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Bajaj Electricals: Modest growth in profits - Views on News from Equitymaster

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Bajaj Electricals: Modest growth in profits
Nov 3, 2011

Bajaj Electricals has announced its September quarter results. The company has reported a 19% growth in topline and 8% YoY growth in net profits for the quarter ended September 2011. Here is our analysis of the results.

Performance summary
  • Topline grows by 19% YoY during the quarter, led by 21% growth in consumer durables
  • Operating margins contract by 0.2% as higher other expenses take toll
  • Bottomline grows by a muted 8% YoY on the back of significant jump in interest expenses
  • Half yearly bottomline falls 21% YoY on the back of 16% growth in topline

(Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Net sales 5,880 7,008 19.2% 10,719 12,452 16.2%
Expenditure 5,430 6,483 19.4% 9,863 11,624 17.9%
Operating profit (EBDITA) 450 525 16.7% 856 828 -3.3%
EBDITA margin (%) 7.7% 7.5%   8.0% 6.6%  
Other income 11 7 -34.3% 25 13 -49.0%
Interest (net) 76 128 68.7% 133 235 76.8%
Depreciation 23 29 24.8% 47 60 27.7%
Profit before tax 361 375 3.7% 701 546 -22.2%
Extraordinary items (1) (0)   (2) -  
Tax 128 125 -2.3% 242 185 -23.8%
Profit after tax/(loss) 232 250 7.5% 457 361 -21.1%
Net profit margin (%) 4.0% 3.6%   4.3% 2.9%  
No. of shares (m) 98.2 99.6   98.2 99.6  
Diluted earnings per share (Rs)*         13.5  
Price to earnings ratio (x)*         14.6  
(* on trailing twelve months earnings)

What has driven performance in 2QFY12?
  • Company's topline managed to grow by a strong 19% YoY during the quarter. This was driven by its mainstay, the consumer durables business, which recorded a growth of 21% YoY. Another division that contributed strongly towards the robust topline growth was the lightings division. This segment grew the fastest on account of strong consumer demand and logged in 25% higher revenues over same quarter last year. Growth in overall topline however was impacted due to the poor performance of the E&P division, which managed a modest 10% 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 0.2% YoY during the quarter. This was mainly on account of a 32% surge in other expenses. As far as segmental margins are concerned, cost pressures took their toll on the consumer durables business as higher metal prices and lower rupee caused the margin of the segment to go down by 2%. However, what turned out to be a saving grace for the company was the improved margin performance of the E&P division. The lightings division also did well on the margin front.


  • Segmental break up...
    Segment 2QFY11 2QFY12 % change 1HFY11 1HFY12 Change
    Lighting
    Revenues 1,514 1,892 25.0% 2,613 3,166 21.2%
    PBIT 68 113 67.4% 89 175 95.7%
    PBIT margin 4.5% 6.0%   3.4% 5.5%  
    Consumer Durables
    Revenues 2,798 3,394 21.3% 5,427 6,425 18.4%
    PBIT 317 315 -0.9% 568 606 6.6%
    PBIT margin 11.3% 9.3%   10.5% 9.4%  
    Engg & Projects
    Revenues 1,563 1,712 9.5% 2,670 2,848 6.7%
    PBIT 48.0 65 35.0% 161.5 (12) n.a.
    PBIT margin 3.1% 3.8%   6.0% -0.4%  
    Others
    Revenues 6 10 70.5% 8 12 54.4%
    PBIT 4 8 119.4% 4 7 97.1%
    PBIT margin 59.0% 76.0%   44.3% 56.6%  

  • Apart from operating margins, what also affected the profitability was the steep 69% jump on account of interest expenses. This was not only due to 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 muted 8% growth 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 196, the stock trades at a multiple of around 8 times our expected FY14 earnings per share. We believe that the consumer durables story is far from over and while competition will no doubt slow growth, the division will still continue to increase revenues at a decent rate. Besides, the company efforts at improving the fundamentals of the E&P division should also ensure that profitability comes in healthy. In view of these expectations, we maintain our positive stance on the stock.

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