Bajaj Electricals - Deleveraging remains on track - ICICI Securities

Bajaj Electricals (BJE) continues to remain on track for deleveraging of the balance sheet (net debt of Rs8bn as of Q1FY21) which we reckon will continue further in FY21E/FY22E. Management outlook of flat CD revenues and breakeven EPC EBIT in FY21 is commendable. Maintain HOLD with a target price of Rs419 based on 25x FY22E EPS of Rs17 (unchanged).

- Q1FY21 was weak on expected lines. CD revenues were down by 50% YoY with 2.1% EBIT margin. Company has managed 200-300bps increase in CD margins driven by price increase which was offset due to lower sales in Q1FY21. The revenue in CD business was nil in April, 60% of last year in May and ~104% of last year in June. July continues to be decent but sporadic lockdown will pose supply challenges. Traditional retail and e-commerce (13% for BJE now) are driving sales while modern retail format remains impacted from lockdown. Kitchen appliances and fans have witnessed better traction compared to coolers. EPC business was down 59% YoY (Illumination, power distribution and transmission revenue of Rs580mn, 660mn and 900mn respectively) in Q1FY21 with EBIT loss of Rs437mn.

- Deleveraging will be a major earnings driver; discipline in EPC project selection key: Debt reduced from ~Rs20bn in FY19 to ~Rs10bn in FY20 and we estimate it to further reduce to ~Rs7bn by FY21 (company guidance Rs5.5bn). 'Debt to Equity' ratio improved from ~1.6 in FY19 to ~0.7 in FY20. Deleveraging has been due to decrease in EPC revenues (from Rs30bn in FY19 to Rs19bn in FY20) while CD has always being FCF-positive. As of Q1FY21, BJE has Rs18.4bn receivables from the EPC business. Continued discipline in project selection (especially power distribution) and faster receipt of receivables in EPC can give a positive earnings surprise. Complete deleveraging can lead to increase of Rs15 in EPS (Rs1.7bn interest cost in FY20).

- Expect EBIT to increase from Rs1.3bn in FY20 to Rs2.8bn in FY22E: We expect EPC revenues of Rs19bn in FY21E (flat vs FY20) and Rs20bn in FY22E with EBIT-breakeven in FY21E and modest EBIT of Rs400mn in FY22E. ECD revenues are expected to remain flat in FY21E (Rs31bn) as per management guidance. We build ~15% growth in consumer topline in FY22E and expect CD EBIT margin to gradually increase from 6.5% in FY20 to 7%/7.5% in FY21E/FY22E.

- CD strategy turns conservative from visionary (being practical will help in short term). (1) Product focus will consciously be on mass market rather than the earlier stress on IoT and AI. In CY17, BJE launched Project Evolve, which aimed to use the power of AI, IoT, analytics and machine learning at the forefront of customer experience. (2) BJE would continue outsourcing and stay away from manufacturing while being prudent in adspend.

Shares of BAJAJ ELECTRICALS LTD. was last trading in BSE at Rs.437.35 as compared to the previous close of Rs. 426.5. The total number of shares traded during the day was 54254 in over 3262 trades.

The stock hit an intraday high of Rs. 442 and intraday low of 419. The net turnover during the day was Rs. 23458944.

Source : Equity Bulls

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