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MOSL: ORIENT ELECTRIC (Buy)-Revenue surprised positively, demand holding up well

ORIENT ELECTRIC: Revenue surprised positively, demand holding up well

(ORIENTEL IN, Mkt Cap USD0.9b, CMP INR323, TP INR395, 22% Upside, Buy)

 

• Revenue came in 6% above our estimate in Commodity cost inflation impacted the ECD segment the most. However, OEL’s cost saving program ‘Sanchay’ arrested the decline in gross margin. EBITDA margin stood 110bp below our estimate of 6.4% due to commodity cost inflation pressures and negative operating leverage. Adjusted profit stood at INR50m v/s our estimate of INR79m.
• Working capital stood elevated owing to higher inventory and marginal increase in receivables. While working capital days is expected to moderate from current levels, it is expected to remain elevated for a couple of quarters, owing to inventory built up and the possibility of a supply chain disruption due to a third COVID wave. The company continues to be a net cash company, 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. As the economy recovers from the pandemic, it can witness a strong margin expansion. We maintain our FY22E earnings, but increase the same for FY23E by 7%, a function of operating leverage, as we raise our revenue estimate marginally by 3%. Our TP stands at INR395 (on an unchanged target multiple of 45x FY23E EPS). On a FY23E P/E multiple basis, OEL is trading at a discount of 30%/14% v/s HAVL/CROMPTON. On an EV/EBITDA basis, the discount stands at 40%/36%. We maintain our Buy rating.