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Bajaj Electricals: E&P takes a big knock! - Views on News from Equitymaster

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Bajaj Electricals: E&P takes a big knock!
Jul 30, 2011

Bajaj Electricals has announced its June quarter results. The company has reported a 13% growth in topline and 51% YoY fall in net profits for the quarter ended June 2011. Here is our analysis of the results.

Performance summary
  • Topline grows by 13% YoY during the quarter, led by 15% growth in consumer durables
  • Operating margins contract by nearly 3% as higher other expenses take toll
  • Bottomline suffers a fall of 51% YoY on the back of poor operating performance and significant jump in interest expenses


Rs m 1QFY11 1QFY12 Change
Net sales 4,839 5,443 12.5%
Expenditure 4,432 5,141 16.0%
Operating profit 406 302 -25.8%
Operating margins (%) 8.4% 5.5%  td>
Other Income 14 7 -52.5%
Interest (net) 57 107 87.5%
Depreciation 24 31 30.6%
Profit before Tax 340 171 -49.7%
Extraordinary item (0.1) (0.3)  
Tax 115 60 -47.8%
Profit after Tax/(Loss) 225 111 -50.8%
Net profit margin (%) 4.7% 2.0%  
No. of Shares (m) 97.9 99.6  
Diluted Earnings per share (Rs)*   13.4  
Price to earnings ratio (x)*   16.2  
*12 months trailing earning

What has driven performance in 1QFY12?
  • The company's topline managed to grow by a decent 13% YoY during the quarter. This was driven by its mainstay, the consumer durables business, which recorded a growth of 16% YoY. Here, had it not been for the sharp 50% fall in sales of coolers on account of less than intense summer, the topline growth would have looked even better. Growth in overall topline however was impacted due to the poor performance of the E&P division, which managed just a 3% YoY growth. However, the company has expressed confidence that this is just a temporary phase and things would certainly look much better second half onwards.

  • As far as margins are concerned, they took a knock of nearly 3% YoY during the quarter. Here again, the E&P division was the culprit as segmental margins turned into the negative on account of a small loss for this division. As per the company, this was a clean up quarter for the division and margins should witness an uptick as the segment was undergoing some serious strategic shift internally. From now on, there will be a still greater focus on profitability and better capital utilization if the management is to be believed.

    Segmental break-up...
    (Rs m) 1QFY11 1QFY12 Change
    Lighting      
    Revenues 1,100 1,274 15.8%
    PBIT 22 62 183.1%
    PBIT margins 2.0% 4.9%  
    Consumer durables      
    Revenues 2,630 3,031 15.3%
    PBIT 251 291 16.1%
    PBIT margins 9.5% 9.6%  
    Engineering and projects      
    Revenues 1,107 1,136 2.6%
    PBIT 114 (76) N.A.
    PBIT margins 10.2% -6.7%  
    Others      
    Revenues 2 2 0.0%
    PBIT (0) (1) N.A.
    PBIT margins -5.6% -55.6%  

  • Apart from operating margins, what also affected the profitability was the steep 88% jump on account of interest expenses. This was not only on account of increased working capital requirement but also due to higher interest rates brought about by the RBI's strong monetary tightening.

  • Thus, lower operating margins as well as high financing costs combined together to result into a steep 51% decline in net profits on a YoY basis during the quarter. The fact that depreciation jumped sharply and other income fell also didn't help matters.

What to expect?
At the current price of Rs 217, the stock trades at a multiple of 10 times our revised FY12 earnings per share. On account of the below par performance in the engineering and projects division which we think will persist for quite some time to come, we are revising our target downwards for the company by about 20%. Our new target now stands at Rs 322 per share. Since this is higher than the current price and also the price at which the stock was recommended, we maintain our positive view on the stock.

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