Mid-cap mantra: Bajaj Electricals eyes rebound in a leaner avatar

MUMBAI: Shekhar Bajaj-promoted Bajaj Electricals is getting rid of loss-making projects and being selective about choosing new ones in an effort to put its past behind and rediscover itself as a leaner and more effective entity.

"We are going to close all the old loss-making projects and take a one-time hit over the next couple of quarters. Our financial performance has been weak in the first half of the year, but the stock is climbing up as investors have realised that the worst is over, and I believe that FY15 will be good," said Shekhar Bajaj, CMD, Bajaj Electricals. The company's shares have remained low for the last three years. But the share price of its consumer durables peers such as Havells and TTK Prestige have more than doubled during the same time. The company is mainly involved in three businesses - consumer appliances, lightings and EPC.

The reason for the poor show on bourses is the EPC business, which has been a drag for the company: it wiped out 53% of the total operating profit in FY13 and 66% in the first half FY14. Cost overruns and execution delays in the EPC business have resulted in the poor performance. The segment also led to a rise in working capital, which impacted the return on capital. But now the company is trying to set things in order. "We have become very selective about the projects we choose and will take the ones only with high margins. We have also set up a new ERP system and a new team for the EPC business and our focus will only be on execution," said Bajaj.

It has emerged as a strong player in the segment with an order book of Rs 1,470 crore at the end of the first half of FY14 compared with Rs 1,070 crore at FY13-end.
As the older projects are closed and newer ones are reorganised, there will be a steady rise in the company's overall operating margins. "We believe, given the changes in the company's processes, Bajaj Electricals' EPC segment will soon turn profitable. Bajaj Electricals' new projects are running ahead of schedule and are profitable with margins at 8%," said Vikas Manthri and Satish Kothari, mid-cap analysts with ICICI Securities recommending the stock with a 40% upside from the current levels. However, there are two other business potentials - consumer durables and lighting. Its consumer durables business, which provides more than half its sales, is growing at a 25% CAGR over the last three years, and its lighting business, which accounts for one-fourth of its sales, is growing at a 17% CAGR. Operating margins for these are around 8%.

The company has also started brand building and spent about Rs 26 crore in the first half of FY14 on advertising and will be spending another Rs 45-50 crore in the second half, which will help it improve its margins.

Assuming a growth of 20% in its consumer durables and lighting businesses and a profit after tax margin of 6%, with absolutely no contribution from the EPC business, the company’s stock is trading at FYF15 price-to-earnings multiples of 12. This is significantly lower than its peers that are trading around a multiple of 20. Earnings contribution from the EPC business will be a bonus though.