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Bajaj Electricals (BEL) stock has under-performed the S&P BSE Sensex since July this year and corrected over 20% in the past one month. The company's consensus earnings estimates for FY15 have been cut by 50% to Rs 9.1 per share since 1st July. The FY16 earnings estimates, too, have been trimmed by 23.5% to Rs 16.9 per share in the same period. Slowdown in overall revenue growth (from 18.4% year-on-year in June 2013 quarter to 7.2% in the September 2014 quarter) and continued losses in the Engineering and Projects (E&P) business are key reasons for the earnings cuts and stock price under-performance.
"With expected delay in E&P turnaround along with worsening growth and profitability in core lighting and consumer business, we cut our EPS estimates for FY15 and FY16 by 52% and 12% respectively", says Atul Mehra of MOSL. While revenue growth as well as order inflow has been healthy for the E&P segment (20% of revenues), profitability is under pressure due to higher costs towards hiring, stretched working capital and provisions towards bad debts on legacy orders. The segment's EBIT margins thus fell from 3.2% in FY12 to negative 9% in FY14 and stood at -8.3% in the September 2014 quarter. Given that bad debts related woes are likely to continue for some time, this segment is likely to turnaround only in FY16 (versus FY15 expected earlier), believe analysts.
Consumer durables (55% of revenues) and lighting (25% of revenues) are two key segments of BEL, in addition to E&P. Under the consumer durables segment, BEL offers a whole range of home and kitchen appliances such as irons, food processors, induction cook-tops, water purifiers, hobs, as well as fans. Revenue growth in this segment is impacted by weakness in overall consumer demand as well as rising competitive intensity and has come off from 22% in December 2012 quarter to 2.6% in the September 2014 quarter. Robust distribution network though is a key strength for BEL and will enable future growth in this segment. Also, management plans to double total Bajaj World stores (exclusive stores of its products) to 200 by the end of this fiscal. With consumer demand likely to improve, analysts expect this segment to grow at a healthy clip.
"With a strong dealer network, we believe the consumer durables and lighting segments will witness sales CAGR of 14% and 8%,respectively, in FY14-17, supported by an un-penetrated rural market, rapid urbanisation and a growing middle class", says Sanjay Manyal of ICICI Securities.
BEL's lighting and luminaries business has witnessed volatile revenue growth in the past few quarters and posted a 10% fall in the same in September 2014 quarter. Shift in consumer preference from CFL lights to LED lights is a key concern for BEL given that the company has a weak presence in the latter. Company needs to scale up its LED business significantly to drive growth going forward.
At current valuations, the BEL stock is trading at fair valuations of 13.4 FY16 estimated earnings. However, company needs to put up consistent financial performance to warrant a significant upmove from current levels. Sustainable turnaround of E&P business will be a key catalyst going forward. Intensifying competition in the appliances and fans segment is a key risk.
