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September 23, 2013

Bajaj Electricals Ltd.

… taking new guard

SKP Securities Ltd www.skpmoneywise.com of 15

CMP ` 163 Target: ` 221 Initiating Coverage – BUY

Source: Capitaline

Company Profile Bajaj Electricals Ltd (BEL) is a 75 years old India based company with diversified product portfolio comprising of small household appliances (such as mixer grinder, electric irons, OTGs, gas hobs and so on), fans, lighting & luminaries and engineering & projects (E&P). E&P division comprises of high mast, poles and transmission line towers (TLT). Majority of its products are outsourced from the third parties in India and abroad. The company is the market leader in electric iron, toasters, grillers, mixers and water heater. Key Highlights Topline to grow with the moderate CAGR of 13% during the next two years:

BEL’s revenue has grown with a CAGR of 15% between FY10‐13 with lighting, luminaries, E&P and consumer durables contributed 15%, 11%, 21% and 49% respectively.

Consolidated topline posted by the company for FY13 was ` 33.8 bn, which we expect to touch ` 44.1 bn by the end of FY15 with the CAGR growth rate of 13%.

We expect lighting BU to grow with a CAGR of 18% between FY13‐15E led by the rising demand of CFLs and LED lightings.

We expect Luminaries BU to grow with a CAGR of 7% during FY13‐15E. Consumer durables, the largest contributing BU to the revenues of the

company is expected to grow with a CAGR of 13% with Fans and other appliances to grow by 12% and 15% respectively. The increasing purchasing power of the middle class is creating demand for consumer durables.

E&P BU of BELs is expected to grow by 43% in FY14 largely due to execution of the low margin old orders. We expect the BU to clog the revenue of ` 10.2 bn orders of which ` 7 bn will be through the new orders. The BU grew by almost 50% during Q1FY14 due to closure of old sights.

Margins to improve by FY15 with high margin new E&P orders:

EBIDTA margins of the company declined by 430 bps during FY13 from 7.6% in FY12 to 3.3% in FY13. It has further moved southwards to 2.8% in Q1FY14. This has happened due to execution old low margin orders majorly in TLT segment, which has further mar the profitability of the division.

We expect that BEL will be able to execute all low/negligible margin orders by the end of FY14, thus, margins will remain under pressure during the period.

The company is now bagging high margin new orders execution of which is expected to start by FY15, thus, improving the margins of the company. We expect BEL to clog the margin of 7.6% at EBIDTA level and 3.7% at PAT level during the year.

Outlook & Recommendation Since, BEL is the case of strong brand recall, we have valued the stock on the basis of market cap to sales ‐ of 0.5x of FY15E revenues – method of relative valuation. We recommend BUY rating on the stock with a target price of ` 221/‐ (36% upside) in 18 months.

Key Share DataFace Value (`) 2.0Equity Capital (` mn) 199.5M.Cap (` mn) 16561.052‐wk High/Low (`) 233/150Avg. Daily Vol 24976BSE Code 500031NSE Code BAJAJELECReuters Code BJEL.BOBloomberg Code BJE IN

Shareholding Pattern (as on June 30, 2013)

66%11%

6%

17%Promoters

FII

DII

Public & Others

Particulars FY12 FY13 FY14E FY15ENet Sales 30989.6 33875.7 39131.4 44128.9Sales Gr. 13.0% 9.3% 15.5% 12.8%EBIDTA 2370.6 1107.5 1177.9 3353.8PAT 1178.4 512.1 227.1 1635.5PAT Gr. ‐18.1% ‐56.5% ‐55.7% 620.3%EPS (`) 11.8 5.1 2.3 16.4CEPS (`) 13.1 6.6 4.2 18.5

Financials (` mn)

Particulars FY12 FY13 FY14E FY15EInt Cover (x) 3.6 1.4 1.4 4.2P/E (x) 13.8 31.7 71.5 9.9P/BV (x) 1.4 1.4 1.4 1.1P/Cash EPS (x) 12.5 24.7 39.0 8.8M.Cap/Sales (x) 0.5 0.5 0.4 0.4EV/EBIDTA (x) 7.5 15.7 14.7 5.2ROCE (%) 24.8% 10.8% 11.0% 30.2%ROE (%) 16.8% 7.0% 3.1% 18.9%EBIDTM (%) 7.6% 3.3% 3.0% 7.6%NPM (%) 3.8% 1.5% 0.6% 3.7%Debt‐Equity (x) 0.3 0.2 0.2 0.2

Key Ratios

Price Performance BEL vs S&P BSE 500

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BEL

S&P BSE 500

Analyst: Vineet P. Agrawal Tel No: +91 22 4922 6006; Mobile: +91 98195 10575 e‐mail: [email protected]


SKP Securities Ltd. www.skpmoneywise.com of 15

Business Classification

An introduction: Bajaj Electricals Ltd (BEL) is a 75 years old company, established in 1938. It commenced its operations in Lahore with the marketing of small appliances and lighting products. Today, it has diversified interests in lighting, luminaries, electrical appliances, fans and engineering & projects. Business classification of BEL is as follows:

Source: Company & SKP Research; Revenue Contribution are based on FY13 figures

1. Appliances Business Unit (BU): • Wide range of products: Appliances BU offers wide range of household appliances namely

water heaters, mixer grinders, food processors, microwave oven, OTGs, air coolers, steam and dry irons, electric kettles, water filters, toasters, rice cookers, induction cookers, chimneys, gas stoves, hobs and so on.

• A brand game: It enjoys the leadership (number one position) in the domestic market in irons, water heaters and toasters & grillers and mixer segment, whereas it has number two in air cooler segment after Symphony. BEL and Philips jointly holds 31% market share in mixer grinder segment.

• BEL has tie‐ups with Morphy Richards (MR), UK, for small appliances and Nardi, Germany for hobs. MR manufactures wide range of home appliances from irons, kettles, and toasters to vacuum cleaner. 90% of the households in UK make use of at least one MR appliance making it UK’s number ONE brand. It is also a leading brand (number one) in India in kettles, coffee makers, and oven toaster grillers.

• MR is the fastest growing international brand in the Indian small domestic appliances market.

MR brand Food Processor, Model “Select 600”, has been ranked as the “No.1 Food Processor in India,” based on performance and energy efficiency from amongst ten other top brands, in tests carried out by Consumer Voice, a leading consumer awareness magazine in India.

• MR brand is preparing to launch new product categories like Water Heaters, Water Purifiers,

Table Fans, Pedestal Fans and Wall Mounting Fans and a new range of steam irons, deep fryers, room heaters and juicers in the current financial year.

BEL

Consumer Durables (Revenue Contribution: 49%)

Lighting (Revenue Contribution: 15%)

Appliances & Fans (Revenue Contribution:

Appliances ‐ 31% Fans ‐ 18%)

Special Projects, High Mast Poles

& TLT

Luminaries (Revenue Contribution: 11%)

BMS(Focuses on conserving energy

through HVAC controls, fire alarms, access and security

control systems)

E & P(Revenue Contribution: 21%)

Commercial & Industrial Lighting Projects

(Street lighting, Retail Lighting, Hazardous Area Lighting, Office

lighting etc)



• Competitors: Philips, Black & Decker, Kenstar, Usha, Maharaja, Marloni, Inalsa, Prestige, Hawkins and so on.

2. Fans BU: • Products: The Fans BU of the company manufactures ceiling fans, table fans, pedestal fans,

wall mounted fans, exhaust and fresh air fans. Bajaj fans are sold in almost 87,000 outlets across the country constituting 55% of Fans Selling Counters in the country.

• Infrastructure: BEL has its manufacturing facility for fans at Chakan with the annual capacity of 8 lakh units.

• Third party outsources: The Company also sources its requirements from dedicated vendors at

Noida, Delhi and Himachal Pradesh. It also imports fans from China. Around 90% of its requirements are outsourced.

• Industry: During 2011‐12, the members achieved a consolidated production figure of 36.22 mn

fans which translates to a negative growth of 3.13% over 2010‐11 on the back of slowdown in the housing and real estate sector triggered by economic uncertainties. This has happened first time since 2002‐03.

• The organised sector accounts for nearly 70% of the total fan industry in the country. The total

export of the organised sector of the fan industry during 2011‐12 had marginally improved having registered a growth of just 1.28 per cent over the previous year.

• Market Share: BEL has the market share of more than 15% in fans and is the second largest

player in the segment after Crompton Greaves followed by Orient and Usha.

• The BU enjoys leadership position in 12 major states and is a dominant player in 6 other states in the country.

• Tie‐Ups: BEL has tied‐up with China based Midea for marketing their fans in India. Midea is

renowned for manufacturing of household appliances. It is one of the largest household appliances maker and exporter in China. Midea is also world’s largest manufacturer of TPW (Table, Pedestal and Wall) fans.

• The company has also tied up with Disney, USA for manufacturing kids fan category with Bajaj‐

Disney brands.

3. Lighting BU: • The lighting business unit markets wide range of light sources such as general lighting services

(GLS) lamps, fluorescent tube lights (FTL), compact fluorescent lamps (CFL), special purpose lamps, torches etc.

• The manufacturing of GLS and FTL lamps are done at Hind Lamps Ltd (HLL), an associate

company of BEL with 50% stake, located in Shikohabad, Utter Pradesh. HLL fulfills around 70% of the requirement of BEL.

• The company has also invested in Sterlite Lighting (23% stake), which fulfills 40% of CFL

demand for the company. Rest is outsourced.

• BEL is the third largest company in India with overall lighting segments after Philips and Surya.



• Market Size: The Size of the current lighting market in India stands at about ` 96 bn. According to the Association of Electrical Lighting Manufacturers in India (ELCOMA), the lighting industry in the country has been growing at nearly 17‐18 per cent annually over the past two‐three years.

• CFL market in India has grown with a CAGR of 19% between CY08 to CY11. The biggest reason for CFL dominance is its wide acceptance by the residential segment. Even today more than 60% of Indian households use CFLs, whether urban, semi‐urban or rural. CFL’s contribution to lighting segment was 22% in CY11. The current market size of CFL is about ` 30 bn.

• With the introduction of LED lamps, the lighting scenario in India has been going through a drastic change. Though the overall CFL industry in the country is growing, the growth rate has been decreasing over the last few years. The Industry growth rate declined from 29% in CY08 to 12% in CY11.

• Major Foray in to LED portable lighting: BEL has also entered in to LED (Light Emitting Diode) portable lights with the introduction of products such as LED torches and LED lanterns. LED lamps are preferred choice of the environmentally conscious people all over the world.

• During FY13, BEL has launched the complete range of iLED lighting products and the range

comprises of panel lights, down lighters and tube lights, in India, which will help save cost of the consumer by consuming less energy. Move has been started from Kerala.

• BEL and Hong Kong‐based Megaman, an LED technology company, recently extended their

two‐year‐old marketing tie‐up to technology transfer.

• Considering an increase in the demand for eco‐friendly LED lighting products, BEL has also announced plans to start manufacturing LED products at its Nashik facility in 2013. The company is currently manufacturing compact fluorescent lights (CFLs) at Nashik.

• Size of the current LED lighting industry in India is about ` 10 bn. Although the overall lighting market growth is going to be slower, the LED lighting market offers very high growth opportunity. The demand for eco‐friendly LED lighting products is increasing, particularly in hospitality industry and home lighting. The LED Industry is expected to touch around ` 30 bn (USD 500 mn) by 2015 in India. Within the segment, the demand for LED street lights and LED solar lights is expected to grow rapidly in coming years.

• Currently, the contribution of LEDs to the overall Indian lighting industry is quite limited; however, they are expected to contribute about 14% to the overall industry by 2015, reducing the CFL contribution from the 22% (CY11) to around 20%.

• Why LED?: The traditional bulbs emit 90 per cent heat and only 10 per cent light while CFL

products emit 45 per cent heat and 55 per cent light. In contrast, LED products emit 80 per cent light and 20 per cent heat.

• Secondly, LED products, which do not use mercury unlike CFL, are eco‐friendly, more efficient,

and have a longer lifespan of 30,000 to 50,000 hours.

4. Luminaries (light fittings) BU:

• Commercial & Industrial Lighting: The luminaries BU market comprehensive range of luminaries including commercial, industrial, flood lighting, street lighting and post lamp lighting. It also undertakes special luminaries for flame proof and increased safety applications.



• The luminaries are offered to suit wide variety of light sources ranging from CFL, FTL to HID (High Intensity Discharge) lamps of various types and ratings.

• BEL gets the project directly from private players and through intermediary dealers for Government projects. It undertakes the project from designing, to erection and commissioning.

• Tie‐ups: The Company has tied up with Trilux Lenze, Germany, wherein it promotes the premium Trilux luminaries. Trilux is a leading European luminaries brand founded in 1912. It is the market leader in industrial and commercial lighting.

• This BU has also signed an agreement with Ruud Lighting Inc, USA for distributing their LED range of products in SAARC countries. It also acquired rights to manufacture the Ruud Lighting (Beta LED) range of products in India.

• Ruud Lighting, located in Racine, Wisconsin is a manufacturer and worldwide direct marketer

of industrial, commercial and residential lighting fixtures.

• Esteemed Clients: Giant Corporates like TISCO, TELCO, Reliance Group of Industries, L&T, Aditya Birla Group, Siemens, Ranbaxy etc. are some of the esteemed clients of the company.

• Government Entities like Airport Authority of India, CONCOR, SEBs, NTPC, Municipal Corporations, Naval Dockyards, BSES, HUDA, MSRDC, BEST etc. are some of its esteemed clients.

• Building Management System (BMS): The luminaries BU have forayed in to business of BMS in the year 2008. This is a strategic move of BEL to offer a wider product portfolio to the customers of luminaries and lighting BU. The main focus is to conserve energy through HVAC (Heating, Ventilation, Air Conditioning) controls, fire alarms, access and security controls managed by BMS.

• The BU has tied up with Delta Controls, Canada for HVAC controls and Securiton AG, Switzerland for fire alarms, access and security controls. This is an exclusive tie‐up to market Securiton and Delta Controls products in India.

• We expect that this venture will provide a competitive edge to the company and the company will looked upon by the customers as end to end solution provider in total energy management of buildings and facilities.

5. Engineering & Projects (E&P) BU: • E&P BU was started in early 1990s to focus on turnkey lighting projects. The company was

importing high masts from UK at that time and selling them in domestic market. But, the rising pound saw the landed price of the product increasing and it was becoming an unviable to import from UK. So it decided to manufacture it in‐house.

• The company entered in to transmission line towers (TLT) business in the year 2001. Today, E&P BU of BEL can be divided in three divisions viz special projects, high mast & poles and TLT.

• The company has state‐of‐the‐art manufacturing facility at Ranjangaon, near Pune with the installed capacity of 30,000 MT per annum. The facility undertakes the fabrication of lattice mast and TLTs. It also has the state‐of‐the art galvanizing facility at Ranjangaon. The unit was commissioned in FY01.



• Special Projects: Special Projects includes turnkey lighting projects, factory lighting, airport lighting, sports lighting, rural electrification and so on. Some of the successfully completed project by the BU at a glance:

Category Successful ProjectsRetail Lighting Ford Showroom, Chandigarh

Reliance Fresh, Belapur, Navi Mumbai Ansal Mall, Ludhiana, Punjab

Stadium Lighting Chinnaswamy Stadium, Bangluru Green Park Stadium, Kanpur Wankhede Stadium, Mumbai and so on.

Power Plant Lighting Thermal Power Station, Dahanu, Maharashtra BSES Power Station Chimney, Dahanu, Maharashtra Damoder Valley Corporation Power Plant, West Bengal

Airport Lighting Kochi AirportDomestic Airport Terminal building, Mumbai Cargo Airport Lighting at Sahar International Airport, Mumbai

Railway Station Lighting Howrah Railway StationNagpur Railway Station

Street Lighting Queen’s Necklace, MumbaiHaji Ali, Mumbai Airport Approach Road, Mumbai Illumination of Bandra‐Worli Sea Link bridge, Mumbai. Kharghar Street Light, Navi Mumbai Airoli Bridge, Navi Mumbai and so on.

Monument Lighting Taj Mahal and Others Source: Company & SKP Research

• BEL is market leader in sports lighting projects, and power segments. • Under the division, the company has executed prestigious orders from the Government

including lighting works at the Commonwealth Games stadium, Wankhede Stadium, Mumbai and the Bandra‐Worli sea link.

• Under rural electrification BEL undertakes turnkey projects for drawing lines for distributing

cables, street lighting, and installing transformers and so on.

• High Mast Lightings: BEL undertakes the projects for designing, supplying, erecting and commissioning of high mast poles, signages on road, streetlight and poles etc.

• BEL is present in the field for over 20 years. Over the period BEL has supplied more than 20

thousand masts with different operating systems, ranging from 10 to 60 meters. Today, it is the market leader in high mast lightings. It has designed, developed, supplied and commissioned tallest flag post 63 meter high in Kaithal, Kurukshetra in FY10.

• Major Projects executed:

Street lighting for MADC, Nagpur, PWD, Delhi, CIDCO, Mumbai NH‐45 Tamilnadu etc. High Masts for BORL Bina – Bina Refinary; Bhilai Steel Plant; RIL, Jamnagar and so on. Signages for HPCL, BPCL, IOC, Reliance etc.

• Transmission Line Towers: BEL entered in to TLT business in 2002. The TLT manufactured at

Ranjangaon is approved by PGCIL and majority of SEBs across India. It manufactures TLTs ranging from 110‐132‐220‐440‐765 KV class.

• The division is executing EPC orders from important customers such as PGCIL, Damodar Valley

Corporation, GETCO, Andhra Pradesh Transmission Corporation, Tamilnadu Electricity Board and so on.

• TLT majors such as KEC International, Jyoti Structures, Kalpataru Power and L&T provides

competition to the company in the segment.



Sourcing Arrangement of BEL at a glance

BEL’s business model is such that it outsources its product requirements to the third parties. Some of the BEL’s outsourcing vendors are local players while some are renowned global leaders in the respective segments. A brief description of these tie‐ups is as follows:

Product Category BEL’s Mfg. Base Local Outsourcing/Foreign tie‐ups Country ImportAppliances ‐‐ Outsource through local vendors at

Noida, Delhi and Himachal Pradesh (HP) Morphy Richards Nardi for gas hobs

India UK Germany

China

Fans Chakan Hydrabad and HP Midea for TPW fans Walt Disney for children’s fan

India China USA

China

Electrical Lamps & Tubes ‐‐ Mfg by HLL, an associate company; and outsourced from local vendors

India ‐‐

CFL ‐‐ Mfg by Starlite Lighting at Nashik, a sister concern of BEL

India ‐‐

Luminaries ‐‐ Local vendors at Daman and HP Trilux Lenz for premium Technical lighting Ruud Lighting Inc. for LED lighting Disano for street lighting Securiton for fire alarms, access and security control Delta Controls for HVAC

India Germany USA Italy Germany Canada

China

E&P – Special projects Abacus for sports lighting UK ‐‐

E&P – High Mast and Pole Ranjangaon ‐‐

India ‐‐

E&P ‐ TLT Ranjangaon ‐‐ India ‐‐Source: Company & SKP Research

Raw Materials

• The key raw materials for the products manufactured by BEL are ferrous and non‐ferrous metals. Metals which contains appreciable amount of Iron or its alloys such as steel, is called ferrous metal and vice versa. Aluminium, copper and zinc are non‐ferrous metals used in the products by BEL.

• Metals used in appliances, fans and lighting are aluminium and copper. Plastic is also used for making these products whereas towers and poles are fabricated with steel, which then is galvanized with zinc. Galvanization provides weatherproofing to towers and poles.

• The above metals are highly price sensitive. BEL has the hedging policy in place. It buys raw materials on a weekly basis that provides cover against price fluctuation. This limits the risk only to that consignment. It does not store raw materials. The Company also enjoys discounts from vendors on zinc.

• The Company also have price variation clause in most of its TLT orders, which makes up to 20‐22% of the total orders, where the customer compensates for the price increase in raw materials.

• The company procures both ferrous and non‐ferrous metals from dedicated domestic vendors.



Investment Rationale

1. Topline to grow with the moderate CAGR of 13% during the next two years: BEL’s topline has seen CAGR growth of 15% between FY10‐13 with lighting, luminaries, E&P, and consumer durables contributed about 15%, 11%, 21% and 49% respectively, during FY13. Consolidated topline posted by the company for FY13 was ` 33.8 bn, which we expect to touch ` 44.1 bn by the end of FY15 with the CAGR growth rate of 13%.

• We expect lighting BU to grow with a CAGR of 18% between FY13‐15E led by the rising demand of CFLs and LED lightings, the market of which is expected to grow by 40% in the next five years. Compared to CFL, LED products save 50 per cent more power. When compared to traditional lighting products, LED saves as high as 90 per cent of electricity.

• We expect Luminaries BU to grow with a CAGR of 7% during FY13‐15E.

• Consumer durables, the largest contributing BU to the revenues of the company is expected to grow with a CAGR of 13% with Fans and other appliances to grow by 12% and 15% respectively. The increasing purchasing power of the middle class is creating demand for consumer durables.

• BEL has the total order book of ` 9.2 bn which is 1.3x of FY13 E&P BU revenues. Out of the

total order, ` 2.0 ‐ 2.5 bn worth orders are old orders. Orders for TLT, special projects and high masts constitute ` 2.9 bn, ` 5.4 bn and ` 920 mn respectively.

• E&P BU of BELs is expected to grow by 43% in FY14 largely due to execution of the low margin

old orders. We expect the BU to clog the revenue of ` 10.2 bn orders of which ` 7 bn will be through the new orders. The BU grew by almost 50% during Q1FY14 due to closure of old sights.

• BEL also has plans to increase the contribution from exports in phased manner. Exports

contribute just 1% to the total revenues currently, though the company sells its products to 40 countries including the Middle East, Africa and some markets in South East Asia. BEL aims to increase its exports to about 5% in the coming few years. The company plans to create global hubs to achieve this goal. This global exposure will also provide the company with a natural hedge mechanism.

• Revenue chart of BE at a glance:

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Others (Including Other Operating Income)

Fans

Appliances

Engineering & Projects

Luminaries

Lighting

Source: Company & SKP Research



2. Well diversified business portfolio‐ provides cushion to the topline of the company: The revenues of the

company is evenly divided among its different business portfolio. As mentioned earlier company’s E&P BU comprise of three different businesses. When one product fails to bring enough orders, the other does more than enough to fill the gap. Revenue mix of the company at a glance:

High growth consumer durables segment contributed 49% in FY13 whereas lighting, luminaries, and E&P contributed 15%, 11%, and 31% each. This ensures well diversified revenue streams driven from high growth sectors. This also ensures that any slowdown in particular sector will not adversely affect the revenues of the company.

3. Margins to improve by FY15 with high margin new E&P orders:

• EBIDTA margins of the company nosedived by 430 bps during FY13 from 7.6% in FY12 to 3.3% in FY13. It has further moved southwards to 2.8% in Q1FY14. This has happened due to:

Its consumer durables business took hit due to volatile commodity costs and unprecedented exchange rate fluctuations.

E&P segment saw a loss of ` 1.24 bn loss at EBIT level from a profit of ` 449.4 mn during FY12. BEL saw further losses of ` 258.7 mn during Q1FY14. This has happened on the back of slowdown in infrastructure industry resulting in degrowth in the topline from ` 8.4 bn in FY12 to ` 6.9 bn in FY13, thus unable to absorb the fixed cost fully.

Secondly, the company has also executed old low margin orders majorly in TLT segment, which has further mar the profitability of the division. We expect that BEL will be able to execute all low/negligible margin orders by the end of FY14, thus, margins will remain under pressure during the period. The company is now bagging high margin new orders execution of which is expected to start by FY15, thus, improving the margins of the company. We expect BEL to clog the margin of 7.6% at EBIDTA level and 3.7% at PAT level during the year.

13% 15% 15% 16%

12% 11% 10% 9%

27% 21% 26% 25%

31% 31% 31% 32%

18% 18% 17% 17%

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FY12 FY13 FY14E FY15E

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(%)

Fans

Appliances

E&P

Luminaries

Lighting




Margins of the company at a glance:

EBIDTA & EBIDTM PAT & PATM

ROE & ROCE

4. A low debt company – Favorable D/E:

• The company is reducing its term loans from its books. Term loans, which stood at ` 451 mn in FY11, reduced to ` 345 mn in FY13.

• Though, Company’s foreign currency loan (short‐term) has increased to ` 745.47 mn in

FY13 from ` 144.57 mn in FY11. We expect this loan to be repaid fully by March, 2014. • This reduction in debt has helped the debt‐equity of the company to improve

significantly to 0.2x in FY13 which is very much favourable for the company.

2549

.7

2370

.6

1107

.5

1177

.9

3353

.8

9.3%

7.6%

3.3% 3.0%

7.6%

0.0%

1.0%

2.0%

3.0%

4.0%

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EBID

TM (

%)

EBID

TA (`

mn)

1438

.1

1178

.4

512.

1

227.

1

1635

.5

5.2%

3.8%

1.5%

0.6%

3.7%

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23.5%

16.8%

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3.1%

18.9%

33.8%

24.8%

10.8% 11.0%

30.2%

0.0%

5.0%

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35.0%


ROE (%)

ROCE (%)

1121

.66

2037

.93

1599

.85

1677

.85

1752

.81

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Deb

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366.

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Debts and D/E Interest Cost & Interest Coverage





5. Planned R&D centre to develop next generation products with a view to increase exports: • As mentioned earlier, BEL wants to go global. To achieve this, the Company has planned to set

up an integrated research and development (R&D) centre to create next generation products which may include development of appliances, lighting and small bits of E&P.

• The total capex for the centre is set at about ` 500 mn which is expected to be completed by Q3FY14.

• The strategy behind the move is to cater peripheral markets through global hubs. In the past

BEL used to export through a Bajaj Group Company which has merged with BEL last year.

• The current contribution of exports to overall turnover is just 1%, though the company’s products are sold over 40 countries which include West Asia, Africa and Southeast Asia. BEL wants to increase it exports to about 5% of its total revenue in coming few years.

6. Introduction of new products every now and then to penetrate deep in the competition and maintain steady growth: Competition is quite intense in consumer durables and luminaries segment putting pressure on topline and margins. BEL is introducing new products every now and then for maintaining steady topline and margins. Some of the recently introduced new products by the company are: • Lighting BU launched its premium segment of lighting range including LED lights in South India

beginning Hyderabad, in July 2013. It plans to introduce them across South India over the next few days and across the country in a phased manner.

• As mentioned earlier the premium lighting products are being brought to India through a tie up with Megaman, a Hong Kong‐based company. These new products, including the LED range and fluorescent lights, which is expected to help reach out to new markets

• During April 2013, the Lighting BU also introduced its new range of “futuristic” LED products, under the brand name of iLED, in Kerala.

• These products have been launched keeping in view the potential market of LED’s in India. We expect the company to achieve the turnover of ` 6 bn through LED products. Bajaj has already launched 25 LED products so far, and is set to introduce another 45 this year.

• The use of renewable lighting sources has become inevitable in the current environmental conditions. With power saving and energy conservation being the key to achieve environmental balance, renewable energy sources like solar power in lighting applications has emerged as the need of the hour. Considering this the Luminaries BU has launched solar street light range of luminaires, in FY13.

• In comparison with CFL based Street Light Luminaires, solar based luminaires has potentially saved 5.56% of energy consumption. During the year the BU sold 2200 solar street light Luminaires, which on an annual basis saved energy of about 2,40,900 KWh.

• The saving in energy consumption has resulted in reduction of electricity cost by ` 1.57 mn, reduction in emission of Carbon Di‐oxide by 166 metric ton (equivalent to removal of 50,300 small cars from street) and saving of 1,67,27,04,000 gallons of water from being contaminated due to Mercury.



• Appliances BU introduced a new range of sophisticated and versatile food processors and a range of feature rich and differentiated induction Cookers with copper coils, a unique selling proposition in the Indian market, under the brand Morphy Richards (MR) during FY13.

• MR brand is preparing to launch new product categories like water Heaters, Water purifiers, table fans, pedestal fans and wall mounting fans and a new range of steam irons, deep fryers, room heaters and juicers in the current financial year.

With the help of these new products we expect that BEL will be able to mitigate the competition successfully resulting in to steady topline growth and maintaining the margins. 7. Government’s energy conservation drives undertaken every now and then provides opportunity

for lighting industry: • Lighting accounts for about 20% of electricity consumption in India and majority of lighting

needs of households are met by incandescent bulbs which are not energy efficient as only 5% of electricity is used for lighting and rest is converted in to heat resulting in the wastage of energy.

• As mentioned CFLs and LED,s provide that energy‐efficient alternative to the incandescent

lamp to provide the same level of illumination.

• Government’s efforts for promotion of CFLs have the desired impact on the market with the sales of CFLs in India having grown from about 20 mn pieces in 2003 to around 304 mn pieces in 2010.

• Initially the penetration of CFLs in household remain low largely due to the high price of the

CFLs, which was 10‐12 times the cost of incandescent bulbs, whereas, combined penetration share of incandescent lamps for lighting in the commercial and residential sectors was nearly 80%. Now, people have started accepting CFLs due to prolonged life and low electricity consumption.

• Bachat Lamp Yojana: For, Instance, the Bachat Lamp Yojana was launched by the Government

in February 2009, which focused on the cost barrier to reduce the cost of CFLs to that of incandescent bulbs.

• The scheme promoted replacement of inefficient bulbs with CFLs by leveraging the sale of

Certified Emission Rights (CERs) under the Clean Development Mechanism (CDM) of the Kyoto Protocol. Under the scheme 60 Watt and 100 Watt incandescent Lamps was to be replaced with 11‐15 Watt and 20‐25 Watt CFLs respectively.

• It was estimated that, once achieved, this would save the country 6,000 MW of power, or

around ` 250 bn.

• The scheme provided a unique platform for a robust public‐private partnership between the Government of India, private sector CFL suppliers and State level Electricity Distribution Companies (DISCOMs).

• The companies that sell these bulbs at subsidized rates was allowed to recover the remaining

amount through the sale of carbon credits under CDM of the Kyoto Protocol.

• Bachat Lamp Yojana has failed due to crashing of carbon market.



• Replacing CFL with LEDs on the streets: Since 2009, the BEE has been providing grants to Indian municipalities to

undertake pilot trials of LED street lamps.

Public lighting on connected roads, in India, requires almost 4,400 MW of connected load. Replacement by LED saves 50‐70% reduction in energy consumption.

Till 2011, 13 LED projects have been completed in cities in Arunachal Pradesh,

Assam, Maharashtra and Nagaland. Anecdotal evidence suggests that results of these pilots have been mixed, largely because of lack of knowledge about how to go about procuring quality LED products at the municipal level.

The BEE has also provided grants of USD 100,000 each to Kolkata and Thane for

one‐year trials, to be matched with local funds.

Results to date have been encouraging. The LED luminaires are also providing more illuminance than the baseline HPS luminaires, while achieving nominal savings ranging from 40% to 59% for replacement of the two HPS wattage types.

Such efforts made by the Government provide huge opportunities for lighting industry, especially when the penetration level of the product is low.

Key Concerns

1. Highly Competitive Industry: All the segments of BEL are highly competitive putting pressure on the topline and margins of the company. The Company is mitigating the risk by continuous introduction of new products and optimizing the utilization of its extensive distribution system of urban and rural areas.

2. Price volatility of metals: Metals (both ferrous and non ferrous) are the key raw material for the company, which is highly price volatile. Any adverse movement in the prices may put negative impact on the margins of the company.

Valuation

BEL has balanced business portfolio, which is consumer centric and infrastructure oriented. The strong distribution network, a powerful brand, wide product portfolio, large infrastructure segment, excellent vendor base along with excellent channel partners continue to be the major strengths of the company. Since, BEL is the case of strong brand recall, we have valued the stock on the basis of market cap to sales ‐ of 0.5x of FY15E revenues – method of relative valuation. We recommend BUY rating on the stock with a target price of ` 221/‐ (36% upside) in 18 months.



CONSOLIDATED FINANCIALS(All data are in ` mn unless specified, Y/e March)

Income Statement FY12 FY13 FY14E FY15E Balance Sheet FY12 FY13 FY14E FY15E

Net Operating Income 30989.6 33875.7 39131.4 44128.9 Equity Capital 199.3 199.5 199.5 199.5

Operating Expenditure 28618.9 32768.1 37953.6 40775.1 Reserves 6799.1 7086.8 7076.2 8474.1

EBIDTA 2549.7 2370.6 1107.5 1177.9 Net Worth 6998.4 7286.3 7275.7 8673.6

Depreciation 125.2 144.5 188.9 208.5 Loan Funds 2037.9 1599.9 1677.9 1752.8

EBIT 2245.4 963.0 988.9 3145.3 Total Liabilities 9036.3 8886.1 8953.6 10426.4

Interest 630.5 689.8 723.2 755.5 Net Fixed Assets 1840.2 2264.2 2809.8 3101.3

Other Income 144.2 169.2 78.3 88.3 Capital WIP 29.6 58.7 0.0 0.0

EBT 1759.1 689.7 344.0 2478.1 Investments 440.6 297.6 297.6 297.6

Exceptional Item 0.0 247.2 0.0 0.0 Net Current Assets 6707.3 6186.5 5767.0 6948.4

Tax 580.7 177.7 117.0 842.5 Defferred Tax Assets 18.6 79.2 79.2 79.2

PAT 1178.4 512.1 227.1 1635.5 Miscellaneous Exp 0.0 0.0 0.0 0.0

EPS (`) 11.8 5.1 2.3 16.4 Total Assets 9036.3 8886.1 8953.6 10426.5

Cash Flow Statement FY12 FY13 FY14E FY15E Ratios FY12 FY13 FY14E FY15E

PBT 1759.5 689.7 344.0 2478.1 Valuation ratios (x)

P/E 13.8 31.7 71.5 9.9

P/Cash EPS 12.5 24.7 39.0 8.8

Net change in WC, Tax, Int ‐599.5 ‐397.6 ‐813.3 ‐1546.6 P/BV 1.4 1.4 1.4 1.1

EV/EBIDTA 7.5 15.7 14.7 5.2

EV/Sales 0.6 0.5 0.4 0.4

Capital Expenditure ‐468.8 ‐626.8 ‐650.0 ‐500.0 Earning Ratios (%)

EBIDTAM 7.6% 3.3% 3.0% 7.6%

OPM 7.2% 2.8% 2.5% 7.1%

NPM 3.8% 1.5% 0.6% 3.7%

ROE 16.8% 7.0% 3.1% 18.9%

ROCE 24.8% 10.8% 11.0% 30.2%

B/S Ratios

Current ratio (x) 1.6 1.5 1.3 1.4

D/E (x) 0.3 0.2 0.2 0.2

Opening Cash Balance 461.1 518.5 482.4 583.2 Debtor Days 108.0 100.2 89.4 86.1

Creditor Days 93.8 97.2 99.7 101.6

Inventory Days 50.5 53.2 53.4 55.6

Closing Cash Balance 518.5 482.4 583.2 638.2 FA/Turnover (x) 16.8 15.0 13.9 14.2

Cash Flow from Operating Activities 756.2 1422.4 1628.2 1467.9

Cash flow investing Activities ‐675.9 ‐1.6 ‐650.0 ‐500.0

Add: Depreciation, Interest & Other Exppenditure 874.4 958.9 912.1 964.0

Net Increase/Decrease in Cash & Cash equivalents 57.4 ‐36.1 100.7 55.0

Investments, Sales of FA, Dividend received and others ‐207.2 625.2 0.0 0.0

Cash balance of acquired subsidiaries 0.0 0.0 0.0 0.0

Cash flow from Financing Activities ‐22.8 ‐1456.9 ‐877.5 ‐912.9

Financials (` mn)



SKP Securities Ltd www.skpmoneywise.com Page 3 of 15

Notes:

The above analysis and data are based on last available prices and not official closing rates. SKP Research is also available on Bloomberg, Thomson First Call & Investext Myiris, Moneycontrol, Tickerplant and ISI Securities.

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