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Bajaj Electricals: Focus on margins
Jul 6, 2010

We recently met the management of Bajaj Electricals Ltd to understand the company's growth plans and the sector prospects. Here are the key takeaways from our meeting. A brief about the company: Bajaj Electricals is a part of the Bajaj group. The group which is one of the oldest business conglomerates in India. The company manufactures and markets appliances, fans, lighting and luminaries. It also has interests in engineering and project works. However, the company considers itself as a marketing entity. This is because it has outsourced manufacturing of its products. The products are manufactured as per the company's specification and marketed under the Bajaj brand. Out of the range of small appliances that it offers, it only manufactures fans that to only 40% of the total sales. The company has also tied up with other brands such as Morphy Richards to market their products in India. It has acquired stake in Starlite Lightening Ltd. that manufactures Compact Fluorescent Lamps (CFL ).

Nature of the business segments: Consumer durables and lightening segment together account for 60% of the total revenues. Both these business segments are highly competitive in nature. The margins are also on a lower side. The positive aspect of this business is its low working capital requirement. Lightening business operating margins have hovered around 7% over the past eight years. The average annual operating margins of consumer durables stand at 7%. But the same have improved over the years from around 5% in FY04 to 10% in FY09. On the other hand, engineering and projects division operating margins hover around 14%. The competition in this line of business is limited. Moreover, considering the company's experience and expertise it is less likely to witness threat of new entrants. However, this business' working capital requirements are on higher side.

Strategy adopted...: The company has adopted a strategy to focus on margins. It has outlined plans to focus on engineering business segment. This is because of the high margin nature of the business. The competitive business segments (small appliances and lightening business) are likely to support growth in revenues. On the other hand engineering business is expected to cushion margins. The company's business segments are complementary in nature. The consumer durables and lightening business is an asset light model generating cash. Whereas high working capital requirement engineering business cushions margins of the company.

Going forward, the management of the company foresees all three business segments accounting for equal share in revenues. Though the company's revenue structure is witnessing a change, the business strategy remains the same. The company is focused on margins. While booking revenues, the company ensures that its operating margins are maintained at around 10% level.

Way forward: Recently the company had come out with a QIP issue of Rs 1.6 bn to fund its future growth plans. The funds raised would also be utilised to lower its debt burden and to meet its working capital requirements (project business). The company is expanding its dealer distributor network. Increased reach would support growth of its small appliances and lightening business. In case of engineering business it is planning to expand capacity. However, the same is yet to be finalized. Over the next two to three years, the company is expected to spend of Rs 500 to 550 m on an annual basis. The company plans to grow organically as well as inorganically as the opportunities exists. The funds raised would suffice the company's growth plans. Thus, it does not intend to increase borrowings.

The company has indicated that its debt to equity (D/E) ratio is around 0.3 times. This is taking into account its FY10 performance, QIP issue and split of shares (share of face value of Rs 10 each is sub divided into 5 shares of face value of Rs 2 each). The company has no intensions of leveraging its balance sheet to fund its growth plans. The company has a comfortable D/E ratio of below 1. In fact the same may come down further as the capital expenditure plans start generating returns over the next two to three years.

Our view: The three business segments are complementing each other. The growth drivers of these segments are increasing population, aspiring individuals, government's increased spend on infrastructure (roads, bridges, ports and so on) built up. Considering the opportunities there is immense potential to explore and grow. Engineering and project business is expected to grow at an annual average rate of 40% in the coming years, while the other businesses are expected to clock in growth of 20%. Considering the growth opportunity and the company's focused approach, we believe that the capital invested would generate returns to the tune of 25% on an average annual basis going forward.

At the current juncture, the stock at RS 220 is trading at 18.3 times its trailing twelve month earnings

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