Buy Bajaj Electricals; target of Rs 435: ICICIdirect

“The core business of BEL (CD and lighting segment contributes ~70% to the topline) recorded a subdued performance during FY14. Given the GDP growth in FY14 slowed down to 4.7%, urban as well as rural income levels were negatively impacted. This, in turn, resulted in dismal segment revenue growth of ~5% and ~8% YoY, respectively, with muted offtake of kitchen appliances, fans and luminaries. However, under the appliances category, BEL’s premium brand Morphy Richards (MR) recorded sales growth of 11% YoY to Rs 190 crore in FY14. The company plans to revamp its MR product portfolio with new models at the entry level of the premium segment in steam irons, mixers, food processors, induction cookers, instant water heaters and dry irons. With improved economic sentiments, we believe a revival in demand of consumer durables & lightings is imminent. We expect consumer durable & lighting segments to see revenue CAGR of 17% and 18%, respectively, in 2014-16E.”

“BEL’s E&P segment remained a laggard over the last two years at the EBIT level, in-spite of sales CAGR of ~18% during FY12-14, largely due to sharp cost overruns on legacy projects. During FY14, the company completed 40 legacy sites, which were loss making and recorded a loss of Rs 103 crore. However, the company turned cautious and focused on bidding only on higher margin projects to improve profitability. BEL recently bagged an order of worth Rs 89 crore from the Bihar government. The current order book size stands at ~Rs 2389 crore, which includes TLT projects- ~Rs 700 crore, special projects (rural electrification)- ~Rs 1489 crore and high masts- Rs 117 crore. We believe BEL will benefit from the government’s thrust to improve power infrastructure in India. We expect E&P segment to record sales CAGR of ~26% in FY14-16E with positive EBIT of Rs 47 crore and Rs 59 crore for FY15E and FY16E, respectively.”

“With an expected turnaround in the E&P business from FY15E onwards and continued dominance in the lighting & consumer durable business, we expect the company to generate EBITDA of Rs 323 crore in FY15E and Rs 451 crore in FY16E. We believe the stock is trading at attractive multiples considering the turnaround in the E&P segment. We have valued consumer durable, lighting & E&P business at 12x, 6x and 6x FY16E EBITDA, respectively, to arrive at a target price of Rs 435/share with a BUY recommendation,” says ICICIdirect.com research report.

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