Neutral Orient Electric; target of Rs 500: Motilal Oswal

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Motilal Oswal's research report on Orient Electric

Revenue grew 37% YoY and came in 19% above our estimate. While the surge in commodity prices led to a 480bp YoY deterioration in gross margin, strong volume growth, led by operating leverage, cushioned the impact at the EBITDA margin level v/s our expectation. EBITDA grew 7% YoY and was 31% ahead of our expectation. Adjusted PAT grew by 7% and came in 46% ahead of our expectation. - Working capital stood elevated owing to higher inventory in anticipation of global supply chain shortages and possibility of a third COVID wave. The management expects working capital to normalize over the next two quarters. Despite escalation in inventory levels, the company continues to remain net cash, a feat achieved in 4QFY21. - OEL's cost structure (with higher employee costs and ad spends as a percentage of sales) makes it a strong operating leverage story, if strong topline growth materializes. 2QFY22 result performance reconfirms this hypothesis. On account of a superior performance in 2QFY22, we increase our FY22-24E EPS by 5-6%. Our TP stands at INR500/share (on an unchanged target multiple of 45x FY24E EPS, a 10% discount to HAVL). OEL trades at a discount of 40%/15% v/s HAVL/CROMPTON on a FY24E PE basis. On an EV/EBITDA basis, the discount stands at 48%/36%. We maintain our Buy rating. OEL is our top pick in the Consumer Electrical space.

Outlook

We value OEL at 45x FY24E EPS, with a TP of INR500. At the CMP, the stock trades at a FY23E/FY24E P/E of 36x/30x. Our longer term thesis indicates a reduction in the margin differential between OEL and leading FMEG peers (refer to our initiation report). On a FY24E P/E multiple basis, OEL is trading at a discount of 40%/15% v/s HAVL/CROMPTON. On an EV/EBITDA basis, the discount stands at 48%/36%. We maintain our Buy rating.

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