Management Speak: Bajaj Electricals (Unrated) - ECD on growth trajectory, balance sheet a concern

We met Bajaj Electricals’ (BJE) management. Below are key takeaways:

• ECD seeing sharp improvement…: BJE’s ECD segment reported slow growth over FY16-18, due to lack of focus and implementation of Range Reach expansion program (RREP), which impacted distribution. Management’s refocus and completion of RREP helped the ECD segment to post sharp 23% yoy growth in FY19 (30% in appliances, 27% in fans), which continued into Q1FY20 (31% yoy growth). Demand remains strong in Q2FY20, except in few states affected by floods.
• …focus on next leg of growth: A strong brand image, new product range (200 SKUs launched in last 6 months) and innovation would be key for BJE to achieve the next leg of growth for the ECD. The company expects to target the young generation through ads and promotions and is working on cost efficiencies to improve sourcing costs and in reducing overheads, which it believes will boost margins to 10% over next 3-4 years from 6.6% in FY19.
• EPC business to taper down: Management expects to focus on profitable projects with higher cash conversions, considering its lower margins and high working capital, mainly after the huge stress in the UP project (Rs25bn order, of which, Rs22bn has been executed; Rs7-8bn receivables).Accordingly, we expect backlog to deplete and drive down revenues over FY19-21 (revenues fell 5% yoy in Q1FY20). While it believes margins could gradually improve to 7-8% in the medium term, higher overheads and completion of ongoing UP project could keep margins under pressure in the near term.
• Focus on deleveraging: The sharp uptick in EPC revenues over last 2 years (41% CAGR) from the UP project led to a surge in working capital, causing debt to jump to Rs16bn in FY19 end (Rs7.2bn in FY18). Management aims to reduce debt by improving ECD growth (negative working capital), lower EPC revenues to reduce working capital by ~Rs1.5-2bn as also release of Rs2-3bn Bihar retention money by FY21. Internal accruals and QIP (~Rs6bn) would help deleverage.

Valuation and Outlook

The outlook is positive on the ECD business, given its focus, improved distribution and initiatives to launch new products and improve margins. Despite high leverage and steep finance costs, the likely reduction in working capital would pare debt and improve earnings. However, the stock is likely to remain under pressure due to impending equity dilution. BJE currently trades at 24x FY20E consensus earnings. Not rated.