Structural rejig for next level of growth

Based on most valuation metrics, the Bajaj Electricals stock trades at a 30-50 per cent discount to Havells India, its close competitor. The premium Havells commands comes from the perception of being a more aggressive company, something it has proved with new products, as well as the Sylvania acquisition. At Bajaj Electricals, too, change is underway and this could bridge the valuation gap for the stock (now at Rs 201.20) to some extent, albeit gradually.

As recently as March 28, Anant Bajaj was elevated as the joint managing director of the 72-year-old Bajaj Electricals. The company is now charting a new growth path, through restructuring its businesses and creating synergies in terms of focus and cost reduction. Leveraging its brand equity, it wants to focus more on the engineering business, getting into exports and reaching more consumers in the domestic market, with a focus on rural India.

“The strategy is to simplify business and focus on growth to take the company to the next level. Our revenues in the last 10 years have grown 25-30 per cent and profits have grown 30-35 per cent annually. We hope to grow at 15-20 per cent annually,” says chairman and managing director Shekhar Bajaj.

Putting things in order
Largely perceived as a consumer lighting and appliances company, Bajaj Electricals is also in the engineering and procurement (E&P) business, which accounts for a quarter of revenues. The restructuring will split the business into two verticals — consumer products and business to business (B2B). Consumer products will include appliances, fans, consumer durables, lighting and Morphy Richards, with luminaries and engineering projects forming the B2B vertical. Through this restructuring, Bajaj wants to enhance focused growth and achieve operational efficiencies, leading to cost-cutting.

ON THE GROWTH PATH
In Rs crore	FY11	FY12E	FY13E
Revenue	2,740.8	3,103.5	3,611.9
OPM (%)	9.5	7.4	8.7
Net profit	146.7	116.0	173.5
EPS (Rs)	15.3	11.7	17.6
PE (x)	13.1	17.2	11.4
E: Estimates                          Source: India Infoline Research

Consumption story
The growth of Bajaj Electricals is correlated to the domestic consumption story. Its 5,000 dealer network and a presence in 400,000 retailers across the country should help leverage brand equity and growth in the coming years. It has charted plans to expand in rural markets, with a renewed focus on marketing and distribution networks. It also intends to increase presence in the urban and semi-urban markets with premium products.

Growth will also be driven by an increase in reach and penetration. Though exports don’t account for much at present, the share should rise with increased focus. Analysts are confident the consumer division would grow annually at 12-15 per cent over the next two years. Importantly, its turnover is almost 12 times its fixed assets in the business. Bajaj operates largely on the outsourcing model, which means with an incremental growth in the consumer division, a high-margin business, the return on investment (27.4 per cent in FY11) will improve and internal cash generation rise. In fact, backed by internal accruals and very low debt on the books, the management is open to acquisitions and says funding would not be an issue, considering it can raise up to Rs 1,000 crore at the current level.

Contrary to the consumer business, the engineering business (30 per cent of revenues) requires more cash and working capital. Even as the segment accounts for 70 per cent of the capital deployed, it contributes just 30 per cent to the earnings before interest and taxes. In this division, Bajaj provides electrical solutions for industrial and government clients. It also undertakes work related to transmission lines and competes with larger players like KEC International, Kalpataru Power Transmission and Jyoti Structures. The segment has an order book of Rs 700-750 crore and the company is aiming to achieve E&P revenue of Rs 1,000 crore in FY13, compared to a target of Rs 840 crore in FY12. Sustainable growth in the engineering division and margins in this segment would be the key thing to watch, given that the company is yet to establish itself in the transmission business.