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BAJAJ ELECTRICALS KC DEC 11 IC

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					            Bajaj Electricals Ltd- Initiating Coverage Report                                                                             BUY




Date: 29th December, 2011      Bajaj Electricals Ltd (BJE) is a 72 year old company with diversified business interest in
                               consumer durables, lighting and engineering & projects (E&P) which has been growing
Sector:         Engineering & strongly at a CAGR of 25.9% between FY08-FY11 and is expected to grow at the CAGR of
                Capital Goods 17.5% between FY11-FY13E backed by robust growth in consumer durable segment and
CMP                     `140.0 steady growth in other divisions.
Target Price:          `208.0
Upside Potential:      48.6%
                                                Consumer Durables BU rising high on increasing Indian consumption: Consumer
                                                                               g   g                 g                p
BSE Code              500031
                                             durables segment (small appliances & fans business units) has grown exponentially with the
NSE Code           BAJAJELEC
                                             CAGR of 28.4% between FY08-FY11 and is expected to grow at the CAGR of 22%% between
Bloomberg             BJE@IN
                                             FY11-FY13E backed by company's aggressive promotion strategies, extensive dealer network,
Reuters              BJEL.BO
Mkt cap (Rs. bn)        13.94
                                             strong brand franchise, introduction of newer products. The business unit (BU) contributes
Equity shares(mn)        98.8                ~46.6% to total revenue of BJE and the contribution is expected to go to 50.3% by FY13E.
Face Value(`)               2                Around 35% of total sales in consumer segment come from rural and semi-urban areas which
52Weeks H/L      296.0/132.9                 are growing at approximately three times the growth in urban markets.
Sensex               15727.9
                     15727 9
Nifty                 4705.8 Lighting and luminaries BU on steady growth backed by increasing CFL demand:
                           The Lighting BU has achieved a turnover of `3160 mn in FY11 with robust CAGR growth of
Shareholding as on 30th    ~24% between FY07-FY11 and is expected to grow at the CAGR of ~21.7% in FY11-FY13E
September 2011 (%)         despite intense competition and rapidly changing market dynamics. The CFL segment
Promoters            65.6 continues to register a strong growth with sales exceeded the `1750 mn mark in FY11 and is
Mutual Funds/UTI       9.2 expected to grow at the CAGR of 23.5% in FY11- FY13E. The luminaire BU maintains No. 2
FIs/ Banks            1.0
                           position in India with ~17% market share in organized sector.
FIIs                         6.5
                             65
Bodies Corporate             3.7
                                   Re-structuring of E&P projects BU to improve ROCE & Operating Margin: The E&P
Public                      13.0
                                 project BU contributed ~30% to BJE’s total revenue but the contribution is expected to decline
Any Others:                  1.1
                                             to ~25% of total revenue by FY13E and is expected to grow at the CAGR of 9.7% between
        BJE                                  FY11-FY13E. BJE is planning to close down critical projects to reduce excess capital employed
        SENSEX (,000) [R.H.S.]
                                             and improve the segment performance.
300                         25
                                      ands




                                               Changing Product mix to achieve better margins in long run: The share of consumer
                                                     g g                                         g           g
250
                                 Thousa




                            20               durable segment to total has increased to 46.6% in FY11 and is expected to go up to 50.3%
200                                          by FY13E, considering BJE’s strategy to re-align business model toward fastest growing
                            15               consumer durable segment. With the increasing share of higher margin consumer durable
150                                          segment in the total sales along with favorable products mix in lighting (higher sales of CFLs),
                            10               we expect BJE’s EBITDA margins to improve to 9.0% by FY13E.
100

 50                         5                Valuation & Recommendation:
                                                              share,                                              9.1x
                                             At CMP of `140/ share BJE is currently trading at P/E Multiple of 9 1x on FY12E EPS of `15 4
                                                                                                                                      `15.4
  0                         0                and at 7.4x on FY13E EPS of `18.9. We recommend “BUY” on BJE with target price of
                                             `208/ share (11x P/E on FY13 EPS of `18.9), which is strongly supported by BJE’s renowned
                                             brand, collaboration with strong foreign players and wide distribution providing an competitive
                                             advantage to BJE and will help BJE to improve its margins in coming years. BJE is a dominant
                                             player in Appliances, luminaire & lot of product categories in fans division.

                         Revenue                 EBITDA    EBITDA Margins     PAT  
                          (    )
                          (` mn)                 (
                                                 (` mn))         (%)
                                                                 ( )        (` mn)
                                                                            (     )           g ( )
                                                                                      Net Margins (%)   EPS       P/E  
                                                                                                                   /      EV/EBITDA
                                                                                                                            /              ROE
FY10                     22286.3                 2363.6        10.6%        1252.7         5.6%         12.8      17.4         9.6        25.3%
FY11                     27407.5                 2522.7         9.2%        1448.6         5.3%         14.7      16.7         9.9        23.7%
FY12E                    31508.0                 2728.8         8.7%        1521.4         4.8%         15.4      9.1          5.6        20.7%
FY13E                    37808.2                 3395.2         9.0%        1873.1         5.0%         18.9      7.4          4.3        20.9%
                                KC Research Reports are also available on Reuters, Thomson publishers, myiris.com, Bloomberg KCSL <GO> and Factset


             Analyst: Amit Anwani – amit.anwani@kcsecurities.com                                                          +91-22-30287987
          Bajaj Electricals Ltd- Initiating Coverage Report




                        Investment Rationale:
                        Consumer Durables to provide future growth potential backed by rising Indian consumption:
Consumer
Durables, fastest
growing segment with    Consumer segment which consists of small appliances & fans business units (BUs) has grown
CAGR of 28.4%           exponentially with the CAGR of 28.4% between FY08-FY11 with segment revenue at `12768
between FY08-FY11 &
is     t dt
i expected to grow at
                    t                                                                       FY11 FY13E
                        mn in FY11 and is expected to grow at the CAGR of 22% between FY11-FY13E backed by
the CAGR of 22% in      company's aggressive promotion strategies, extensive dealer network, strong brand
FY11-FY13E
                        franchise, introduction of newer products and improvement in existing products. Consumer
                        durable business unit (BU) contributes ~46.6% to total revenue of Bajaj Electricals Ltd (BJE)
                        and the contribution is expected to go to 50.3% by FY13E. Around 35% of total sales in
                        consumer segment come from rural and semi-urban areas which are growing at
                        approximately three times the growth in urban markets.
                            20000                                       13.0%                                  19011.3     14%
                                                                                  11.3%        15450.1                     12%
                                        10.4%                                                               11.2%
                            15000                      9.3%                     12768.6           11.0%
                                                                                                                           10%
                                                                      9544.5                                               8%
                            10000                     7532.7
                                      6031.6                                                                               6%

                             5000                                                                                          4%
                                                                                                                           2%
                                0                                                                                          0%
                                       FY08            FY09             FY10     FY11          FY12E           FY13E
                                      Consumer Durables BU Revenue (Rs. Mn)          Consumer Durables EBITDA Margin (%)

                        A) Small Appliances BU:

Morphy Richards                                                                                 heaters, mixers,
                        Appliances BU has a wide range of domestic appliances including water heaters mixers food
Brand is fastest
                        processors, microwave ovens, air coolers, steam and dry irons, electric kettles, water
growing in ‘Domestic
small Appliance’        filters, toasters, rice cookers, (OTG) oven-toaster-grillers, juicer-mixer-grinders, hair
category & occupies     dryers, chimneys, gas stoves, hobs, room heaters, home ups, pressure cookers, water
no.1
position in India for   purifier etc. Bajaj electrical being the fastest growing Appliances company in the country is
coffee-makers,          having leadership position in various category including Irons, Water Heaters, OTG, Mixers
toasters,
                        and Coolers etc. with market share ranging between 15-30% across the categories.
                        The launch of vide range of Pressure Cookers and Water Purifiers during the year in few
                        markets has received good response with ~23% contribution to appliance BU sales in FY11.
                        BJE is having a tie-ups with UK based Morphy Richards (MR), and BJE is also having tie-up
                        with Italy based Nardi for gas appliances, cooking etc.
                        The MR brand has emerged as a fastest growing and leading brand in the premium segment
                        of “Small Domestic Appliances” industry and being the first brand in small appliances segment
                                                          ,          g p                                 ,     ,
                        to cross the `1000 mn milestone, has strong presence in modern format retail, CSD, and in
                        Premium trade outlets. The Morphy Richard revenue has grown at the CAGR of 35% between
                        FY09-FY11 and is expected to grow at the CAGR of 25% between FY11-FY13E, in spite of
                        intense competition from international premium brands.
                                                                                          Source: Company, ACE Equity, KC Research
           Bajaj Electricals Ltd- Initiating Coverage Report




                           In the coming years, Morphy Richard growth will be supported by introducing new models in
                           mixers, water heater and iron, expending dealer network for deeper rural penetration and
                           focusing on modern retail formats and setting up showrooms in major cities across India to
                           have more visibility. The small appliances BU (other than Morphy Richards) has grown at the
                           CAGR of ~31% between FY07-FY11 and is estimated to grow at ~22.1% between FY11-FY13E.


                           B) Fans BU:
Bajaj fans have
unchallenged               The Fans BU has a wide and attractive range of ceiling, portable, fresh air & industrial air
leadership in 12 major
                           circulators and exhaust fans, in various sizes and colors and also has taken new initiatives by
states in the country
and a dominant player      entering into water lifting pumps and power generators market.
in 6 states backed by      The company is having tie-ups with Midea (China) the world’s largest company for TPW fans
strong relationships
with its vendors           and with Walt Disney for children fans under which BJE has already launched new models with
located across the         Bajaj-Disney Brand. During the year, the company introduced many new models of air-
states in India.,
                           circulators and a wide range of industrial exhaust fans, pumps & motors and power generators.
                           Bajaj fans are sold in almost 55000 outlets across the country, of which around 18% are in
                           rural areas and small towns with population less than 50000 with its aggressive marketing and
                           promotional strategy. Bajaj fans have unchallenged leadership in 12 major states in the
                           country and a dominant player in 6 states backed by strong relationships with its vendors
                           located across the states in India.
                           The fan industry is dominated by organized sector with market share of ~65% with major
                           players like CG, Usha and Orient . BJE’s fan BU is among top three players in fans with a
                           market share of ~16.5% in organized sector. The fan BU has grown at the CAGR of ~29%
                           between FY07-FY11 and we expect the segment to grow at the CAGR of ~21.3% between
                           FY11-FY13E backed by the revival in construction sector industry, replacement markets and
                                  g                    g        g           g          g
                           shifting of sales from unorganized segment to organized segment.
                            Chakan Unit of BJE produced over 0.428 mn fans/ annum and did innovative work on new
                           product development, value engineering initiatives, quality improvement efforts.

  14000                                                                                     70%   8000                                                                            45%
               61.0%        60.6%          59.9%            60.3%           60.4%                          39.0%        39.4%          40.1%         39.7%            39.6%
  12000                                                                                     60%   7000                                                                            40%
                                                                            1625.1                                                          36.1%                                 35%
  10000                                                                                     50%   6000
                                                            1300                                                                                                                  30%
   8000                                                                                     40%   5000                     27.9%
                                           1040                         9853.6                                                                                                    25%
                           730                     32.3%                                          4000                                                                    22.7%
   6000                                                                                     30%                                                          20.0%                    20%
                                 25.9%
              570                                                   21.7%           23.3%         3000
   4000                                                                                     20%                                                                                   15%
                                                           8011.0                                 2000   2940       3760           5115.9           6139.1       7532.7
                           5054.5        6612.7                                                                                                                                   10%
   2000      4022.7                                                                         10%
                                                                                                  1000                                                                            5%
       0                                                                                    0%
                                                                                                    0                                                                             0%
             FY09          FY10            FY11            FY12E            FY13E
                       Morphy Richards Rev. (Rs. Mn.)                                                    FY09       FY10           FY11             FY12E        FY13E
                                                                                                                Fans BU Rev. (Rs. Mn.)
                       Small Appliances Rev. (Rs. Mn)
                       Appliances Rev. Growth (%)                                                               Fans BU As % of Consumer Durables Rev. (%)
                       Appliances as % of Consumer durables Rev. (%)                                            Fans BU Rev. Growth (%)

                                                                                                                           Source: Company, ACE Equity, KC Research
          Bajaj Electricals Ltd- Initiating Coverage Report




                        Lighting and luminaries to maintain steady growth backed by increasing CFL demand:
CFL segment on strong
growth footing with     The Lighting BU markets a wide range of light sources and domestic luminaires. The light
expected CAGR of        sources include General Lighting Service (GLS) lamps, Fluorescent Tube Lights
~23.5% between FY11-
FY13E with improving    (FTL), Compact Fluorescent Lamps (CFL) and special purpose lamps. The BU has made a
retail presence &       major foray into LED based products through introduction of LED portable lights to lay special
superior distribution
                        emphasis on the green, environment friendly technologies and products. The manufacturing
structure
                        of GLS and FTL lamps is undertaken at Hind lamps, an associate of BJE, located in U.P. The
                        equity investment in Starlite Lighting for CFL has added to its marketing strength.
                        The Lighting BU is doing well despite intense competition and rapidly changing market
                        dynamics. It has achieved a turnover of `3160 mn in FY11 with robust CAGR growth of
                        ~24% between FY07-FY11 and is expected to grow at the CAGR of ~21.7% in FY11-FY13E.
                                     g                      g             g g                g          p
                        The CFL segment continues to register a strong growth due to greater adoption of energy      gy
                        saving lamps by individuals and the government bodies. The CFL sales, as a product
                        segment, have exceeded the `1750 mn mark in FY11 and is expected to grow at the CAGR of
                        23.5% between FY11- FY13E. The BU has bagged prestigious orders from both government
                        undertakings and private Bodies in FY11 in the CFL category.
                        The BU has continued to improve its retail presence by expanding its network and reaching to
The luminaries' BU
maintain No. 2 position over 400000 outlets with its superior distributor structure to increase the reach in Tier III &
in industry with ~17%
                  17%             towns.                                                         network,
                        Tier IV towns The Lighting BU with its improved distribution network wide product
market share in
organized sector in     range, and efficient sourcing strategies is poised for improved growth in the future. The CFL
India is expected to    would act as a growth driver with reduced price and energy conservation drive.
grow at 14.1% CAGR in
                        The Luminaires BU markets a comprehensive range of luminaires (light fittings)
FY11-FY13E
                        covering, commercial, industrial, flood lighting, street lighting, post-top lighting and a wide
                        variety of light sources ranging from CFL, FTL to HID lamps of various types.
                        The BU maintains clear No. 2 position in Luminaire industry in India with ~17% market share
                        in organized sector, next only to Philips (~22%). The major customers of the business unit
                        include corporate like Tata Group, Reliance group, L&T, Aditya Birla Group, Siemens, Airport
                        Authority of India, Container Corporation of India, State Electricity Boards, NTPC, MSRDC etc.
  10000                                                                  45%
                                                                               3000                                                                  60%
   9000                                               39.0%              40%
                                                                                                  50.0%
   8000                                   34.6%                    34.8% 35%   2500                                                                  50%
   7000                                                                  30%
   6000                    25.2%                      25.9%              25%   2000                                                                  40%
   5000                                   21.1%                17.7%     20%                         28.0%        27.7%      25.0%
                          16.9%
                                                                               1500                                                          30.4%   30%
   4000                                                          15.0% 15%
   3000                              14.6%          13.1%                10%   1000      20.5%                               29.0%          22.0%    20%
   2000                                                                  5%                                    16.7%
                                                                               500                                                                   10%
   1000                    ‐1.8%
                                                                         0%
      0                                                                  ‐5%      0                                                                  0%
           FY09     FY10           FY11           FY12E       FY13E                   FY09        FY10         FY11       FY12E       FY13E
                        Luminaires (Rs. Mn)
                        Lighting BU Rev. (Rs Mn.)                                                CFL Rev. (Rs. Mn.)
                                                                                                 CFL R (R M )
                        Lighting BU Rev. Growth (%)                                              CFL Rev. Growth (%)
                        Luminaires BU Rev. Growth (%)
                        Segment Rev Growth (%)                                                   CFL as % of Lighting & Luminaires BU (%)

                                                                                                          Source: Company, ACE Equity, KC Research
           Bajaj Electricals Ltd- Initiating Coverage Report




                        Restructuring of E&P projects BU to improve return on capital employed & Operating Margin :
The E&P project BU
contribution is expected    The E&P project BU contributed ~30.3% to BJE’s total revenue in FY11 but the contribution
to decline to ~26.4% of     is expected to decline to ~26.4% of total revenue by FY13E. The E&P projects BU has grown
total revenue by FY13E
                            at the CAGR of 28.5% between FY07-FY11 and is expected to grow at the CAGR of 9.7%
and is expected to grow
at the CAGR of 9.7%         between FY11-FY13E . For the first time, Special Project Division & TLT Division has crossed
b t
between FY11-FY13E.
          FY11 FY13E        the `3000 mn marks each during FY11.
BJE is planning to close
down critical projects to   Despite intense competition from the new players in the highmast and street lighting domain
reduce excess capital       during FY11, E&P BU has been able to sell nearly 4200 highmasts and over 45000 street
employed and to
                            lighting poles and 19004 metric tones of transmission line towers and achieved nearly
improve margins.
                            30,000 tons of galvanizing in FY11. The E&P project order book as on July 2011 stood at
                            `7337 mn which is mainly skewed toward transmission line tower and special projects. BJE’s
                                           g       y        p j                         j g
                            manufacturing facility for E&P project BU is located at Ranjangaon.
                            The BU has executed several landmark projects during the year and has received many
                            prestigious orders including; i) Successful illumination of Wankhede Stadium at Mumbai for
                            Cricket World Cup 2011 ii) Order received from East North Interconnecting Co. Ltd. (ENICL)
                            for 400 KV D/C (Quad) Biharsharif Purnia Line to cover a distance of 272 kms iii) Order
                            received from HRBC, Kolkata for special effect lighting for Vidyasagar Setu Bridge, Kolkata.
                            BJE continued its foray into the Rural Electrification business which gave a sales turnover of
                                                                                          Restructured–Accelerated
                            `2360 mn and it is also making efforts to move into Restructured Accelerated Power
                            Development Reform Program (R-APDRP) scheme and sub-station arena.
                            The overall margins for E&P project BU in FY11 were depressed, because of abnormal
                            increase in raw materials prices and extra efforts for time bound completion of prestigious
                            Projects under time constraints and adverse weather conditions. The return on capital
                            employed from E&P projects has been dismal so far, hence BJE is planning to close down
                            critical projects to reduce excess capital employed and improve the segment performance.

    E&P project‐ segment wise revenue contribution (%) & E&P                E&P project BU Revenue (Rs. Mn) and Revenue Growth (%)
    EBITDA Margin Trend 
                                                                           12000                                                           50%
  100%                                                               14%               44.0%
            38.3%      26.5%       40.0% 27.1%          28.5%                                                                 10,000       45%
   90%           12.6%
                                                                           10000                 41.1%
                                                                     12%                                                                   40%
   80%                                                                                                     8,314      8,500
                            10.7%
   70%                                                               10%                       7,368                                       35%
                                                                           8000
                                       8.8%                                                                                                30%
   60%                                                               8%
                                                             7.5%
                                                             7 5%
   50%                                             7.0%                    6000     5,224                                                  25%
                       36.6%                                         6%
   40%      30.2%                 24.0%     37.6%       35.5%                                                                      17.6%   20%
   30%                                                                     4000
                                                                     4%                                                                    15%
                                                                                                              12.8%
   20%                 36.9%      36.0%      35.3%       36.0%                                                                             10%
           31.6%                                                     2%    2000
   10%                                                                                                                                     5%
                                                                                                                          2.2%
    0%                                                               0%
                                                                               0                                                           0%
             FY09      FY10        FY11        FY12E       FY13E
                                                                                    FY09       FY10        FY11       FY12E      FY13E
                  3) Highmast
                  2)  Special Projects                                                Engineering & Projects BU Revenue (Rs. Mn)
                  1)  TLT
                 Engineering & Projects EBITDA Margin (%) (R.H.S.)                    E&P Project Rev. Growth(%)

                                                                                                       Source: Company, ACE Equity, KC Research
           Bajaj Electricals Ltd- Initiating Coverage Report




                             Changing Product mix to achieve better margins in long run:
BJE’s strategy to re-
align business model         BJE's business is a good mix of products in consumer sector (consumer durables & lighting)
toward fastest               and infrastructure sector thereby providing healthy diversification. Among the 3
growing, high margin
consumer durable             segments, consumer durable is the fastest growing segment with EBIDTA margins at 10-
segment along with           11% which is higher than 6-6.5% for lighting & 8-10% for E&P projects.
favorable products
                             The share of consumer durable BU to total revenues has increased from 43.9% in FY08 to
mix in lighting (higher
sales of CFLs), we           46.6% in FY11 and is expected to go up to 50.3% by FY13E, considering BJE’s strategy to
expect BJE’s EBITDA          re-align business model toward fastest growing consumer durable segment. With the
margins to improve to
9.0% by FY13E.               increasing share of higher margin consumer durable BU in the total sales along with
                             favorable products mix in lighting (higher sales of CFLs), BJE’s margins are expected to
                             improve in next two years. We expect EBIDTA margins to improve to 9.0% in FY13E.


                                                                 Bajaj Electricals Ltd ‐ Revenue Mix
                                 100%
                                               26.4%          29.6%          33.1%              30.3%           27.0%             26.4%
                                  80%

                                  60%
                                              43.9%           42.7%
                                                              42 7%                                             49.0%
                                                                                                                49 0%             50.3%
                                                                                                                                  50 3%
                                                                             42.8%
                                                                                 %              46.6%
                                                                                                46 6%
                                  40%

                                  20%
                                              29.6%           27.7%          24.0%              23.0%           23.9%             23.2%
                                   0%
                                               FY08           FY09           FY10              FY11             FY12E             FY13E
                                              Lighting       Consumer Durables BU           Engineering & Projects          Others


           Bajaj Electricals Ltd ‐ Segment‐wise EBITDA                                Segment‐wise EBITDA Margin Trend
                       Margin contribution                              50.0%                     45.6%
                                                                                                              44.7%
    100%                                                                40.0%
                                           29.3%   21.6%     22.0%
     80%     33.3%    37.6%      33.4%                                                                                                     33.0%
                                                                        30.0%                                                      30.0%
                                                                                        27.2%                             27.1%
     60%
                                                   62.0%     62.4%
                                                                        20.0%
     40%     44.7%    39.9%      52.2%     57.6%                                                            13.0%
                                                                                       12.9% 12.6%                      11.3%     11.0% 11.2%
                                                                        10.0%           10.4%   9.3%           10.7%      8.8%
     20%                                                                                                                           7.0%     7.5%
             21.7%    22.0%      14.1%             16.2%     15.4%
                                           12.9%                         0.0%
      0%
              FY08        FY09   FY10      FY11    FY12E     FY13E                   FY08       FY09      FY10       FY11    FY12E        FY13E
                                                                                            Lighting EBITDA Margin (%)
                                                                                            C          D bl EBITDA M i (%)
                                                                                            Consumer Durables EBITDA Margin (%)
       Lighting                          Consumer Durables                                  Engineering & Projects EBITDA Margin (%)
       Engineering & Projects            Others                                             Others

                                                                                                     Source: Company, ACE Equity, KC Research
Bajaj Electricals Ltd- Initiating Coverage Report




         Strengthening dealer Network, Mfg. & outsourcing arrangement to serve the customer better:

         BJE has a strong distribution network with over 1000 distributors, 3000 authorized
         dealers, more than 400000 retail outlets and 270 plus customer care centers across India.
         This ensures wider penetration and better after sales services to the consumers and hence
         provides it an edge over Chinese and other players.
         p                g                          p y
         BJE focuses mostly on design, quality control, branding and distribution. Most of the
         manufacturing is outsourced to third party vendors, who manufacture products according to
         the specifications and designs provided by the company. BJE has over 200 vendors (of
         which ~70% are dedicated vendors) from where they outsource their manufacturing jobs.
         In Appliance BU, BJE sources its requirement from dedicated vendors situated at
         Noida, Delhi, Himachal and imports from China. Under Morphy Richards brand, BJE sources
                            p             g                  ,
         about 50% of its products through Indian vendors, while the rest is sourced from Chinese
         and other foreign vendors. In Fans, BJE sells outsources more than 95% of manufacturing to
         vendors while remaining 5% from its plant in Chakan with manufacturing capacity of 0.8 mn
         units/annum. The company purchases more than 4 mn units from Midea, China, a strategic
         move to thwart Chinese competition.
         In Lighting, it outsources 40% with the rest manufactured at its associate group
         company, Hind Lamp in UP (GLS & FTL lamps); and Starlite Lighting at Nasik (CFLs). In E&P
            ,                 g                                         gp           j g
         BU, BJE fabricates high-masts and towers at their manufacturing plant at Ranjangaon.


         Key risks & concerns:


           Fluctuation in commodity prices: The Key raw materials for BJE includes copper and
         aluminum any major fluctuation in these commodities may hurt the margins.


           Increasing Competition: Due to high growth potential of segments in which BJE
         operates, there has been increasing competition to gain market share. The key competitors
         for BJE includes Havells, Crompton Greaves, Usha, Orient and foreign players mainly from
         china. Any strategic move by competitors could impact the sales of the company. The
         pricing across company’s business is also under risk due to competition.


           Global & domestic economic environment: The global economic environment including
         debt crisis in certain European countries may hurt BJE’s business. Due to domestic economic
         slowdown the players in consumer durable industry will need to engage more in diversifying
         their business model and extending its reach by offering good value proposition. In E&P
         segment, slowdown in economy could pose a risk of delay in order inflows.


                                                          g                 p         p
           Currency fluctuation related Risk: The weakening of the Indian Rupee has impacted BJE’s
                  y
         imports as well as raw material cost. The Company had undertaken some foreign exchange
         forward and option contracts to hedge the risks against the currency fluctuations.

                                                                    Source: Company, ACE Equity, KC Research
              Bajaj Electricals Ltd- Initiating Coverage Report




                             Valuation & Recommendations:
We recommend “BUY”
on BJE with target           We believe that BJE’s consumer and Lighting segment are showing growth potential in
price of `208/ share (11x    future years though the poor E&P performance in the H1FY12 was disappointing because of
P/E on FY13 EPS of
`18.9), which is strongly    abnormal increase in raw materials prices and extra efforts for time bound completion of old
supported by BJE’s           projects by the company, which is resulting into the cost overrun for E&P segment. The
renowned
                             company has guided to reduce the capital employed in E&P projects for better cash flow
brand, collaboration
with strong foreign          visibility and to improve margins in coming year. The concern of margins in consumer
players and wide             durables BU is also easing off with some price increases taken by the company and decline
distribution providing
an competitive               in the commodity prices in FY11.
advantage to BJE.            BJE is expected to report total revenue and net profit CAGR of 17.5% and 13.7%
                             respectively between FY11-FY13E backed by strong growth in consumer durables & lighting
                                                p j        g
                             and revival of E&P projects segment.
                             At CMP of `140/ share, BJE is currently trading at P/E Multiple of 9.1x on FY12E EPS of `15.4
                             and at 7.4x on FY13E EPS of `18.9. We recommend “BUY” on BJE with target price of
                             `208/ share (11x P/E on FY13 EPS of `18.9), which is strongly supported by BJE’s
                             renowned brand, collaboration with strong foreign players and wide distribution providing an
                             competitive advantage to BJE and will help BJE to improve its margins in coming years. BJE
                             is a dominant player in Appliances, luminaire & lot of product categories in fans division.
Peer Comparison :

                       Net Sales        EBITDA       EBITDA Margin       PAT       PAT Margin 
Particulars            (Rs. Mn)        (Rs. Mn)           (%)          (Rs Mn)        (%)            EPS (Rs.)      ROE (%)        P/E (x)         P/BV (x)
                     FY12E FY13E FY12E       FY13E FY12E      FY13E FY12E FY13E FY12E FY13E FY12E FY13E             FY12E FY13E FY12E FY13E FY12E FY13E
Bajaj Electricals Ltd 31780 38136 2729        3395      8.7     9.0 1521 1873            4.8   5.0   15.4    18.9    20.7   20.9   9.0       7.3   1.9    1.5
*Havells India Ltd   64131 71408 6473         7436     10.1    10.4 3603 4349            6.0   6.0   28.8    34.9    43.3   37.5 13.6    11.3       5.9   4.2
*Crompton Greaves 109349 121489 10142        12667      9.3    10.4 5948 7586            5.0   6.0    9.3    11.8    16.8   18.6 13.2    10.4      2.2    1.9
*TTK Prestige Ltd    10961 14318 1754         2301     16.0    16.1 1175 1538           11.0   11.0 103.8 135.8      49.0   42.7 24.2    18.5 11.8        7.9
  * Bloomberg estimates

                     Bajaj Electricals Ltd- P/E Band                         40000              Bajaj Electricals Ltd- EV/EBITDA Band
   350
                                                                             35000
   300
                                                                             30000
   250
                                                                 Price       25000                                                                 EV
   200
                                                                 4x          20000                                                                 2x
   150
                                                                 8x          15000                                                                 5x
   100                                                           12x         10000                                                                 10x
    50                                                           16x             5000                                                              7x

      0                                                                            0




                                                                                                            Source: Company, ACE Equity, KC Research
Bajaj Electricals Ltd- Initiating Coverage Report




             Company Background:

             BJE is primarily a trading company where manufacturing of more than 90% of the products
             sold by the company are outsourced. BJE has diversified business interest and operates
             through three main segments which includes; Consumer Durables (Small Appliance, Morphy
             Richard and Fans), Lighting (lighting, CFL and luminaries) and E&P projects.

                Consumer Durables:
             Consumer durables segment is divided into appliances and fans. Appliance BU deals in a wide
             range of electric appliances including water heaters, mixers, microwave ovens, electric
             irons, toasters, rice cookers, oven-toaster-grillers, juicer-mixer-grinders, pressure
             cookers, water purifier etc. Fans BU has a wide range of ceiling, portable, fresh air &
             industrial air circulators and exhaust fans which are outsourced as well as manufactured in
             company's Chakan plant with annual capacity of 0.8 mn units.
                 p y              p                  p   y

                Lighting:
             Lighting BU markets various products ranging from General Lighting Services (GLS)
             lamps, Fluorescent tube lamps (FTLs), Compact fluorescent lamps (CFLs), and Light-Emitting
             Diodes (LEDs). Luminaries BU undertake projects in modern workspace lighting, retail
             lighting, roadway ,lighting, area lighting and industrial lighting.

                Engineering & Project (E&P):
             E&P division which contributes ~30% to BJE’s total revenue, operates in three sub-segments;
             A) Special projects: This sub-segment mainly includes turnkey projects like factory
             lighting, airport lighting, rural electrification etc. Company has a dominating position in this
             space and some of its prominent clients include- BHEL, NTPC, Airport authority of India and
             other electricity boards.
             B) High masts and poles: It undertakes design, supply, erection and commissioning of high
             masts, signage and street lights. Company is the leader in this category and enjoys over
             60% market share.
             C)Transmission line tower: It undertakes design, supply, erection and commissioning of
             transmission lines, telecom towers and monopoles (next generation transmission towers).
             Some of the major clients of the company are Power Grid, Damodar Valley, Maharashtra
             Electricity Board and other state utilities.

   E&P P j                  i Od b k
   E&P Project‐ segment wise Order book                         E&P P j                  i Od b k
                                                                E&P Project‐ segment wise Order book 
   contribution as on July 2011                                 position (Rs. In Mn) as on July 2011


                                           Transmission Line 
                                                                                                         Transmission Line 
                                           Towers (TLT)
                                                                                                         Towers (TLT)
          42.9%             39.9%          High mast & pole                                   2927       High mast & pole
                                                                          3147
                                           Special Projects                                              Special Projects


                    17.2%
                                                                                     1263


                                                                                     Source: Company, ACE Equity, KC Research
Bajaj Electricals Ltd- Initiating Coverage Report




        Income Statement (` in Mn):

       DESDRIPTION                               FY08       FY09       FY10       FY11     FY12E      FY13E
       Net Sales & Operating Income           13815.9    17657.1    22286.3    27407.5   31508.0    37808.2
       Increase/Decrease in Stock              ‐391.6       ‐73.6    ‐332.2     ‐753.8      ‐86.0    ‐488.0
       Raw Material Consumed                  10049.1    12812.2    16357.8    21087.2   23271.9    28189.0
       Power & Fuel Cost                          15.8       16.7       38.9      41.2       31.8      38.1
       Employee Cost
       Employee Cost                            609.0      708.5      885.1     1119.2    1271.2     1525.4
       Other Manufacturing Expenses             583.7      586.1      678.3      802.3     953.4     1144.1
       General and Administration Expenses      350.7      457.0      560.8      686.8     794.5      953.4
       Selling and Distribution Expenses        883.8      972.8     1319.8     1462.7    1747.9     2097.5
       Miscellaneous Expenses                   270.4      407.4      569.8      657.0     794.5      953.4
       Less: contract Expenses Capitalized         0.0       17.3     155.7      217.9        0.0        0.0
       Total Expenditure                      12370.8    15869.8    19922.7    24884.8   28779.2    34413.0
       Operating Profit (Excl OI)              1445.2     1787.3     2363.6     2522.7    2728.8     3395.2
       EBITDA Margin/ Op. Profit Margin (%)     10.5%      10.1%      10.6%       9.2%      8.7%       9.0%
       Other Income
       Oth I                                      81 6
                                                  81.6     110.9
                                                           110 9      105 3
                                                                      105.3      136 2
                                                                                 136.2     149.8
                                                                                           149 8      149.8
                                                                                                      149 8
       Operating Profit                        1526.7     1898.2     2468.9     2658.9    2878.6     3545.0
       Interest                                 337.6      412.6      370.7      362.8     473.3      580.5
       PBDT                                    1189.1     1485.6     2098.2     2296.1    2405.3     2964.5
       Depreciation                               74.5       85.5      92.0      107.6     104.6      114.0
       Profit Before Tax                       1114.6     1400.1     2006.2     2188.5    2300.7     2850.5
       Provision for Tax                        383.3      506.7      753.5      739.9     779.3      977.4
       Profit After Tax                         731.3      893.4     1252.7     1448.6    1521.4     1873.1
       Net Profit  Margin (%)                    5.3%       5.1%       5.6%       5.3%      4.8%       5.0%
       Adjusted EPS                                8.5       10.3      12.8       14.7       15.4      18.9


        Balance Sheet (` in Mn):
       DESCRIPTION                               FY08       FY09       FY10      FY11     FY12E      FY13E
       SOURCES OF FUNDS:
       Share Capital                            172.9      172.9      195.1      197.7     197.7      197.7
       Share Warrants & Outstanding
       Share Warrants & Outstanding              13.2       28.4        1.6        0.2       0.2        0.2
       Total Reserves                          1561.8     2248.8     4747.0     5913.2    7156.3     8751.1
       Shareholder's Funds                     1747.8     2450.1     4943.7     6111.1    7354.2     8949.0
       Total Debts                             2367.0     2138.5     1518.3     1164.7    1971.9     1759.0
       Total Liabilities                       4114.8     4588.7     6462.1     7275.8    9326.1    10708.0
       APPLICATION OF FUNDS :
       Net Block                                916.2      946.0     1016.2     1532.8    1566.7     1600.7
       Capital Work in Progress                   3.0       24.8        0.9        0.0      40.7       41.6
       Investments                              223.3      315.6      365.6      365.8     365.8      365.8
       Inventories
       I        i                              1621.8
                                               1621 8     1777 0
                                                          1777.0     2094.3
                                                                     2094 3     2946 4
                                                                                2946.4    3620.8
                                                                                          3620 8     4642 9
                                                                                                     4642.9
       Sundry Debtors: Unsecured               4253.5     5591.6     7507.0    10653.7   11099.8    15210.6
       Cash and Bank                            319.6      538.1      612.4      481.3     522.1      930.9
       Other Current Assets                       0.2        0.0        0.0        0.0       0.0        0.0
       Loans and Advances                       889.5     1131.2     1790.6     1667.7    1661.4     1521.1
       Total Current Assets                    7084.5     9038.0    12004.4    15749.1   16904.1    22305.5
       Current Liabilities                     3645.3     5191.6     6287.0     9661.3    8828.6    12795.8
       Provisions                               425.7      512.6      643.0      730.7     757.1      853.4
       Total Current Liabilities
       Total Current Liabilities               4071 0
                                               4071.0     5704.2
                                                          5704 2     6930.0
                                                                     6930 0    10392.0
                                                                               10392 0    9585 7
                                                                                          9585.7    13649 1
                                                                                                    13649.1
       Net Current Assets                      3013.6     3333.8     5074.4     5357.1    7318.3     8656.4
       Deferred Tax Assets / Liabilities        ‐41.3      ‐31.5        5.0       20.1      34.5       43.4
       Total Assets                            4114.8     4588.7     6462.1     7275.8    9326.1    10708.0
                                                                    Source: Company, ACE Equity, KC Research
Bajaj Electricals Ltd- Initiating Coverage Report




        Cash Flow Statement (` in Mn):

       DESCRIPTION                                     FY08      FY09       FY10      FY11      FY12E      FY13E
       Profit Before Tax                             1114.6    1400.1     2006.2    2188.5     2300.7     2850.5
       Adjustments for:                                  0.0       0.0        0.0       0.0        0.0        0.0
       Depreciation                                     74.5     85.5       92.0     107.6      104.6      114.0
       Interest on loans                              381.2     455.7      370.7     362.8      473.3      580.5
       Interest received
       Interest received                                 0.0
                                                         00        0.0
                                                                   00      ‐55.9
                                                                             55 9     72 0
                                                                                     ‐72.0        79 2
                                                                                                 ‐79.2       79 2
                                                                                                            ‐79.2
       Dividend Received                                 0.0                 ‐0.3      ‐1.0       ‐1.1       ‐1.1
       Interest Received (Considered as Operating)    ‐44.2     ‐42.9        55.9     72.0        79.2       79.2
       Changes In working Capital                    ‐603.8      55.0    ‐1564.0    ‐827.8    ‐1926.8    ‐1069.5
       Cash Flow after changes in Working Capital     962.3    2054.8      957.8    1834.2      963.8     2490.1
       Direct Taxes Paid                             ‐377.7    ‐542.4     ‐912.0    ‐806.1     ‐770.1     ‐808.2
       Extra & Other Item (Prior Period Items)          ‐0.3     ‐2.1        ‐5.5      ‐2.9        0.0        0.0
       Cash From Operating Activities                 584.4    1510.2       40.3    1025.1      193.7     1681.9
       Purchase of fixed assets
       Purchase of fixed assets                       ‐91.1
                                                      ‐91 1    ‐147 5
                                                               ‐147.5     ‐146.8
                                                                          ‐146 8    ‐631.1
                                                                                    ‐631 1     ‐178.5
                                                                                               ‐178 5     ‐189.0
                                                                                                          ‐189 0
       Sale of fixed Assets                              8.3      1.5         2.5       3.6        0.0        0.0
       Advances of capital nature                    ‐169.3     ‐28.3     ‐247.8     419.5        25.8        0.0
       Redemption on Investment                          0.0      0.0         0.0       0.0        0.0        0.0
       Purchase of Investment                           ‐0.3    ‐92.3      ‐50.0       ‐0.2        0.0        0.0
       Loan given to companies (Associates)             26.5   ‐154.2        57.5       0.0        0.0        0.0
       Dividend Received                                 0.0      0.1         0.3       1.0        1.1        1.1
       Cash Flow from Investing Activities           ‐217.4    ‐420.6     ‐384.3    ‐207.1     ‐151.6     ‐187.9
       Capital Subsidy
       Capital Subsidy                                   0.0      0.0        ‐1.0
                                                                              1.0       0.0        0.0        0.0
       Proceeds from Issue of Equity Share Capital       0.0      0.0     1634.2      55.5         0.0        0.0
       QIP Issue Expenses                                0.0      0.0      ‐34.8        0.0        0.0        0.0
       Bonus share issue expenses                        0.0     ‐0.2         0.0       0.0        0.0        0.0
       Interest Paid                                 ‐336.9    ‐418.3     ‐368.9    ‐365.3     ‐473.3     ‐580.5
       Proceeds from / (repayment of) borrowings        ‐4.7   ‐228.5     ‐620.2    ‐353.7      807.2     ‐212.9
       Forex (loss) / Gain                              12.7    ‐57.4         8.6    ‐10.3       ‐12.5      ‐14.9
       Profit / (loss) on Hedging                        0.0     ‐5.6         1.4      ‐1.0        0.0        0.0
       Dividends paid                                    0.0   ‐138.3     ‐171.7    ‐235.4     ‐278.0     ‐238.4
       Income tax on dividend paid                       0.0    ‐23.6      ‐29.4     ‐38.9       ‐44.9      ‐38.4
       Expenses on issue of shares                      ‐0.2      0.0         0.0       0.0        0.0        0.0
       Cash from Financing Activities                ‐341.1    ‐871.0      418.3    ‐949.0        ‐1.3   ‐1085.2
       Net Cash Inflow / Outflow                       25.9     218.6       74.4    ‐131.0        40.7     408.9
       Opening Cash & Cash Equivalents                293.7     319.6      538.1     612.4      481.3      522.1
       Closing Cash & Cash Equivalent                 319.6     538.1      612.4     481.3      522.1      930.9

        Key Financial Ratios:

       Key Financial Ratios:                          FY08      FY09       FY10       FY11     FY12E      FY13E
       Operating Profit Margin (%)                   10.5%     10.1%      10.6%       9.2%      8.7%       9.0%
       Net Profit Margin (%)                          5.3%      5.1%       5.6%       5.3%      4.8%       5.0%
       Debt/ Equity (x)                                 1.4       0.9        0.3        0.2       0.3        0.2
       ROA (%)                                       17.8%     19.5%      19.4%      19.9%     16.3%      17.5%
       ROE (%)                                       41.8%     36.5%      25.3%      23.7%     20.7%      20.9%
       EV/ EBITDA (x)                                   2.5       1.2        9.6        9.9       5.6        4.3
       EV/ Sales (x)                                    0.3       0.1        1.0        0.9       0.5        0.4
       P/ E (x)                                       10.2        2.8      17.4       16.7        9.1        7.4
       P/BV (x)                                         0.9       0.2        4.4        4.0       1.9        1.5
       Adj. EPS (Rs.)                                   8.5     10.3       12.8       14.7      15.4       18.9

                                                                         Source: Company, ACE Equity, KC Research
  Toll Free: 1800 220 370
  SMS : “KC RESEARCH” to 58888                               Email : research@kcsecurities.com




CONTACT US :


INSTITUTIONAL RESEARCH :

Research Analyst Sector Allocation          E mail
                                            E-mail                                 Direct Nos.
Amit Anwani      Capital goods,             amit.anwani@kcsecurities.com           022 - 30287987
                 Construction & Realty




F&O AND TECHNICAL RESEARCH :

Research Analyst      Sector Allocation   E-mail                               Direct Nos.
Jaldeep S. Vaishnav   F&O Analyst         jaldeep.vaishnav@kcsecurities.com    022 - 30284401
Muralidhar Shenoy     Senior Analyst      muralidhar.shenoy@kcsecurities.com   022 - 30288158
Kapil Vasania         Analyst             vasania.kapil@kcsecurities.com       022 - 30288160
Nemish Shah           Analyst             nemish.shah@kcsecurities.com         022 - 30288159

				
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