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Bajaj Electricals: Margins go for a toss - Views on News from Equitymaster
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Bajaj Electricals: Margins go for a toss
May 28, 2013

Bajaj Electricals has announced its March quarter results. The company has reported 5% growth in topline and 99% YoY fall in net profits for the quarter ended March 2013. Here is our analysis of the results.

Performance Summary
  • Topline grows by 5% YoY during the quarter, led by 22% growth in consumer durables
  • Operating margins contract by 6.7% as cost of traded goods go up
  • Bottomline falls by 99% YoY on the back of a poor operating performance and rise in depreciation expenses
  • Bottomline for the full year falls by 57% YoY on the back of a 9% growth in topline

(Rsm) 4QFY12 4QFY13 Change FY12 FY13 Change
Net sales 10,599 11,137 5.1% 30,990 33,876 9.3%
Expenditure 9,756 11,005 12.8% 28,618 32,768 14.5%
Operating profit (EBDITA) 842 132 -84.3%  2,371 1,108 -53.3%
EBDITA margin (%) 7.9% 1.2%   7.7% 3.3%  
Other income 83 82 -1.7%  144  169 17.7%
Interest (net) 163 161 -1.2%  630  690 9.4%
Depreciation  36  43 17.7%  125  145 15.4%
Profit before tax 726  10 -98.6%  1,760  443 -74.9%
Extraordinary items - -   -  247  
Tax 236 4 -98.3%  581  178 -69.4%
Profit after tax/(loss) 490  6 -98.7%  1,179  512 -56.6%
Net profit margin (%) 4.6% 0.1%   3.8% 1.5%  
No. of shares (m)  99.7  99.7   99.7 99.7  
Diluted earnings per share (Rs)*          5.1  
Price to earnings ratio (x)*         32.7  
Price to earnings ratio (x)*

What has driven performance in 4QFY13?
  • Company's topline managed to grow by a tepid 5% YoY during the quarter. This was driven by its mainstay, the consumer durables business, which recorded a growth of 22% YoY. With the consumer story remaining intact, this segment was able to once again record impressive growth.

  • Growth in overall topline however was impacted due to the poor performance of the E&P division, which witnessed a decline of nearly 22% YoY. However, the company has expressed confidence that things would certainly look much better in FY14.

  • As far as margins are concerned, they took a huge knock of nearly 7% YoY during the quarter. It is clear from the table below that main culprit behind the poor margin performance is the company's E&P segment. The division suffered a loss at the PBIT level. As per the company this was mainly on account of the fact that it is undergoing a major clean up exercise for the older projects that are seeing significant cost overruns. Once the legacy projects are taken care of, the performance of the company should improve as almost all the new orders that it has come with good margin potential.

  • Apart from this, segmental margins for other divisions also came in lower and this further affected the operating performance. Consumer durables and lightings segments both suffered a margin contraction on account of inventory write down of some old goods still lying with the company and also due to adverse impact of rupee depreciation as the company imports quite a lot of goods from China.

    Segmental break up...
    Segment 3QFY12 3QFY13 Change 9mFY12 9mFY13 Change
    Revenues 2,002 2,215 10.6% 5,169 5,755 11.3%
    PBIT 132 151 14.9%  336  360 7.0%
    PBIT margin 6.6% 6.8%   6.5% 6.3%  
    Consumer Durables
    Revenues 4,138 5,044 21.9% 10,564 12,935 22.4%
    PBIT   475 598 25.9% 1,090 1,307 19.8%
    PBIT margin 11.5% 11.8%   10.3% 10.1%  
    Engg & Projects
    Revenues 1,794 1,469 -18.1% 4,643 4,028 -13.2%
    PBIT 68   (401) n.a. 59.4 (737) n.a.
    PBIT margin 3.8% -27.3%   1.3% -18.3%  
    Revenues   3 3 -5.9% 16 13 -19.4%
    PBIT   1  0.4 -42.9%   8   4 -42.1%
    PBIT margin 20.6% 12.5%   49.0% 35.2%  

  • Apart from operating margins, what also affected the profitability was the less than proportionate fall of 1% in interest expenses as also higher depreciation charges. This led to a massive 99% fall in both PBT as well as PAT for the company.

What we expect?

At the current price of Rs 164, the stock trades at a multiple of around 7 times our revised FY15 earnings per share. Although some legacy orders in the E&P segments are still to be completed, the company expects a much improved performance from this segment in FY14 than in the recent past. Given the company's seriousness in achieving this and the continued strong growth prospects of its consumer durables and lightings business, we maintain our HOLD view on the stock.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also, within your overall exposure to equities, please ensure that you broadly follow our suggested asset allocation and that no single mid cap stock comprises more than 3-4% of your portfolio.

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