Investment Focus: Bajaj Electricals — Buy

The stock of Bajaj Electricals has been battered badly in the recent market rout. But the company is among the very few listed players to have a presence in the market for small consumer appliances.

Home appliance sales have grown strongly despite rising interest rates. At the current price of Rs 164, the stock discounts the company's estimated FY-12 earnings by 10 times and appears to be a value buy.

Bajaj Electricals derives 70 per cent of its revenues from consumer businesses — lighting and kitchen appliances. It enjoys a leadership position in the northern and eastern regions in appliances such as fans, compact fluorescent bulbs and mixer-grinders.

In the consumer durable business (appliances and fans), the company's sales expanded by 15 per cent and profits grew at 16 per cent, as margins were maintained in the latest June quarter.

The company's consumer appliances business has been growing at a compounded rate of 30 per cent annually over the last five years, driven by consumers upgrading to branded products in electric fans and mixer-grinders.

In the recent June quarter, except for air-coolers which saw a dip in sales due to a mild summer, volume growth in this business was at 27 per cent. Though input costs rose, the company was able to pass on the increases through product price increases. Bajaj Electricals took a price increase of 6 per cent in fans and 4 per cent in the appliances category.

In the June quarter even as the appliances business delivered strong numbers, the Engineering & Projects (E&P) business turned in a tepid performance. The company's after tax profit had declined 50 per cent due to a loss in company's E&P division, which contributes 30 per cent to the company's top line.

The losses were a result of a muted quarter for E&P execution, which resulted in low recovery of fixed costs. However, this business may have the potential to recoup over the next few quarters.

For one, the first six months of the financial year are generally a lean period as far as the E&P business is concerned, with low sales and margins. The company has historically made it up in the second half of the year.

Revenues are usually quite lumpy in the E&P business, with the third and fourth quarters bringing over 60 per cent of a year's revenues.

Two, the E&P business unit has an order book of Rs 730 crore now (in rural electrification projects, building transmission line towers and street lighting) which is 0.9 times the unit's last year's sales. The company has bid for orders worth Rs 2,250 crore and even if half of this materialises, there will be a strong addition to order book.

The recent correction in copper and aluminium prices and efforts to control working capital and inventory may help the company contain margin pressures in this business. Copper prices are down 10 per cent from recent highs while aluminium is down 8 per cent.

The company's interest cover was at nine times for the year 2010-11. Outstanding debt on the company's balance-sheet as of end-June 2011 was Rs 205 crore which results in a debt-to-equity ratio below 0.5.

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