EUR 120.00 For Business Accounts Only

MOSL: ORIENT ELECTRIC (Buy)-Gross margin pressure offset by operating leverage

ORIENT ELECTRIC: Gross margin pressure offset by operating leverage

(ORIENTEL IN, Mkt Cap USD1b, CMP INR338, TP INR500, 48% Upside, Buy)

 

Demand environment steady, despite an erosion in pent up demand

• Revenue grew 37% YoY and came in 19% above our estimate. While the surge in commodity prices led to a 480bp YoY deterioration in gross margin, strong volume growth, led by operating leverage, cushioned the impact at the EBITDA margin level v/s our expectation. EBITDA grew 7% YoY and was 31% ahead of our expectation. Adjusted PAT grew by 7% and came in 46% ahead of our expectation.
• Working capital stood elevated owing to higher inventory in anticipation of global supply chain shortages and possibility of a third COVID wave. The management expects working capital to normalize over the next two quarters. Despite escalation in inventory levels, the company continues to remain net cash, a feat achieved in 4QFY21.
• OEL's cost structure (with higher employee costs and ad spends as a percentage of sales) makes it a strong operating leverage story, if strong topline growth materializes. 2QFY22 result performance reconfirms this hypothesis. On account of a superior performance in 2QFY22, we increase our FY22-24E EPS by 5-6%. Our TP stands at INR500/share (on an unchanged target multiple of 45x FY24E EPS, a 10% discount to HAVL). OEL trades at a discount of 40%/15% v/s HAVL/CROMPTON on a FY24E PE basis. On an EV/EBITDA basis, the discount stands at 48%/36%. We maintain our Buy OEL is our top pick in the Consumer Electrical space.