Investor's Eye: Stock Idea - Bajaj Electricals (Set to see an electrifying turn-around); Update - Automobiles (Auto February 2014 sales: a mixed bag)

 

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Summary of Contents     STOCK IDEA Bajaj Electricals Recommendation: Buy Price target: Rs320 Current market price: Rs245 Set to see an electrifying turn-around Key points Charting a course to correction: Bajaj Electricals Ltd (BEL), a lighting and consumer goods company, suffered in the past few years due to heavy losses in its engineering and project (E&P) business. It incurred a loss of Rs124 crore in the E&P business in FY2013 (against a profit of Rs73.5 crore in FY2011) which pulled down its net profit to Rs26.5 crore in FY2013 from Rs144 crore in FY2011. However, the situation is changing for the better now. The induction of a new head, Rakesh Markhedkar (who has extensive experience in the project business having worked in a range of E&P companies including Larsen and Toubro, KEI Industries and Emco) has improved the performance of the E&P business significantly. Thanks to stringent working capital management and close monitoring of projects, the losses of the business reduced sharply in the last quarter. After the completion of the loss-making projects in the next couple of quarters the management expects the E&P business to earn a margin of 7-8% in FY2015 in view of the profile of the new orders in hand.  Consumer durable and lighting businesses face margin pressure but cash flow remains strong: BEL has the advantage of a widespread pan-India distribution network (4 lakh retailers and 2,200 distributors) and strong brand recall. Further, through its association with international brands like Morphy Richards it has strengthened its product portfolio. However, the competition in the consumer and lighting businesses is intense and the slowdown in consumer discretionary spending across the country is resulting in margin pressure. On the brighter side, these businesses would continue to grow in double digits giving a high return on the capital employed and remain stable cash generators.  Risks and concerns: The key risk to our call is a higher than expected slowdown in the domestic consumer durable segment. Moreover, any delay in the turn-around of the E&P business would also severely dent the re-rating story. Valuation-further scope for re-rating: With the potential turn-around of its E&P business, BEL's earnings are estimated to see a close to eight-fold increase in the next three years on a low base of FY2013 and cross the Rs200-crore mark by FY2016. It would also result in an increase in the return on equity (RoE) to over 20% in FY2016 from a low of 4% in FY2013. Consequently, there is significant scope for a re-rating of the multiples, in line with that of its peers. Accordingly, we are initiating a Buy recommendation on BEL with a price target of Rs320 (based on 15x FY2016E earnings).      SECTOR UPDATE Automobiles Auto February 2014 sales: a mixed bag The automobile companies showed a mixed trend in the February 2014 volumes. Companies such as TVS Motors, Escorts and Mahindra & Mahindra (M&M; tractor segment) reported a volume growth. Maruti Suzuki India (Maruti Suzuki) and Hero MotoCorp reported flat volumes, while Tata Motors, Ashok Leyland and Eicher Motors reported a double-digit volume decline. The key takeaways are: The commercial vehicle (CV) segment continued to bare the brunt of the economic slowdown which continued to report a double-digit decline in the volumes. Tata Motors, Eicher Motors and Ashok Leyland saw the volumes being impacted the most. Even the light commercial vehicle (LCV) segment has been witnessing a decline in the demand.  Escorts and M&M have benefited from a strong tractor demand, though the utility vehicle (UV) sales of M&M reported a decline in the volumes during February 2014. Maruti Suzuki India (Maruti Suzuki) reported flat volumes indicating the continued sluggishness in the passenger vehicle industry. In the two-wheeler space, TVS Motors outperformed with a mid single-digit volume growth on the back of a strong demand for scooters. Hero MotoCorp reported flat volumes, while Bajaj Auto on the other hand reported a decline in volumes due to the absence in the fast growing scooter space and production constraints of new motorcycles. With not much improvement in the economic scenario, we expect the automobile sales to remain under pressure. While the excise duty cut may provide some relief, it is not sufficient to revive the automobile demand. We expect the two-wheeler and the tractor segments to continue their outperformance given the increased contribution from the rural areas which have shown resilience in the overall challenging environment. Picks: We prefer M&M among the stocks under our active coverage. Amongst the stocks under our soft coverage, we prefer TVS Motors and Escorts. Though Maruti Suzuki is doing well in terms of business, the Gujarat plant issues will continue to weigh down on the stock (we have downgraded to Hold recently). Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

Regards, The Sharekhan Research Team

 

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