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The stock of Bajaj Electricals jumped 12 per cent intraday on Wednesday before closing with gains of 10.66 per cent on the NSE. The stock, which hit a new lifetime high at ₹548.7, has gained 136.77 per cent in the last one year and has been the best performing stock among its peers, including Havells India and Crompton Greaves.
The strong outperformance followed a bad bear patch when the company was going through transformation of its distribution model in consumer durable business, which forms 54 per cent of overall revenues. But now with each passing quarter, outlook on the company’s consumer durable business is getting better. There are expectations that this business is expected to see a revival from the December 2017 quarter. The changes in the distribution model are 65 per cent complete and will fully stabilise by end-FY18.
“We expect profitability to increase once the distribution channel stabilises by FY18-end and is rolled out fully, as the discounts given to wholesalers will now be fully eliminated. Good growth is seen in states where it has rolled out new distribution strategy. Bajaj is looking at 1-1.5 per cent better margins, sustainable in coming quarters,” said Surbhi Lodha, analyst at Anand Rathi.
E&P division in good shapeFurther, its engineering and procurement division (46 per cent of revenues) is also sitting on high-margin order book of ₹3,420 crore and will only add to the growth momentum in the coming quarters.
In FY17, the company’s standalone revenues, operating profit and net profit declined 7.16 per cent, 10.88 per cent and 3 per cent, respectively. Performance has improved in the first half of FY18 wherein sales has grown a marginal 0.51 per cent year-on-year and net profit was flat (marginally down 0.13 per cent). Operating profit declined at a lesser rate of 8.3 per cent.
The stock’s valuation at 30 times and 23 times its FY18 and FY19 estimated earnings, respectively, also looks reasonable as the period of pain is over for the company and financial performance is going to get better. It has breached the already revised target price and is soon expected to see a further revision post announcement of December quarter performance.
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