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The stock of Bajaj Electricals is likely to witness resistance in the medium term following gains of 86 per cent in the past one year. The stock moved up too fast on expectations of an improvement in its overall fortunes, and especially turnaround in its consumer products business post implementation of the range and reach expansion programme (RREP), which eliminates the need for wholesalers. According to the company, the RREP is now 90 per cent complete and the rest 10 per cent will be done by September end.
As promised by the company, the overall performance has improved fantastically in FY18 and the consumer products business has indeed turned around. In FY17, the consumer products’ revenue and profit had declined 11 per cent and 14 per cent, respectively. The EPC business was also under pressure with 2 per cent and 8 per cent decline in segment revenue and profit, respectively.
Intense competition
In FY18, while EPC business revenue witnessed a jump of 25 per cent, segment profit climbed 37 per cent. While sales of consumer products declined 3.7 per cent, profit rose 10 per cent. Thus, the company’s overall sales grew 10 per cent to ₹4,716 crore and profit before tax and exceptional items jumped 51 per cent to ₹253 crore.
The pain of market share or revenue loss in the consumer products business is now over. However, gaining market share is not going to be easy for the company as competition has intensified, according to analysts. “RREP will give them better product exposure and revenue. But it does not necessarily mean market share gains,” said an analyst. Consumer products business will require a lot of handholding, he added.
In FY19 too, the EPC business will continue to be the major driver. The firm recently bagged close to ₹6,000-crore worth orders from Uttar Pradesh (in the first half of April) spiking its order book to ₹8,934 crore, 3.6 times FY18 EPC revenues.
However, analysts see execution risk and aggressive pricing in the recently bagged orders. Besides these, they are also worried about higher-than-estimated rise in working capital requirements. Unpreparedness to face the huge order position is another problem.
“The company was expecting only ₹3,000 crore worth of orders. So, it has got more than required. Besides, these being electrification projects, timeline is going to be tight. I see this as a risk for the EPC business. I just hope they don’t repeat the bad past,” said an analyst.
Rally may pause
Amid these concerns, the stock’s rally may pause for a while. But it will continue to look attractive eventually due to cheap valuation of 21 times FY20 estimated earnings compared to 27.5 times and 36 times in case of Crompton Greaves Consumer Electricals and Havells, respectively.
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