Moderating growth, E&P losses dim Bajaj Electricals' prospects

The stock has been under pressure, recording sharp earnings downgrades in recent times

The Bajaj Electricals stock had fallen 19 per cent in a few days after analysts cutting their (consensus) earnings estimate about 20 per cent to Rs 13.8 at the end of July this year. Now, a similar event has seen the stock plunge about 28 per cent; on Tuesday, it fell 6.55 per cent to Rs 203.35. Since July, the company's consensus earnings estimate for FY15 has been cut 50 per cent to Rs 9.1 a share. In the same period, the FY16 earnings estimate has been cut 23.5 per cent to Rs 16.9 a share.

A slowdown in overall revenue growth (which fell from 18.4 per cent year-on-year in the June 2013 quarter to 7.2 per cent in the September quarter this year) and continued losses in the engineering and projects (E&P) business are key reasons for the cuts in estimates and the stock's under-performance.

"With expected delay in an E&P turnround and worsening growth and profits in the core lighting and consumer business, we cut our EPS (earnings per share) estimate for FY15 and FY16 by 52 per cent and 12 per cent, respectively," said Atul Mehra of Motilal Oswal Securities. While revenue growth and order inflow have been healthy for the E&P segment (20 per cent of revenue), profit is under pressure due to high costs towards hiring, stretched working capital and provisions to bad debt on legacy orders. The segment's earnings before interest and tax margin fell from 3.2 per cent in FY12 to -9 per cent in FY14, standing at -8.3 per cent in the September quarter this year. Given bad debt-related woes are likely to continue for some time, this segment is likely to turn around only in FY16 (against earlier expectations of FY15), analysts say.

Consumer durables (55 per cent of revenue) and lighting (25 per cent) are two key segments. Revenue growth in the consumer durables segment has fallen from 22 per cent in the December 2012 quarter to 2.6 per cent in the September quarter this year. A robust distribution may enable growth in this segment. The company plans to double Bajaj World stores to 200 by the end of this financial year. With consumer demand likely to improve, analysts expect this to grow at a healthy rate the next financial year. "With a strong dealer network, the consumer durables and lighting segments will see sales compound annual growth rate of 14 and eight per cent, respectively, in FY14-17, supported by an unpenetrated rural market, rapid urbanisation and a growing middle class," says Sanjay Manyal of ICICI Securities.

  Bajaj Electricals' lighting and luminaries business has seen volatile revenue growth, posting a 10 per cent fall in the September quarter. A shift in consumer preference from CFL lights to LED lights is a concern, as the company's presence in the LED segment is weak. "We expect the performance in the consumer durables segment much better in the third quarter. For the lighting segment, CFL continues to be a problem and, so, I don't expect much improvement in two quarters. We are looking at a lot of corrective actions so that next year, the lighting segment will fare well. We should have positive growth in the luminaries segment," Chairman and Managing Director Shekhar Bajaj said in a post-results call with analysts. He, however, maintained the FY15 revenue target of Rs 4,700 crore. He is also hopeful of writing back some provisions towards bad debts in the E&P segment in the fourth quarter. The stock is trading at a reasonable 13.4 times the FY16 estimated earnings. Though the consensus target price of Rs 250 suggests upsides, most analysts remain bearish.