Reduce Bajaj Electricals; target of Rs 428: YES Securities

YES Securities' research report on Bajaj Electricals

BJE’s numbers were weaker than expected due to a sharp increase in EBIT loss in its EPC business. EPC business performance was quite weaker than expected due to high overhead costs and lower execution. Revival in segment performance is delayed to Q4 due to slower execution. Consumer business revival was strong in June (4% yoy) and July (flat yoy) led by ecommerce and non-metro regions. CP business margins were lower than expected as employee costs remained high yoy and the company just cut 40% on A&P spend. Gross margins were higher by 200bps yoy due to price hikes announced in Q2 FY20. Company expects to report improvement in EBIT margins from Q2 FY21. The company registered Rs1.45bn of operating cashflow on the back of sharp reduction in CP inventory and marginal decline in EPC and CP receivables. Gross debt declined to Rs8.1bn (Rs9.6bn at Q4) led by the strong operating cash flow and utilization of cash (declined to Rs120mn from Rs1.1bn). We have lowered our FY21 estimates factoring in the sharp fall in Q1 profitability and slower recovery in EPC business. However, we maintain FY22 estimates on expectations of recovery in EPC business (completion of legacy orders in FY21) and recovery in demand for CP business. In the near term, though we are quite positive on the CP business, we remain skeptical over recovery in EPC business due to lower government spending and slower reduction in receivables.

Outlook

Valuations discount (Currently trading at 25.6x FY22E P/E) to peers would stay until EPC business remains under pressure. Maintain Reduce rating.

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