INSTITUTIONAL EQUITY RESEARCH Bajaj E ?· INSTITUTIONAL EQUITY RESEARCH Page | 1 | PHILLIPCAPITAL INDIA…

Embed Size (px)

Text of INSTITUTIONAL EQUITY RESEARCH Bajaj E ?· INSTITUTIONAL EQUITY RESEARCH Page | 1 | PHILLIPCAPITAL...

  • INSTITUTIONALEQUITYRESEARCH

    Page|1|PHILLIPCAPITALINDIARESEARCH

    BajajElectricals(BJEIN)TOCandRREParecomingintoplayreratingsoonINDIA|MIDCAPELECTRICALS|CompanyUpdate

    11May2017

    Whyreadthisreport? BajajElectricals(BJE)isonthecuspofarerating OurchannelcheckssuggestthatimplementationofTOC(TheoryofConstraints,started

    twoyearsago)andRREP(RangeandReachExpansionProgram,beganayearago)havestartedyieldingrapidresultsnow.

    IncreasingtouchpointsandproductmixunderRREP isresulting in improvingrevenuevisibilityandmarginimprovement.

    TightcontrolonworkingcapitalandchannelfinancingunderTOC isresulting in lowerworkingcapitalneeds.BJEsWCdaystofallto53byFY19;willleadFCFofRs6bnoverFY1719highestinthelastsevenyears.

    RoE/RoCEimprovingto19%/25%byFY19from13%/17%inFY16.

    WhatBJEdidoverthelastfewyears:ItsTOCandRREPimplementationinvolvedincreasingtouchpointsandcounters, improving inventoryandstockingmanagement,productreach,andincreasingSKUs,andreducingworkingcapitalneeds.Italsosetouttorecreateitsbrandtoridearevivalintheconsumersegmentplanstoincreaseitsadvertisingspendto2.5%ofsales by FY19 vs. 1.9% in FY16. In E&P, it became more selective about projects, andincreasedexecution.ItalsoimprovedmarginsandreducedWCthroughlowerinventory.

    Theresultsofthechanges(PCestimates):ConsumerDurables(CD,70%ofsales)willstartshowinggrowth (10%/13% inFY18/19)basedongrowing touchpointsandproductreach.E&P (30% of sales) is out from slowmoving projects and is seeing better execution andprojectselection;shouldsee8%/10%growthinFY18/19,backedbyhealthyorderbook(Rs18.5bninFY17).Marginswillimproveby145bpsoverthenexttwoyears(majorlydrivenbyCD)andprofitswilldouble(30%CAGR inFY1719). Improvement inbusinessmixwilleaseworkingcapitalrequirements to53days from75days inFY16.Freecashwillhelppayoffdebtin34years.RoE/ROCEwillimprovedramatically. How isTOChelping:Atthebeginningof implementation,BJE lostmarketshare inCD,buthasnowappliedTOC inmostof itsmarkets.Thishelped itto increasetouchpoints (retailcounters),which resulted inmorevisibilityandavailabilityof itsproducts.Weexpect thisvisibilitytoaidBJEinrecoveringitsmarketshareandinsalespickingupfromFY18.

    OutlookandvaluationHistorically,BJEhastradedatasignificantdiscounttoitspeers,andrightlyso,duetolowermarginsinCDandvaluedestructioninE&Pduetolosses.However,overthenexttwoyears,weexpectthevaluationgapbetweenBJEanditspeerstonarrowas:(1)TOCyieldsresults,(2) BJE focuses on leveraging distribution network through geographical and productexpansion, (3) there is strong revenue visibility, with levers for margin expansion, (4)workingcapitalcouldimprovebecauseofTOCandasBJEadoptschannelfinancing,resultingin an FCF generation of Rs 6bn over FY1719 (highest in the last seven years), and (5)improvingreturnratios.Consequently,wehaverevisedourFY18/19earningsestimatesby4%/6%.

    Currentstockprice impliesa20xPE forBJEsCDsegmentand6xEV/EBITDAonourFY19estimates.WeassignaFY19 targetPEof26x toBJEsCD segmentearnings (72%ofFY19PAT)togetapersharevalueofRs390.Weexpectmeasurestakenbythecompanytoleadtorobustcashflowgeneration; improvement inthereturnprofilewillspurarerating.Ourmultiple is at a 35% discount to the industry average. We value its E&P segment onEV/EBITDAat7xFY19vs.industryaverageof10xtoarriveatapersharevalueofRs60.Wereviseourtargetprice(SOTP)toRs450(Rs300earlier)implying29%upside.UpgradeourratingtoBuyfromSell.

    BUY(Upgrade)CMPRS350TARGETRS450(+29%)COMPANYDATAO/SSHARES(MN): 101MARKETCAP(RSBN): 36MARKETCAP(USDBN): 0.652W7KHI/LO(RS): 388/203LIQUIDITY3M(USDMN): 2.8PARVALUE(RS): 10SHAREHOLDINGPATTERN,% Mar17 Dec16 Sep16PROMOTERS: 63.4 63.4 63.5FII/NRI: 7.6 7.6 7.9FI/MF: 6.8 7.7 7.7NONPRO: 7.4 5.6 5.6PUBLIC&OTHERS: 14.8 15.6 15.3PRICEPERFORMANCE,%

    1MTH 3MTH 1YRABS 1.3 30.0 51.5RELTOBSE 1.0 23.2 34.1PRICEVS.SENSEX

    Source:PhillipCapitalIndiaResearchKEYFINANCIALSRsmn FY17E FY18E FY19ENetSales 44,663 48,824 54,688EBIDTA 2,719 3,366 4,121NetProfit 1,108 1,588 2,105EPS,Rs 11.0 15.7 20.8PER,x 31.9 22.2 16.8EV/EBIDTA,x 14.2 11.5 9.3P/BV,x 4.3 3.8 3.3ROE,% 13.4 17.0 19.4Debt/Equity(%) 0.9 0.7 0.5

    Source:PhillipCapitalIndiaResearchEst.DeepakAgarwal(+912262464112)dagarwal@phillipcapital.in

    6080

    100120140160180200

    Apr16 Sep16 Feb17

    BajajElec BSESensex

  • Page|2|PHILLIPCAPITALINDIARESEARCH

    BAJAJELECTRICALS COMPANYUPDATE

    ImplementingRREPsuccessfullyInitsinitialstages,implementationofitsRREPresultedinlowersalesorsomemarketsharelossinsomeCDproducts.Sofar,itsRREPhascovered~45%ofitsaddressablemarket.ManagementexpectscrosscountryRREPimplementationtobecompletebytheendofFY18(hascovered99districtssofar,willcover111inFY18).IthascoveredMaharashtra,TamilNadu,Bihar,Rajasthan(someparts),andallmajormetros.InareaswhereBJEhasimplementedTOC,itsprimarysaleshavestartedpickingupaccordingtoourchannelchecks.Thisprogramishelpingthecompanytoincreaseitstouchpoints(retailcounters)withmoreproducts/SKUsavailability.ThishasresultedinmorevisibilityandavailabilityofBJEproductsand isalsohelping ittorecover itsmarket share. We expect primary sales to pick up from FY18; see a growth of10%/13%inFY18/19fromitsCDbusiness(lighting+consumerdurables).

    AbetterdistributionnetworkUnderTOC,BJEhasmodifieditstraditionaldistributionnetworktoavoidapricewarbetween channel partners and to reduce channel stuffing (inventory blocking bychannelpartners). Ithas removedwholesalers from thechannel,andnowsuppliesdirectly to dealers and retailers. Initially, this step resulted in lower sales (aswholesalersmovedout from thechannel)andsome loss inmarketshare.Butnowthis move is helping BJE to: (1) increase its touch points/counters (focusing onincreasingreach),(2)controlinventory(workingcapital)andpricing,and(3)achievegrowthandhealthmargins.Traditionaldistributionchannel Newdistributionchannel

    Retail/SubDealers

    BajajElectricalsLtd

    Distributors(CD+Lightning)

    Dealers Wholesale

    Retail/SubDealers

    BajajElectricalsLtd

    Distributors(ConsumerDurables)

    Dealers

    ConvertedunderoneBU(businessunit):

    OnedistributorforaspecificareawithallproductsandSKUs

    Lowersmanpowercost Focusedarea,resultincoveringmorecounters

    Removal of thewholesaler: Noinventorystocking Nopricewar Somelossinsales

    Channelcheck: InRREPimplementedareasoutof10retailcounter~5arenowsellingBajajproductsvs.12earlier

    Infans:LostsomemarketshareintheinitialstagesofTOC,asthisproductsegmentwasmajorlydrivenbywholesalers

    Toincreaseitspresence,BJEisfocusingonecommerce.

    Channelcheck:InanareaswhereBJEimplementedTOC,adealerstouchpointshaveincreasedto~200countersvs.~70earlier

  • Page|3|PHILLIPCAPITALINDIARESEARCH

    BAJAJELECTRICALS COMPANYUPDATE

    Marginstorise The visibility of its products and itsmargins have both improved due to coverage(touch points) in RREP implemented areas and better availability of SUKs withuniform pricing policy across dealers and distributors. This has started showing inBJEsperformance in3QFY17(lighting+consumerdurables)margin improvementof134bpsyoyand438bpsqoq.Weexpectafurtherimprovementof150bpsoverthenexttwoyearsascoverageandproductmiximproves. LightingandCDtoshowimprovementof121bps/236bps QuarterlyCD(CD+lighting)margin

    Source:Company,PhillipCapitalIndiaResearchEstimatesCDandlightingsegmentperformanceLighting Mar13 Mar14 Mar15 Mar16 Mar17 Mar18 Mar19Revenues(INRm) 8,604 9,530 8,983 10,576 8,990 9,529 10,386Growth(%) 12.5% 10.8% 5.7% 17.7% 15.0% 6.0% 9.0%EBITDA 600 420 353 718 633 724 831OPM(%) 7.0% 4.4% 3.9% 6.8% 7.0% 7.6% 8.0%ConsumerDurables Mar13 Mar14 Mar15 Mar16 Mar17 Mar18 Mar19Revenues(INRm) 18,377 19,252 20,237 20,026 19,225 21,532 24,762Growth(%) 22.5% 4.8% 5.1% 1.0% 4.0% 12.0% 15.0%EBITDA 1,780 1,436 1,402 929 1,000 1,335 1,733OPM(%) 9.7% 7.5% 6.9% 4.6% 5.2% 6.2% 7.0%

    Source:Company,PhillipCapitalIndiaResearchEstimatesPolishingtheBajajbrandBajaj is one of the oldest brands in consumer durableswith about 60,000 touchpoints.Duringthe lasttwoyears,BJEhas lostmarketshare(dueto implementationofTOC)especiallyinsomeproductssuchasfans,butwasabletomaintainitsmarketshare insomeotherssuchas irons,waterheaters,andmixers. IthasastrongpanIndiapresenceandisnowfocusingonincreasingitstouchpoints(retailcounters)andaggressively increasing advertising spend and activity.We except it to increase itsbrandequityandtoregainitslostmarketshareinthenext12years.

    0%

    2%

    4%

    6%

    8%

    10%

    12%

    14%

    FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17e FY18e FY19e

    Lighting ConsumerDurables

    0.0%

    2.0%

    4.0%

    6.0%

    8.0%

    10.0%

    12.0%

    14.0%

    Mar/07

    Oct/07

    May/08

    Dec/08

    Jul/0

    9

    Feb/10

    Sep/10

    Apr/11

    Nov/11

    Jun/12

    Jan/13

    Aug/13

    Mar/14

    Oct/14

    May/15

    Dec/15

    Jul/1

    6

    NomorepricewarsThecompanyisverifyingbulk(institutional)orderplacedbydealers(togetabetterprice),anddirectlysupplyingtocustomers(tominimiseshamordersapracticebysomechannelpartnerstogetbulkdiscounts).Haskeptuniformprice(RLPretaillandingprice)forallitschannelpartners.

    BJEisimprovingitsproductmixbypushingandsellingmorepremiumproductsinnewandexistingchannels

  • Page|4|PHILLIPCAPITALINDIARESEARCH

    BAJAJELECTRICALS COMPANYUPDATE

    Advertisementspendstoincreaseto2.5%

    Source:Company,PhillipCapitalIndiaResearchEstimatesE&P:SlowandsteadyimprovementSelection of the projects and increased execution has resulted in improvingprofitability in this segment. BJE has implemented TOC for its project executionbusiness to improve supply chain and execution capabilities. To ensure that fixedcostsare coveredand toprotectmargins, it is selectiveaboutpickinguporderswhichresultedin66%lowerorderintakeinFY16.However,thiswillresultinmarginimprovement of 174bps over FY1719. TOC has speeded up project executionsubstanti

Recommended

View more >