The Hindu Business Line : Bajaj Electricals: Buy

The stock of Bajaj Electricals holds potential for upside from the current levels. Our recommendation is based on the substantial growth potential for the company's engineering and projects business that caters to the power and the road sectors, the higher margins in this business, and the strong pick-up in its consumer durables business due to market share gains and targeted branding efforts.

The stock trades at 20 times the trailing 12-month per share earnings. This is at a substantial discount to Crompton Greaves (34 times), which is also in a similar line of business.

The substantial hike in allocation to the Rural Infrastructure Development Programme and the Rural Electrification Programme in the Budget could give a substantial boost to the company's engineering and projects business. This segment is the fastest growing, registering an annual growth of 90 per cent since 2004.

The margins are also much better than its other businesses, which face cut-throat competition.Having executed contracts under the Rural Electrification Programme recently, the company can look forward to more such contracts in the next few years. The programme could also drive demand for its lighting business.

As more highways and roads are constructed and more villages connected to the telecommunication network, products such as highmast and signages could get a great boost. Highmast towers, galvanised poles and transmission line towers contributed close to 25 per cent of the turnover in FY-05.

Bajaj Electricals has a 60 per cent market share in the highmast business. Signages are a new addition to its portfolio and have received encouraging response. The road construction activity and the housing boom have increased demand for its lighting, lamps and fans business. Bajaj has gained market share in the highly competitive consumer durables business, where margins are constantly under pressure. Targeted branding efforts towards different segments and aggressive marketing promotions have helped it gain market share and improve margins.

Tie-ups with international companies for introducing products targeted at the higher end segment could give it access to markets where competition is relatively less. With high-end housing in demand in cities such as Bangalore and Gurgaon and the retail boom, this segment could attract interest. The sharp reduction in the excise duty on compact fluorescent lamps, the fastest growing product in the lamps business, could improve volumes.

Emerging out of a deep debt trouble a couple of years ago, the company's finances are in better shape. Operating profit at three times interest costs gives it sufficient cushion. The company is redeeming 80 per cent of the total preference share capital. This could leave more earnings in the hands of equity shareholders.

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