like water purifiers. This is a segment dominated by established players like Eureka Forbes, Hindustan Unilever and Kent. So will a new entrant like Bajaj Electricals find takers? R Ramakrishnan, executive director, Bajaj Electricals is unfazed.

"The market is so large. I really don't have to beat any existing incumbent. Our task is to expand the size of the cake. If we play our cards well, I certainly think we can create a mega business around water," he told moneycontrol.com.

Bajaj Electricals aims to have water purifiers at multiple price points, from entry level products to the premium ones which are based on reverse osmosis and UV (ultraviolet radiation).

While Bajaj Electricals will continue launching more premium range of products targeting the affluent and the burgeoning middle class of the cities, it feels it will be the first time users of appliances in small towns and villages that will power growth over the next decade.

"We are putting into place a rural strategy," Ramakrishnan said adding, "in terms of looking at semi-urban markets, [we are] looking at a strategy through which we will have regional super stockists, and these super stockists will take some of our lighting products, some appliances like irons, water heaters, immersion rods, some of models of fans at value positioning."

Apart from launching new products, the company wants to ensure that they reach the maximum number of customers and so is planning a big retail push.

"We have about 50,000 retailers selling appliances, 50,000 retailers in fans, we have 400,000 retailers in lighting. I would like to see this expanding at about 10-15% per annum," he said.

Bajaj Electricals also plans to scale up its chain of exclusive retail outlets -- Bajaj Shoppe.

"We have inaugurated first few stores. We intend to have at least 50 Bajaj Shoppes in various parts of the country in the next twelve months," Ramakrishnan said.

Bajaj Electricals has seen strong growth in the over Rs 5,000 crore home appliances business, which is seeing fierce competition. As of November Bajaj branded appliances have grown 24% year-on-year, while Morphy Richards has grown 28%.  It has also seen a 33% growth in the lighting business and 15% growth in luminaries.

However, growth in its engineering and projects division has been slow and Ramakrishnan expects growth will be "sluggish" around 10% this year. He attributes that to the overall slowdown in investments and orders across the E&P industry in India, amid several rounds of interest rate tightening by the RBI, and a "slowdown in decision making in the government."

Bajaj Electricals stock is down 35% since March 31 last year, much sharper than the BSE Consumer Durables index, which has slipped 13% over the same period.

Brokerage Anand Rathi initiated coverage on Bajaj Electricals in December with a "buy" rating and a price target of Rs 193.

"It is poised to benefit from the rising domestic demand for appliances, its increasing urban penetration, product launches and strong distribution in the semi-urban and rural markets," the brokerage said.

Anand Rathi expects Bajaj Electricals' earnings will grow at a compounded annual rate of 21% over fiscal 2011-14, while revenue will rise 18% CAGR over the period. Although the E&P division has not done very well so far this fiscal, the brokerage feels greater government expenditure on building rural and urban infrastructure will boost the division in long term.

Here is the verbatim transcript of Moneycontrol.com's interview with R Ramakrishnan:

Q: The recently released IIP data paints a pretty grim picture for capital goods. Consumer durables sector also has seen some degrowth. What's your assessment, since you are present in both the segments?

A: I think the economic activity has been curtailed a little thanks to the anti-inflationary measures taken by the RBI. Clearly 12 or 13 times if the CRR and other things are getting raised and as a consequence the money supply is curtailed, I think its clearly a anti-inflationary measure. But along side that, India which is a consumption led economy, we are finding impact of that in terms of deceleration in terms of demand conditions, which I actually don't think is very good.

While food related inflation needs to be curbed, and that is coming down, I some how feel that the overall liquidity pressure is something that has resulted in this. I think as an economy we need to examine what is going to be a long-term growth strategy, we need to take care of the supply side of our economy and not just you know look at the demand side for curbing demand.

Q: You at Bajaj Electricals have cut your revenue guidance for the full year from about Rs 3,500 crore to about Rs 32-3,300 crore?

A: No. I think we have been consistent. We have always said 3,300 and we have maintained that. The reason is largely...Our consumer businesses are doing very well, but on the engineering & projects (E&P) side, we had a slightly slow nine months. And that's again a function of the fact that decision making in government has slowed down significantly. There are numerous projects and tenders where we have bid, where decisions haven't come through. The entire cycle of tendering to actual award of contract has really enhanced significantly. And the overall sentiment at this point in time, we don't really have that buoyant feel good factor by which, you know, industries go forward and make investments. So, all in all we have maintained a figure of Rs 3,300 crore approximately, and I think that should be ok.

Q: So how is the year looking now going ahead. With the RBI expected to hold its rates as well, are you seeing some pickup in activity as far as investments in your E&P projects?

A: E&P side, we are expecting to finalise some large orders going forward, and hopefully the fourth quarter performance of the company on the E&P side, both from a revenue perspective and the margin perspective should be significantly better, because we expect to sweat our assets and make sure we produce a lot from our Ranjangaon factory and increase our output. So the fourth quarter, I think should be a pretty decent number. But having said that, clearly the overall order book is not as healthy as we would like it to be. We do expect certain contracts to be finalized going forward and on the E&P side that should take care of things.

Q: What's your current order book size in the segment?

A: Approximately Rs 800 crore.

Q: What's the kind of growth that you are expecting by the end of this year?

On the E&P business side growth will be somewhat sluggish. I don't expect it to be a very buoyant and significant growth. But probably we will end up at 10% growth on the E&P side.

Q: Now come to consumer appliances. That's a very competitive segment. We have seen Havells recently launching a whole range of consumer durables competing with your own Morphy Richards. What's your assessment of the whole segment and what are your growth plans as far as this is concerned?

A: You must appreciate that Bajaj Appliances and Morphy Richards together is a dominant market leader in the small appliance industry in India. Clearly we have said we are not going towards the white goods side. We would not like to get into the air conditioners, refrigerators, washing machines etc. We would like to focus on brown goods, fans, lighting and luminaires on the consumer side. Having said that Bajaj... You know, if Havells or any other competitor is coming into the country, we have our customer base. We have our distribution.

What's our value proposition? We have a great brand, we have a fantastic distribution, we have lot of product innovation and we have a tremendous influence on the distribution channel. And in terms of new product innovation we are ahead in terms of competition. So this unique value proposition puts us in a very different platform from any other player in the context of the market. Also we have segmented the market in terms of premium end, we have Morphy Richards there, we have Disney fans there, we have Magnifique there. On the midpoint we have Bajaj Majesty. We have also introduced Bajaj Platini, which is between Bajaj Majesty and Morphy Richards, and at the bottom we have products like Bajaj Popular, Bajaj Bahar in terms of fans, Bajaj Popular irons etc. So we are straddling multiple price points in context of the market and that's something, which is unique and distinctive about Bajaj Electricals.

Q: What's the kind of growth that you have seen in this segment this year? Any kind of slowdown because of inflationary pressures?

A: I am actually quite amazed at our performance. To be frank with you, as of November, our appliances business is growing quite significantly. We are at a growth of about 24% and a CAGR of 27% in Bajaj brand, and in the Morphy Richards brand the growth is 28% and the CAGR is 35%. Our lighting business is growing at 33% with a CAGR of 26% and our luminaire business is growing at 15% and a CAGR of 16%. The fans business is a little sluggish largely because the season collapsed and the summer season was just not up to the mark. So fans at this point of time we have a growth of 9% and a CAGR of 22%. While the industry on the whole has seen a de-growth in terms of fans, probably a de-growth of as much as 6-10%.

So vis-�-vis competition we have gained market share, we have a very sustainable platform in terms of profitability Our advertising, in what we have done on pressure cookers, induction cookers, Bajaj appliances, rockstar mom, what we have done on lighting recently a couple of commercials, which is sab-kuch roshan kar de, it is something, which has been fantastic. Our Bajaj fans advertising has been liked. So we are building the brand along with strengthening distribution, doing product innovation and we have a great team. I think clearly the team in Bajaj Electricals, our employees are a fantastic strength to us.

Q: Is increasing the retail footprint also a part of your growth strategy?

A: Absolutely. As a company today we have 50,000 retailers in appliances, 50,000 retailers in fans, we have 400,000 retailers in lighting and I would like to see this expanding at about 10-15% per annum. Simultaneously we are putting into place a rural strategy. So in terms of looking at semi-urban markets, [we are] looking at a strategy through which we will have regional super stockists, and these super stockists will take some of our lighting products, some appliances like irons, water heaters, immersion rods, some of models of fans at value positioning. I think that is the strategy going forward. We have also added electric pumps, we have added some home invertors, so the next important strategy for us is a thrust in terms of rural and probably at some point in time we will also create a rural brand in terms of the Bajaj umbrella.

Q: Are you seeing more growth coming from rural areas? Is the urban market kind of saturated now?

A: Clearly we noticed that rural India is doing pretty well even at this point in time. Overall our belief is while urban India will grow, the real growth in the next 10 years will come froma large number of consumers who are going to be first time users of appliances. Whether they be induction cookers, or it be toasters or mixer grinders or it be steam irons. So we are going to definitely be there as the most appropriate value proposition to upgrade consumers from non-users to users or from the unorganised to the organised sector. As and when GST comes in, that will be another kicker to spur the organised industry growth.

Q: Will you also expand your exclusive store chain? You have some exclusive stores as well.

A: Yes. We have a concept of a Bajaj Shoppe. We are in the process of rolling that out. We have inaugurated first few of them. Our intention is over the next twelve months we should have at least 50 Bajaj Shoppes in various parts of the country.

Q: In your appliances, you have launched water purifiers. That's another super competitive segment. What's your strategy to beat the existing incumbents who have huge market share and grow?

A: The market is so large, I don't have to beat any existing incumbent. Our task is to expand the size of the cake. Our task is, what we can do to get... We certainly believe India, which gives 17% of the world's population, has about 25% of water borne diseases and things like that. So if we can give better quality drinking water to the masses and... See Bajaj enjoys a tremendous consumer trust. And if we play our cards well, I certainly feel that we can create a mega business around water going forward.

Q: But will you look at premium products as well?

A: Of course. We will have products at multiple price points. We will have everything from reverse osmosis, our UV purifiers have been launched, and we have some entry level products, which are the first of its kind in the context of the country.

Q: What's your capex plan for this fiscal and the next fiscal?

A: You can on a steady state basis assume about Rs 25 crore in terms of capex per annum, which vis-�-vis the PBT [profit before tax] we make is a fraction of the PBT.

Q: And that will be across the business?

A: Absolutely. It will be some new offices, some new furniture, it could be some little bit of capacity addition and things like that.

Q: So of all the segments, be it consumer durables, you are into lighting, you are into E&P, what is the segment you feel will be the driver for the next few years?

A: I think it will be a combination of the appliances portfolio, which includes Bajaj Appliances and Morphy Richards, Bajaj fans will give long-term value, and I am confident that Bajaj Luminaires, which is a technology related business -- commercial lighting, office lighting, industrial lighting, roadway lighting, LED technology, energy savings, lighting controls -- where we have some fantastic collaborations like Trilux, right now we are in the process of introducing lighting controls from a company called Leviton in the US, we are in the integrated building management systems, which has products like fire alarms from Securiton of Switzerland, we have from Delta Controls of Canada what we call integrated building management systems... So a combination of appliances, fans and luminaires will be the driver of growth for Bajaj Electricals going forward.

Q: Any new segments that you plan to get into, be it your lighting or be it in your consumer appliances?

A: On the lighting side we have given a significant rural thrust by looking at LED rechargeable lanterns, we are going to look at LED solar lanterns and that is something, and probably LED torches, which will give a fillip to growth in the lighting business. We are also seriously in the pumps business and DG sets business now. We have tested the water and I think in pumps in particular you will see a significant movement forward, from a growth perspective, network, channel creation and product introduction perspective etc. In appliances, induction cookers is a big segment and we are a very competitive and aggressive player in that segment.

We also entered pressure cookers and we have tested it in various markets, pressure cooker we have just released our commercial, which has been received exceptionally well, that is going to be an area of significant focus going forward. The water business I have already commented upon. Gas stoves and chimneys are areas, which will give us growth going forward. And of course products where we are already leaders like irons, mixer grinders, or food processors or traditional kitchen appliances, water heaters... They will anyway be giving us growth on a steady state.