Institutional Equities
Bajaj Electricals 7 May 2014
Reuters: BJEL.BO; Bloomberg: BJE IN Electrifying Turnaround BUY We believe Bajaj Electricals (BJE) is heading towards an electrifying turnaround Sector: Capital Goods following the completion of legacy projects and a change in the business strategy of the Engineering & Projects (E&P) segment (26% of 9MFY14 revenue), which CMP: Rs305 coupled with its strong consumer product portfolio, would propel the earnings by 6x over FY14E-FY16E. We expect a sharp revival in profitability of the E&P Target Price: Rs380 segment, which suffered losses over the past two years because of cost over-run Upside: 25% in legacy projects, leading to 75.6%/148.6% CAGRs in EBITDA/PAT of BJE, respectively, over FY14E-FY16E, despite factoring in a decline in margins in the Chirag Muchhala consumer durable/lighting segments by 40bps/50bps, respectively, over the same [email protected] period. In addition, healthy improvement in working capital after the release of +91-22-3926 8092 Rs1.8bn retention money (17.6% of FY14E debtors) likely in FY15E along with improved profitability would lead to strong operating/free cash flows and a sharp recovery in return ratios over FY14E-FY16E, providing a further re-rating trigger. Key Data We have assigned Buy rating to BJE with a target price of Rs380 based on Current Shares O/S (mn) 100.1 16xFY16E EPS. Mkt Cap (Rsbn/US$mn) 30.7/504 E&P segment’s turnaround imminent: We expect a sharp revival in profitability of the 52 Wk H / L (Rs) 320/150 E&P segment over FY14E-FY16E following the completion of low-margin legacy Daily Vol. (3M NSE Avg.) 227,507 projects, booking of cost overrun and likely release of retention money in FY15E post project closure. After functioning in an operating margin range of 9%-12% over FY09- FY11, the E&P segment slipped into losses in FY13/FY14E following faulty business Share holding (%) 2QFY14 3QFY14 4QFY14 strategy, severe price under-cutting because of cut-throat competition and project cost Promoter 66.2 66.2 66.1 Initiating Coverage Initiating over-run. However, post restructuring and legacy order book clean-up, we expect a FII 12.6 15.9 15.4 healthy recovery in operating margin at 5.5%/7.5% in FY15E/FY16E, respectively. Consumer product portfolio remains strong: Driven by strong distribution network, DII 5.4 2.9 3.8 low product penetration, value-for-money product proposition and a leadership position Corporate 4.3 3.2 3.1 in many key products, the consumer durable segment (50.8% of 9MFY14 revenue) and General Public 11.5 11.9 11.6 lighting segment (23.6% of 9MFY14 revenue) are expected to post 17.0%/13.5% revenue CAGRs over FY14E-FY16E, although we have factored in a fall in margins by One Year Indexed Stock Performance 40bps/50bps, respectively, over the same period. 180 Revival in financial health to aid valuation: Imminent turnaround in profitability of the 160 E&P segment, which alone accounts for 60%-65% of total capital employed in a year, 140 would propel BJE’s earnings by 6x over FY14E-FY16E along with significantly improving 120
the financial health of the company. Considering healthy operating/free cash flow 100
generation of Rs5.5bn/Rs1.3bn, respectively, over FY14E-FY16E, along with sharp 80
recovery in RoCE/RoE from 12.0%/5.2%, respectively, in FY14E to 34.2%/23.7%, 60 respectively, in FY16E, we find BJE attractively valued at 12.9xFY16E EPS compared to May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 its past eight years’ average P/E ratio of 17.8x. We have valued BJE at 16xFY16E EPS, BAJAJ ELECTRICAL NSE CNX NIFTY INDEX implying a P/E of 18x for consumer product business and 6x for the E&P business.
Y/E March (Rsmn) FY12 FY13 FY14E FY15E FY16E Price Performance (%) Net sales 30,990 33,876 41,020 49,317 57,100 1 M 6 M 1 Yr EBITDA 2,371 1,108 1,423 3,524 4,389 Bajaj Electricals 13.2 78.1 71.2 Net profit 1,179 512 383 1,818 2,366 EPS (Rs) 11.8 5.1 3.8 18.2 23.7 Nifty Index 0.3 8.0 12.5 EPS growth (%) (18.0) (56.6) (25.3) 375.0 30.1 Source: Bloomberg EBITDA margin (%) 7.7 3.3 3.5 7.1 7.7 PER (x) 25.8 59.4 79.5 16.7 12.9 P/BV (x) 4.3 4.2 4.1 3.4 2.8 EV/EBITDA (x) 13.5 28.5 22.9 9.1 7.1 Dividend yield (%) 0.9 0.7 0.6 0.9 0.9 RoCE (%) 27.6 10.7 12.0 30.3 34.2 RoE (%) 18.0 7.2 5.2 22.1 23.7 Source: Company, Nirmal Bang Institutional Equities Research
Please refer to the disclaimer towards the end of the document.
Institutional Equities
Outlook and valuation We expect BJE to post consolidated revenue CAGR of 18.0% over FY14E-FY16E compared to a 15.1% CAGR likely over FY12-FY14E. The top-line would be driven by execution of healthy non-legacy high- margin projects in the E&P segment, which enjoys a strong order book worth Rs22.5bn, leading to a 23.1% revenue CAGR over FY14E-FY16E compared to a 19.6% CAGR likely over FY12-FY14E. The consumer durable and lighting segments are expected to post revenue CAGRs of 17.0%/13.5%, respectively, over FY14E-FY16E compared to 14.0%/12.0%, respectively, over FY12-FY14E. We expect EBITDA to post a 75.6% CAGR over FY14E-FY16E (against a 22.5% CAGR decline likely over FY12- FY14E), translating to a 148.6% earnings CAGR over FY14E-FY16E (compared to a 43.0% CAGR decline likely over FY12-FY14E). Operating profit margin is expected to increase by 420bps over FY14E-FY16E, while net profit margin is likely to rise by 320bps over the same period. Our estimates are in line with Bloomberg consensus projections for FY15, while we are 4.1%/7.2% above Bloomberg consensus revenue/earnings estimates, respectively, for FY16. The revival in profitability and release of retention money worth Rs1.8bn (17.6% of FY14E debtors) in FY15E would lead to a sharp rise in return ratios, generate healthy operating and free cash flows as well as improve the working capital position and thereby provide a likely re-rating trigger, in our view. BJE stock has traded at an average P/E multiple of 17.8x one-year forward earnings over the past eight years, from FY06 till date (see Exhibit 1). At the CMP, the stock is attractively valued at a P/E of 12.9x FY16E earnings. Despite offering much higher earnings growth and return ratios, BJE currently trades at a discount to its peers (see Exhibits 4 and 5), which we believe would significantly narrow down going forward. Considering the robust earnings growth over FY14E-FY16E (a 6x rise) and strong improvement in the financial position, we have valued BJE at 16xFY16E EPS with a target price of Rs380, translating to a 25% upside from the CMP. The valuation implies a P/E of 18xFY16E earnings for the consumer product business and 6xFY16E earnings for the E&P business. Exhibit 1: One-year forward P/E trend Exhibit 2: Stock price movement in P/E band (x) (Rs) 60 500 450 50 400 350 40 300 30 250 200 20 150 Avg PE = 17.8x 100 10 50 0 0 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 P/E Average Stock price 5x 10x 15x 20x 25x Source: BSE, Nirmal Bang Institutional Equities Research Source: BSE, Nirmal Bang Institutional Equities Research Exhibit 3: Our estimates versus Bloomberg consensus projections (Rsmn) FY15E FY16E Bloomberg Bloomberg NBIE Deviation NBIE Deviation Y/E March consensus consensus estimates (%) estimates (%) estimates estimates Net revenue 49,317 48,564 1.6 57,100 54,853 4.1 EBITDA 3,524 3,490 1.0 4,389 4,127 6.4 PAT 1,818 1,793 1.4 2,366 2,208 7.2 EPS (Rs) 18.2 18.0 1.4 23.7 22.1 7.2 Source: Bloomberg, Nirmal Bang Institutional Equities Research
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Exhibit 4: BJE’s peer comparison – FY16E P/E versus FY14E-FY16E EPS CAGR (P/E FY16E) 20
Havells 18 Crompton 16 Greaves Bajaj 14 Electricals
12
10 0 20 40 60 80 100 120 140 160 (EPS CAGR FY14E-16E) Source: Nirmal Bang Institutional Equities Research Exhibit 5: BJE’s peer comparison – FY16E P/E versus FY16E RoCE
(P/E FY16E) 20
18 Havells
16 Crompton Greaves Bajaj 14 Electricals
12
10 10 15 20 25 30 35 40 (RoCE FY16E) Source: Nirmal Bang Institutional Equities Research Financial overview We expect BJE to post consolidated revenue CAGR of 18.0% over FY14E-FY16E compared to a 15.1% CAGR likely over FY12-FY14E owing to healthy growth momentum across business segments. For the engineering & projects (E&P) segment, we expect the top-line to register a 23.1% CAGR over FY14E-FY16E (compared to a 19.6% CAGR likely over FY12-FY14E) driven by execution of robust order book of Rs22.5bn as of end-FY14. The E&P segment would contribute 31.6% to total revenue in FY16E compared to 29.0% in FY14E. Driven by low penetration, strong distribution network and a leadership position in many key products, the consumer durable segment, the largest business segment of BJE, is expected to post a 17.0% revenue CAGR over FY14E-FY16E (compared to a 14.0% CAGR likely over FY12-FY14E) leading to it contributing 46.7% to total sales in FY16E. The lighting segment is expected to achieve a 13.5% revenue CAGR over FY14E-FY16E (compared to a 12.0% CAGR likely over FY12-FY14E), leading to a 21.7% share in total revenue in FY16E. We expect a sharp revival in profitability over FY14E-FY16E, driven by recovery in the margin of the E&P segment after the completion of low-margin legacy projects, booking of provisions for cost overrun in FY13/FY14E and likely release of retention money in FY15E. After functioning at an operating margin range of 9%-12% over FY09-FY11, E&P slipped into losses with an EBIT margin of a negative 18% in FY13 and a negative 8% likely in FY14E. However, post restructuring and legacy order book clean-up, we expect recovery in operating margin at 5.5%/7.5% in FY15E/FY16E, respectively. Consequently, the share of the E&P segment in total EBIT is likely to rise to 30.8% in FY16E. For the consumer durable segment, we are factoring in a 70bps margin contraction over FY13-FY16E, from 9.5% in FY13 to 8.8% in FY16E, because of the rise in competition.
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However, in absolute terms, EBIT would register a 14.4% CAGR over FY14E-FY16E as compared to 8.9% CAGR likely over FY12-FY14E, thus contributing 53.5% to total EBIT in FY16E. In the lighting segment, we have factored in a decline in operating margin by 130bps over FY13-FY16E, from 6.8% in FY13 to 5.5% in FY16E on a conservative basis. However, in absolute terms, EBIT would grow at 8.7% CAGR over FY14E- FY16E compared to a 1.5% CAGR fall likely over FY12-FY14E, thereby accounting for 15.5% of total EBIT in FY16E. Overall, consolidated EBITDA is expected to post a 75.6% CAGR over FY14E-FY16E (against a 22.5% CAGR decline likely over FY12-FY14E), translating to a robust 148.6% earnings CAGR over FY14E- FY16E (compared to a 43% earnings CAGR decline in FY12-FY14E). The operating profit margin is expected to rise by 420bps over FY14E-FY16E, while net profit margin is likely to rise by 320bps over the same period. Exhibit 6: Revenue trend Exhibit 7: Profitability trend
(Rsmn) (%) (Rsmn) (%) 60,000 23.0 25 5,000 9.3 10 21.1 20.2 50,000 7.7 7.7 20 4,000 7.1 8 15.8 40,000 13.0 15 3,000 6 30,000 9.3 5.2 3.5 10 2,000 3.3 4 20,000 4.1 3.8 3.7 5 1,000 2 10,000 1.5 - 0 - 0.9 0 FY11 FY12 FY13 FY14E FY15E FY16E FY11 FY12 FY13 FY14E FY15E FY16E Revenue YoY growth EBITDA PAT EBITDA margin PAT margin Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research
Exhibit 8: Segment-wise revenue trend Exhibit 9: Segment-wise EBIT margin trend
(Rsmn) (%) 11.3 30,000 10.1 12 9.5 9.2 9.0 8.8 8 25,000 8.8 7.5 7.8 4 5.1 6.8 6.0 5.5 20,000 5.5 0 3.2 15,000 FY11 FY12 FY13 FY14E FY15E FY16E (4)
10,000 (8) (8.0) (12) 5,000 (16) - FY11 FY12 FY13 FY14E FY15E FY16E (20) (18.1) Lighting Consumer durables Engineering & projects Lighting Consumer durables Engineering & projects Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research
Exhibit 10: Segment-wise revenue share break-up Exhibit 11: Segment-wise EBIT share break-up
100% 100% 11 20 29 24 31 30 27 29 31 32 80% 80% 60% 64 60% 59 40% 58 160 126 54 54 48 47 48 47 47 20% 40% 25 13 54 40 17 16 0% 20% (67) -20% (114) 23 25 25 23 22 22 0% -40% FY11 FY12 FY13 FY14E FY15E FY16E FY11 FY12 FY13 FY14E FY15E FY16E Lighting Consumer durables Engineering & projects Lighting Consumer durables Engineering & projects Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research
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Institutional Equities
Investment Arguments E&P segment’s turnaround to propel BJE’s profitability Under the E&P segment, BJE undertakes turnkey projects of transmission line and telecommunications towers, provides high masts, street lighting and signage boards as well as executes special projects relating to power plant lighting, sports lighting (for stadiums etc) and rural electrification works. BJE is a market leader in high masts and signage boards, while it commands a huge 70% market share in sports lighting, where it has executed marquee projects of various cricket stadiums, Commonwealth Games and National Games stadiums. It is also a preferred vendor for power plant lighting projects, with a 70% market share, having executed multiple projects for the likes of NTPC, Bharat Heavy Electricals (BHEL) as well as various state electricity boards. For the transmission line business, it counts Power Grid Corporation of India (PGCIL), and various private players as well as state electricity boards (SEBs) among its clients. E&P accounts for the largest chunk of capital employed While the other two business segments of BJE, namely consumer durables and lighting, are asset-light and fast cash generating businesses, E&P is a long-gestation project business which requires higher capital deployment. On an average, 60%-65% of the total capital employed by BJE in a year is towards the E&P segment, even though its revenue contribution is only around 30% (see Exhibits 10 and 12). Due to its long project execution period of 18 to 30 months, the E&P segment lags behind the other two segments in asset turnover, sales to capital employed ratio as well as RoCE (see Exhibits 13, 14 and 15). As a result, a sound performance of the E&P segment is critical for overall financial health of the company. Exhibit 12: Trend in segment-wise capital employed Exhibit 13: Segment-wise RoCE trend
(Rsmn) (%) 8,000 300
7,000 250 6,000 200 5,000 4,000 150
3,000 100 2,000 50 1,000 0 - FY07 FY08 FY09 FY10 FY11 FY12 FY13 9MFY14 FY07 FY08 FY09 FY10 FY11 FY12 FY13 9MFY14 (50) Lighting Consumer durables Engineering & Projects Lighting Consumer durables Engineering & projects Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research
Exhibit 14: Segment-wise sales to capital employed ratio Exhibit 15: Segment-wise asset turnover ratio
(x) (x) 25 5
20 4
15 3
10 2
5 1
0 0 FY07 FY08 FY09 FY10 FY11 FY12 FY13 9MFY14 FY07 FY08 FY09 FY10 FY11 FY12 FY13 Lighting Consumer durables Engineering & projects Lighting Consumer durables Engineering & projects Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research
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E&P turnaround imminent While the E&P segment used to enjoy an operating profit margin in the 9%-12% range over FY09-FY11 along with RoCE of 17%-20%, a combination of faulty business strategy, severe price under-cutting due to cut-throat competition and project cost over-run led to the E&P business slipping into losses in the past two years. Subsequently, a focused exercise was undertaken to restructure the operations under the new E&P business head, Mr. Rakesh Markhedkar, a turnaround specialist in the E&P industry with 25 years of experience and having a strong track record of successfully turning around EMCO and KEI Industries. The top priority was assigned to faster execution of legacy projects which were struck beyond the scheduled completion period for various reasons, including lack of site clearances and right of way. Secondly, the project execution strategy was changed by avoiding dumping of raw materials on site to avoid pilferage and stop losses. Thirdly, the number of old work sites was brought down significantly from 84 at the beginning of FY14 to less than 40 at the end of the year, thus making it much easier to regularly monitor the sites as well as aid in re-deployment of trained and experienced manpower on new remunerative projects. Finally, all likely provisions for cost overrun were booked during the year, which, post completion of work, helped in unlocking of the held-up payments and retention money. The success of the change in execution strategy and BJE’s prowess in project execution can be gauged by the fact that PGCIL named it the No.1 vendor for completion of projects on time for the 3QFY14 period. While on the one hand BJE accelerated the execution of low-margin and delayed legacy projects, its renewed focus on upgrading India’s transmission and distribution infrastructure resulted in healthy order inflows over the past one year. This was aided by tightening of pre-qualification norms by PGCIL, which benchmarked the vendors on the basis of execution track record of their current projects under construction in order to weed out weak players and irrational bidding, and thereby reducing the number of players bidding for PGCIL tenders from 20 to less than 10. This led to healthy order inflows for BJE in FY14, which should aid revenue growth as well as improve margin traction going forward. Further, with the likely release of retention money worth Rs1.8bn from legacy projects in FY15E, the requirement of capital deployed for the E&P segment would reduce, resulting in the company aiming for an increase in the sales to capital employed ratio from 1.2x in 9MFY14 to 2.5x in FY15E. The company also believes that sharp revival in profitability and efficient capital management would also lead to a jump in RoCE from the negative zone in FY13/9MFY14 to 18%-20% in FY15E and FY16E, in line with its performance in FY09-FY11. Exhibit 16: E&P segment’s financials
(Rsmn) (%) 20,000 80
60 15,000
40 10,000 20 5,000 0
- (20) FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E
(5,000) (40) Revenue EBIT Revenue growth YoY EBIT margin Source: Company, Nirmal Bang Institutional Equities Research
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Exhibit 17: E&P vertical-wise revenue trend Exhibit 18: E&P vertical-wise revenue share break-up
(Rsmn) 100% 3,500 31.9 38.0 36.1 36.1 37.0 3,000 80%
2,500 60% 2,000 38.6 26.0 27.8 27.9 29.0 1,500 40%
1,000 20% 36.0 36.1 36.1 34.0 500 29.5
- 0% FY09 FY10 FY11 FY12 FY13 FY09 FY10 FY11 FY12 FY13 Special projects High masts Transmission towers Special projects High masts Transmission towers Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research Exhibit 19: E&P order book as of end-FY14
High masts 12%
Transmission towers Special 26% projects 62%
Source: Company, Nirmal Bang Institutional Equities Research We expect a 23.1% CAGR in revenue over FY14E-FY16E along with sharp recovery in margins Driven by execution of robust order book worth Rs22.5bn as of end-FY14 (see Exhibit 19), we expect top-line of the E&P segment to register a 23.1% CAGR over FY14E-FY16E compared to a 19.6% CAGR likely over FY12-FY14E. We expect a sharp revival in profitability over FY14E-FY16E after the completion of low-margin legacy projects, booking of provisions for cost overrun in FY13/FY14E and likely release of retention money worth Rs1.8bn from stuck legacy projects in FY15E. Post restructuring and legacy order book clean-up, we expect a recovery in operating margin at 5.5%/7.5% in FY15E/FY16E, respectively. Exhibit 20: Sharp recovery in E&P operating margin
(Rsmn) (%) 1,500 12.6 15 10.7 8.8 7.5 10 1,000 5.5 3.2 5 500 0 - FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E (5) (500) (8.0) (10)
(1,000) (15) (18.1) (1,500) (20) EBIT EBIT margin Source: Company, Nirmal Bang Institutional Equities Research
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Bajaj Electricals – A strong consumer product brand Exhibit 21: BJE’s peer position in consumer durable and lighting industry Market size BJE's BJE's market Product category Market leader Other key competitors (Rsmn) position share Domestic appliances 65,000 Bajaj Electricals Leader 15% to 20% Phillips, Prestige, Kenwood, Preeti, Usha Fans 45,000 Crompton Greaves Fourth 14% to 15% Usha, Havells, Orient, Khaitan Lighting 50,000 Phillips Third 7% to 8% Surya, Crompton, Havells, Osram Luminaires 29,000 Phillips Second 15% to 17% Crompton, Wipro, Havells Source: Industry, Nirmal Bang Institutional Equities Research Leadership in consumer durable business The consumer durable business, the largest business segment of BJE contributing 51% to 9MFY14 revenue, is divided into two verticals - namely domestic appliances and fans. BJE is a dominant player in small appliances in India and enjoys the leadership position in irons, water heaters, toasters, grillers, mixers and induction cookers. Also, BJE sells products like juicers, food processors, water filters, microwave ovens, stoves, rice cookers, electric kettles, tea/coffee makers, chimneys, hair dryers, room coolers and gas stoves. The annual market size of the appliance industry in India is worth Rs65bn, where BJE holds a market share of 15%-20%, on an average, across its products. In the fan vertical, BJE sells ceiling, table, pedestal & wall- mounted fans along with industrial exhaust fans and air circulators. The annual market size of the fan industry is worth Rs45bn, where BJE holds a market share of 14% to 15% and is the fourth largest player after Crompton Greaves, Usha and Havells. BJE enjoys leadership status in fans in 12 major states and is a dominant player in 6 other states in the country. Exhibit 22: Consumer durable vertical-wise revenue trend Exhibit 23: Vertical-wise revenue share break-up
(Rsmn) (%) 100% 12,000 40 7.4 7.6 7.9 9.4 9.8
10,000 80% 30 39.2 39.6 39.9 35.8 33.0 8,000 60% 6,000 20 40% 4,000 10 53.4 52.8 52.2 54.9 57.1 2,000 20% - 0 FY09 FY10 FY11 FY12 FY13 0% Consumer appliances Fans FY09 FY10 FY11 FY12 FY13 Consumer appliances growth YoY Fans growth YoY Consumer appliances Fans Morphy Richards Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research Low product penetration, strong distribution reach, and value-for-money proposition BJE, which positions its brand as a value-for-money, has multiple product offerings across various price points. Further, BJE has the first-mover advantage as it has been in existence since the past 75 years and also benefits because of the well-known umbrella branding of the Bajaj group. BJE boasts of the widest distribution reach among peers, with more than 3.5 lakh retailers across India. It is also expanding its franchisee-based exclusive ’Bajaj World’ outlets. Currently, there are 75 Bajaj World stores and the plan is to scale it up to 200 by FY15E. BJE is laying special emphasis on high distribution reach in rural markets as the penetration level of fans and appliances is very low. While, on an average, the penetration level of fans is 40% and that of appliances is 15% in India, in rural markets the penetration level is less than 5% in case of some products. As a result, BJE’s management believes that on an average 15% to 20% growth can be sustained, at least for the next 5 to 10 years.
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Exhibit 24: Morphy Richards’ revenue trend Exhibit 25: Distribution reach in fans
(Rsmn) (%) (nos) 2,000 50 100,000 42.5 87,000 87,000 37.5 1,600 40 80,000
28.1 1,200 27.3 30 25.0 60,000 55,000 50,000 45,000 800 20 40,000
400 10 20,000 - 0 FY09 FY10 FY11 FY12 FY13 - revenue YoY growth FY09 FY10 FY11 FY12 FY13 Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research Tie-up with international brands BJE is the only consumer durable company to have successfully tied up with leading international brands to manufacture and sell their products in India. It has exclusive tie-ups with Walt Disney (No. 1 American brand for children), Morphy Richards (UK’s leading brand for domestic appliances) and Midea (No. 1 fan brand of China). These tie-ups further prove the strength of BJE’s distribution reach on which these foreign brands are banking upon. The success of Morphy Richards is especially encouraging, as it has achieved a revenue CAGR of 33% over its past 10 year’s association with BJE. It has become the No.1 brand in India in Kettles, Coffee Makers and Oven Toaster Grillers. It is also in the process of launching new product categories like water heaters, water purifiers, fans, deep fryers and juicers. The distribution reach of Morphy Richards brand has increased to 20,000 retail outlets, resulting in it accounting for 9.8% of FY13 revenue of the consumer durable segment. The arrangement between BJE and Morphy Richards is that BJE would pay royalty of 2% to 4% of sales across its products, while Morphy Richards would share the technological know-how. Certain products of Morphy Richards are manufactured in India by BJE while some are directly imported. Focus on cost reduction While the revenue growth traction in appliances as well as fans business remains healthy, rising competition is leading to pressure on margins. Compared to 10%-11% margin range which the segment enjoyed over FY10- FY12, it has come down to 9.5%/9.1% in FY13/9MFY14, respectively. The management has initiated a few cost reduction plans through which it aims to improve the margin by 50bps-100bps per annum over the next three years. As per the management, (a) Focusing on central bulk purchases instead of separate purchasing done till now by Morphy Richards, fans and appliance business units could save 1% of costs, (b) Better inventory management can bring down working capital requirement and save 0.5% of costs, (c) Achieving 15% or more revenue growth would lead to better operating leverage as costs are unlikely to go up 15% YoY, and (d) Shifting consumer focus on premium-end products would lead to higher margins. A key example illustrating shifting consumer preference witnessed by BJE is rising demand for premium and fancy fans in the Rs4,000 to Rs10,000 range. As a result, BJE is shifting its strategy from focusing on economy and sub- economy fans in the below Rs2,000 range earlier, to premium fans now and expects the branded fans of Disney and Morphy Richards to be the key driver. We expect a 17% revenue CAGR over FY14E-FY16E with a 40bps fall in margins Driven by strong distribution network, low product penetration and a leadership position in many key products, the consumer durable segment is expected to post a 17% revenue CAGR over FY14E-FY16E compared to a 14% CAGR likely over FY12-FY14E. While the management has embarked on various cost rationalisation measures, as highlighted above, to improve profitability, we are conservatively factoring in a 40bps EBIT margin contraction over FY14E-FY16E. Our EBIT margin estimates stand at 9.0%/8.8% for FY15E/FY16E, respectively, compared to 9.5%/9.2% in FY13/FY14E. Consequently, in absolute terms, EBIT would register a 14.4% CAGR over FY14E-FY16E compared to a 8.9% CAGR likely over FY12-FY14E.
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Exhibit 26: Consumer durable segment’s financials
(Rsmn) (%) 30,000 40
25,000 30 20,000
15,000 20
10,000 10 5,000
- 0 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E Revenue EBIT Revenue growth YoY EBIT margin Source: Company, Nirmal Bang Institutional Equities Research Lighting segment to remain steady Under the lighting business segment, BJE markets a wide range of light sources and domestic luminaires. The light sources include General Lighting Service (GLS) lamps, Fluorescent Tube Lights (FTL), Compact Fluorescent Lamps (CFL) and special purpose lamps. CFL lights account for the largest chunk or revenue, at 61% of total lighting sales. Going forward, LED lights are also expected to pick up in a big way and, hence, BJE has made a major foray into LED-based products through the introduction of LED portable lanterns, torches and decorative lights. The lighting segment also sells luminaires, which account for 41.6% of the segment’s revenue. It comprises a comprehensive range of luminaires (light fittings) covering commercial lighting, industrial lighting, area lighting, roadway lighting and urban architectural lighting. The market size of the lighting segment in India is worth Rs50bn where BJE trails behind market leader Philips and Surya Roshni with a 7% to 8% market share. Under the luminaires segment, having a market size of Rs29bn, BJE is a clear leader in area and road lighting and has plans to strengthen its presence in the workspace lighting segment as well to gain overall market share. Overall, with 15% to 17% market share, BJE is ranked no. 2 in the luminaires industry in India, behind market leader Phillips. Exhibit 27: Lighting vertical-wise revenue trend Exhibit 28: Vertical-wise revenue share break-up
(Rsmn) (%) 6,000 30 FY13 58.4 41.6
5,000 25 FY12 53.2 46.8 20 4,000 15 FY11 50.9 49.1 3,000 10 2,000 FY10 48.7 51.3 5 1,000 0 FY09 42.7 57.3 - (5) FY09 FY10 FY11 FY12 FY13 0% 20% 40% 60% 80% 100% Lighting Luminaires Lighting growth YoY Luminaires growth YoY Lighting Luminaires Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research CFL lights, wide distribution reach and international tie-ups are key strengths CFL light is the highest selling light product in the portfolio of BJE. Over FY09-FY13, while the lighting segment’s revenue posted a CAGR of 24.8%, CFL sales registered a CAGR of 33.1%. Consequently, the contribution of CFL in total lighting sales of BJE went up from 47.4% in FY09 to 61.0% in FY13 (see Exhibits 29 and 30). Going forward, BJE expects LED light business to pick up in a big way and, hence, it is aggressively marketing LED-based products through the introduction of LED portable lanterns, torches and decorative lights. Similar to its consumer durable segment, BJE has a wide distribution reach for its lighting products with a presence in 350,000 retail outlets, which helps it to tap demand in urban as well as rural areas across the country. BJE has also entered into an agreement with CREE Lighting of the US and Disano & Mareco Luce of Italy for offering outdoor street lighting and landscape lighting solutions. BJE also promotes the premium brand, Trilux Luminaires.
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Exhibit 29: CFL product revenue trend Exhibit 30: CFL as a percentage of lighting product sales
(Rsmn) (%) (Rsmn) (%) 3,500 60 6,000 70 61.4 61.0 50.0 57.5 3,000 50 5,000 53.5 60 42.9 47.4 2,500 50 40 4,000 2,000 30.0 40 25.2 30 3,000 1,500 30 16.7 20 2,000 1,000 20
500 10 1,000 10
- 0 - 0 FY09 FY10 FY11 FY12 FY13 FY09 FY10 FY11 FY12 FY13 Revenue YoY growth CFL sales Non-CFL sales CFL as a % of lighting sales Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research Exhibit 31: Rising presence in retail outlets
(nos) (Rs '000) 400,000 16 340,000 350,000 350,000 14 300,000 300,000 300,000 12 250,000 250,000 10 200,000 8 150,000 6 100,000 4 50,000 2 - 0 FY09 FY10 FY11 FY12 FY13 No. of outlets (LHS) Revenue per outlet (RHS) Source: Company, Nirmal Bang Institutional Equities Research We expect 13.5% revenue CAGR over FY14E-FY16E with a 50bps fall in margins The lighting segment is expected to achieve 13.5% revenue CAGR over FY14E-FY16E compared to a 12% CAGR likely over FY12-FY14E. While the management has undertaken similar cost rationalisation plans like the consumer durable segment, we have conservatively factored in a decline in operating margin by 50bps from 6.0% likely in FY14E to 5.5% each in FY15E and FY16E. Consequently, in absolute terms, EBIT would register 8.7% CAGR over FY14E-FY16E compared to a 1.5% CAGR decline over FY12-FY14E. Exhibit 32: Lighting segment’s financials
(Rsmn) (%) 14,000 25
12,000 20 10,000
8,000 15
6,000 10 4,000 5 2,000
- 0 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E Revenue EBIT Revenue growth YoY EBIT margin Source: Company, Nirmal Bang Institutional Equities Research
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Financial turnaround likely Robust operating/free cash flow generation likely over FY14E-FY16E BJE is likely to post a negative free cash flow of Rs1bn in FY14E owing to a sharp rise in debtors, an outcome of pile-up of retention money worth Rs1.8bn and operating losses in the E&P segment because of booking of provision for cost overrun. However, the cash flow profile is likely to witness a sharp turnaround from FY15 onwards with the release of retention money, closure of legacy projects and revival of profitability in the E&P segment. We expect BJE to report operating cash flow of Rs5.5bn and free cash flow of Rs1.3bn over FY14E- FY16E. Through healthy cash flow generation, we expect BJE to repay debt worth Rs500mn/Rs600mn in FY15E/FY16E, respectively, thereby reducing its debt-equity ratio from 0.35x in FY14E to an even comfortable level of 0.14x as of FY16-end. Exhibit 33: Operating/free cash flow trend Exhibit 34: Debt-equity profile
(Rsmn) (Rsmn) (x) 3,000 12,000 1.0 2,500 10,000 2,000 0.8 1,500 8,000 0.6 1,000 6,000 500 0.35 0.4 - 4,000 0.29 0.22 0.18 0.23 (500) 0.2 2,000 0.14 (1,000) (1,500) - 0.0 FY11 FY12 FY13 FY14E FY15E FY16E FY11 FY12 FY13 FY14E FY15E FY16E Operating cash flow Free cash flow Net worth Debt Debt-equity ratio Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research Return ratios likely to shoot up Severe pressure on profitability in the past two years on account of execution of legacy projects and subsequent booking of losses in the E&P segment led to a sharp deterioration in operating margin of BJE from the 9%-10% range over FY08-FY11 to 3.3%/3.5% in FY13/FY14E, respectively. However, post business restructuring and legacy project clean-up in the E&P segment, consolidated EBITDA margin is again likely to jump to 7.1%/7.7% in FY15E/FY16E, respectively, along with a much improved asset turnover. Consequently, the return ratios, which deteriorated sharply in FY13 and FY14E, are likely to recover in FY15E/FY16E. We expect the RoCE to rise from 12.0% in FY14E to 34.2% in FY16E, while RoE is likely to shoot up from 5.2% in FY14E to 23.7% in FY16E. RoIC would also jump from 13.1% in FY14E to 37% in FY16E. Exhibit 35: Profitability trend Exhibit 36: Trend in return ratios
(Rsmn) (%) (%) 5,000 9.3 10 50 41.2 4,000 7.7 7.1 7.7 8 40 37.0 32.8 31.1 3,000 6 30 35.7 34.2 30.3 27.6 5.2 3.5 26.0 2,000 3.3 4 20 22.1 23.7 4.1 11.9 13.1 3.8 3.7 18.0 10.7 1,000 2 10 12.0 1.5 7.2 - 0.9 0 0 5.2 FY11 FY12 FY13 FY14E FY15E FY16E FY11 FY12 FY13 FY14E FY15E FY16E EBITDA PAT EBITDA margin PAT margin RoCE RoE RoIC Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research
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Working capital cycle expected to improve After the completion of legacy projects in the E&P segment, we expect retention money worth Rs1.8bn (17.6% of FY14E debtors) to be released in FY15E. This would significantly improve the working capital cycle, as debtor days would fall from 100 in FY14E to 93 in FY16E despite a 18% CAGR in revenue over the same period. Focus on better inventory management to reduce costs would also lead to a fall in inventory days from 44 in FY14E to 41 in FY16E. While we have conservatively factored in a decline in terms of trade for payables, with creditor days falling from 125 in FY14E to 118 in FY16E, the cash conversion cycle would still register a healthy decline from 19 days in FY14E to 16 days in FY16E. Ex-cash net working capital as a percentage of sales would reduce from 16.0% in FY14E to 14.5% in FY16E. Exhibit 37: Ex-cash net working capital trend Exhibit 38: Cash conversion cycle profile
(Rsmn) (%) (days) 10,000 25 150 19.9 100 8,000 17.6 20 16.8 50 16.0 50 14.6 14.5 23 19 19 17 16 6,000 15 0 4,000 10 (50)
2,000 5 (100)
- 0 (150) FY11 FY12 FY13 FY14E FY15E FY16E FY11 FY12 FY13 FY14E FY15E FY16E Ex-cash net working capital as % of sales Debtor days Inventory days Creditor days Cash conversion cycle Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research
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3QFY14 performance highlights BJE reported 3QFY14 revenue of Rs10.3bn, up 18.3% YoY, driven by a 81.6% rise in sales of the E&P segment. The top-line of the E&P segment was driven by execution of healthy order book as well as continuation of accelerated execution of legacy projects. During the quarter, BJE completed 14 project sites in the E&P segment and aims to end FY14E with 40 active sites compared to 84 sites at the beginning of the year. Lighting segment’s revenue grew 11.6% YoY at Rs2.5bn, accounting for 24% of total revenue. Consumer durable segment had an off quarter, with a 3% YoY revenue growth at Rs5.2bn, forming 50% of total revenue. EBITDA grew 51% YoY at Rs577mn, driven by significantly lower loss in the E&P segment at Rs135mn compared to loss of Rs398mn/Rs433mn in 3QFY13/2QFY14, respectively, as old legacy projects near completion. The operating margin grew 120bps YoY at 5.6% for the quarter. Driven by improved operating performance, PAT grew 71.5% YoY at Rs200mn. Exhibit 39: 3QFY14 financial snapshot Y/E March (Rsmn) 3QFY13 2QFY14 3QFY14 YoY (%) QoQ (%) 9MFY13 9MFY14 YoY (%) Revenue 8,734 9,602 10,334 18.3 7.6 22,740 27,770 22.1 Raw material costs 6,598 7,611 7,892 19.6 3.7 17,534 21,726 23.9 Staff costs 396 585 456 15.2 (22.1) 1,275 1,443 13.2 Other expenses 1,358 1,421 1,408 3.7 (0.9) 2,954 3,838 29.9 Total expenditure 8,352 9,617 9,757 16.8 1.5 21,763 27,007 24.1 EBITDA 382 (16) 577 51.1 NA 977 763 (21.9) OPM (%) 4.4 (0.2) 5.6 - - 4.3 2.7 - Depreciation 35 39 104 194.6 166.1 102 184 80.4 Interest costs 196 196 197 0.9 0.7 529 557 5.3 Other income 24 20 25 4.7 21.8 86 64 (25.6) Exceptional items 0 0 0 - - 247 0 - PBT 174 (231) 300 72.0 NA 679 86 (87.3) Tax 57 (77) 99 73.1 NA 174 33 (81.0) PAT 117 (154) 200 71.5 NA 505 53 (89.5) EPS (Rs) 1.2 (1.5) 2.0 71.3 NA 5.1 0.5 (89.5) Source: Company, Nirmal Bang Institutional Equities Research Exhibit 40: 3QFY14 segment-wise snapshot Y/E March 3QFY13 2QFY14 3QFY14 YoY (%) QoQ (%) 9MFY13 9MFY14 YoY (%) Revenue (Rsmn) Lighting 2,216 2,509 2,472 11.6 (1.5) 5,758 6,555 13.8 Consumer durables 5,046 4,539 5,192 2.9 14.4 12,942 14,098 8.9 Engineering & projects 1,469 2,545 2,667 81.6 4.8 4,028 7,104 76.4 Revenue mix (%) Lighting 25.4 26.2 23.9 - - 25.3 23.6 - Consumer durables 57.8 47.3 50.3 - - 56.9 50.8 - Engineering & projects 16.8 26.5 25.8 - - 17.7 25.6 - EBIT (Rsmn) Lighting 156 191 129 (17.7) (32.9) 360 397 10.2 Consumer durables 609 386 500 (18.0) 29.4 1,307 1,289 (1.3) Engineering & projects (398) (433) (135) (66.0) (68.8) (737) (827) 12.2 EBIT margin (%) Lighting 7.0 7.6 5.2 - - 6.3 6.1 - Consumer durables 12.1 8.5 9.6 - - 10.1 9.1 - Engineering & projects (27.1) (17.0) (5.1) - - (18.3) (11.6) - Source: Company, Nirmal Bang Institutional Equities Research
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Key risks Any unforeseen delay in the closure of remaining legacy projects could elongate project execution and may lead to further cost over-run. Any new bottlenecks arising in the execution of healthy contracts of the E&P segment could impact revenue traction along with a dent in profitability. Change in competitive intensity or unforeseen reduction in market size of the E&P industry would affect future order inflow traction. Sudden collapse in demand in case of consumer product and lighting segments would impact revenue growth. Any unforeseen change in industry dynamics due to the shift to alternate products, higher preference for competitors’ products or lack of continued product innovation could affect the market share of BJE in the consumer durable and lighting segments along with pressure on margins. The impact of any sharp rise in commodity prices or steep rupee depreciation, if not passed on to the consumers, will affect margins. Termination of international tie-ups with leading foreign brands in consumer durable and lighting segments could impact the future business prospects in that product category.
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Financial statements
Exhibit 41: Income statement Exhibit 42: Cash flow Y/E March (Rsmn) FY12 FY13 FY14E FY15E FY16E Y/E March (Rsmn) FY12 FY13 FY14E FY15E FY16E Net sales 30,990 33,876 41,020 49,317 57,100 EBIT 2,246 963 1,138 3,198 4,029 % growth 13.0 9.3 21.1 20.2 15.8 (Inc.)/dec. in working capital (1,342) 485 (871) (665) (1,055) Raw material costs 23,577 26,651 32,201 37,629 43,681 Cash flow from operations 904 1,448 267 2,533 2,974 Staff costs 1,496 1,673 1,969 2,244 2,512 Other income 144 169 135 142 151 Other overheads 3,545 4,445 5,427 5,921 6,517 Depreciation 125 145 285 326 361 Total expenditure 28,618 32,768 39,597 45,793 52,711 Interest paid (-) (630) (690) (756) (705) (648) EBITDA 2,371 1,108 1,423 3,524 4,389 Tax paid (-) (581) (178) (134) (817) (1,165) % growth (7.0) (53.3) 28.5 147.6 24.6 Dividends paid (-) (324) (233) (210) (303) (327) EBITDA margin (%) 7.7 3.3 3.5 7.1 7.7 Net cash from operations (362) 661 (413) 1,176 1,345 Other income 144 169 135 142 151 Capital expenditure (-) (462) (598) (600) (620) (640) Interest costs 630 690 756 705 648 Net cash after capex (824) 63 (1,013) 556 705 Depreciation 125 145 285 326 361 Inc./(dec.) in short-term borrowing 963 (379) 0 (500) (600) Exceptional items 0 247 0 0 0 Inc./(dec.) in long-term borrowing (46) (59) 1,000 0 0 Profit before tax 1,759 690 517 2,635 3,531 Inc./(dec.) in total borrowings 916 (438) 1,000 (500) (600) Tax 581 178 134 817 1,165 (Inc.)/dec. in investments (75) 143 0 0 0 Net profit 1,179 512 383 1,818 2,366 Cash from financial activities 843 (295) 1,000 (500) (600) % growth (18.0) (56.6) (25.3) 375.0 30.1 Others 32 196 0 0 0 PAT margin (%) 3.8 1.5 0.9 3.7 4.1 Opening cash 486 536 501 488 543 Reported EPS (Rs) 11.8 5.1 3.8 18.2 23.7 Closing cash 536 501 488 543 649 % growth (18.0) (56.6) (25.3) 375.0 30.1 Change in cash 51 (36) (13) 56 105 Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research
Exhibit 43: Balance sheet Exhibit 44: Key ratios Y/E March (Rsmn) FY12 FY13 FY14E FY15E FY16E Y/E March FY12 FY13 FY14E FY15E FY16E Share capital 199 200 200 200 200 Per share (Rs) Reserves 6,799 7,087 7,260 8,774 10,813 EPS 11.8 5.1 3.8 18.2 23.7 Net worth 6,999 7,286 7,459 8,974 11,013 Book value 70.2 73.0 74.8 90.0 110.4 Short-term loans 1,633 1,254 1,254 754 154 Valuation (x) Long-term loans 405 345 1,345 1,345 1,345 P/E 25.8 59.4 79.5 16.7 12.9 Total loans 2,038 1,600 2,600 2,100 1,500 P/BV 4.3 4.2 4.1 3.4 2.8 Liabilities 9,037 8,886 10,059 11,074 12,513 EV/EBITDA 13.5 28.5 22.9 9.1 7.1 Gross block 2,721 3,260 3,869 4,489 5,129 EV/sales 1.0 0.9 0.8 0.6 0.5 Depreciation 881 996 1,281 1,607 1,968 Return ratios (%) Net block 1,840 2,264 2,588 2,882 3,161 RoCE 27.6 10.7 12.0 30.3 34.2 Capital work-in-progress 30 59 50 50 50 RoE 18.0 7.2 5.2 22.1 23.7 Long-term Investments 441 298 298 298 298 RoIC 31.1 11.9 13.1 32.8 37.0 Inventories 3,552 4,212 4,510 5,197 5,977 Profitability ratios (%) Debtors 9,220 9,379 10,251 11,756 13,557 EBITDA margin 7.7 3.3 3.5 7.1 7.7 Cash 536 501 488 543 649 EBIT margin 7.2 2.8 2.8 6.5 7.1 Loans and advances 2,018 2,132 2,245 2,258 2,394 PAT margin 3.8 1.5 0.9 3.7 4.1 Other current assets 1,864 2,649 2,918 3,230 3,565 Turnover ratios Total current assets 17,191 18,873 20,412 22,985 26,142 Total asset turnover ratio (x) 3.8 3.8 4.3 4.7 4.8 Creditors 8,222 9,823 10,077 11,479 13,143 Debtor days 108 100 100 95 93 Other current liabilities & provisions 2,262 2,864 3,290 3,741 4,074 Inventory days 38 42 44 42 41 Total current liabilities 10,484 12,687 13,367 15,220 17,217 Creditors days 123 124 125 120 118 Net current assets 6,707 6,187 7,044 7,765 8,925 Solvency ratios (x) Deferred tax asset (net) 19 79 79 79 79 Debt-equity 0.3 0.2 0.3 0.2 0.1 Total assets 9,037 8,886 10,059 11,074 12,513 Interest coverage 3.6 1.4 1.5 4.5 6.2 Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research
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Disclaimer Stock Ratings Absolute Returns
BUY > 15%
HOLD 0-15%
SELL < 0%
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