Bajaj Electricals: Re-inspiring trust

Bajaj

Consumer

Initiating Coverage | Sector:

Electricals

Bajaj Electricals

BSE Sensex

22,877

S&P CNX

6,841

CMP: INR280

TP: INR370

Buy

Re-inspiring trust

Earnings to quadruple over FY14-16; re-rating imminent

Stock info

Bloomberg

Equity Shares (m)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

M.Cap. (INR b)

M.Cap. (USD b)



BJE IN

100.0

292/150

-5/59/42

28.0

0.5



Financial Snapshot (INR m)

Y/E March

2014E 2015E 2016E

Net Sales

40,977 46,723 53,352

EBITDA

Adj PAT

EPS (INR)

Growth (%)

BV/Share (INR)

RoE (%)

RoCE (%)

P/E (x)

P/BV (x)

1,588 3,947 4,507

587 2,133 2,469

5.9

75.4

7.9

17.9

47.6

3.7

21.4

24.8

15.8

24.5

43.4

11.3

2.5



Bajaj Electricals (BJE) enjoys enviable consumer franchise, with market leadership

in Small Appliances. Given its asset-light model, large product portfolio and wide

distribution network, the performance of its Consumer-facing businesses remains

robust.

BJE’s Engineering & Projects (E&P) business, however, has been burning cash,

impacting consolidated financials and stock performance. We expect the E&P

business to witness a sharp turnaround in FY15 led by key initiatives undertaken

over the last 12 months.

Consolidated earnings are set to quadruple over FY14-16, driven by the expected

turnaround in E&P and continued robust performance in Consumer-facing

businesses. The stock should see a re-rating, as overall performance improves.

We initiate coverage with a Buy rating. Our target price of INR370 implies 32%

upside.

Enviable consumer franchise

BJE is known for its Consumer-facing Appliances and Lighting businesses. It

derives 80% of its revenues and its entire profits from these businesses. With

over 75 years of history, its

Bajaj

brand enjoys mass awareness, which helps BJE

to thrive with lower ad spends than peers. At ~1.6% of sales, BJE’s ad spends are

lower than peers (5.8% spent by TTK Prestige, 4.6% by V-Guard, 3.2% by Havells

and 2.8% by Hawkins).

Bajaj

is the only brand apart from

Havells

that has a pan-

India recall. TTK Prestige (60% South), Hawkins (70% North) and V-Guard (75%

South) derive majority of their revenues from a single market. While BJE has

positioned

Bajaj

as a mass market brand, it has forged tie-ups with international

brands like

Morphy Richards

and Disney to capture the opportunity at the

premium end of the market.

78.6 263.4

25.5

41.5

13.1

3.0

92.1 109.9

Shareholding pattern (%)

As on

Promoter

Foreign

Others

Mar-14 Dec-13 Mar-13

66.1

15.4

14.7

66.2

2.9

15.9

15.0

66.1

4.5

12.0

17.5

Domestic Inst 3.8

Strong product portfolio and distribution reach, an asset-light model

BJE has a huge product portfolio in the Appliances and Lighting segments,

spanning over 2,000 SKUs. The combined market size for BJE’s consumer-facing

segments is pegged at over INR178b, with BJE’s revenues and market share

standing at INR26b and 15.2%, respectively. We believe BJE’s strategy of having

a presence across products gives it a great degree of clout amongst consumers

as well as the distribution channel, which has helped it to grow and sustain its

market leadership. It has a wide distribution reach, with over 4,100 dealers and

a 400k strong retail network for Lighting, 86k dealers for Fans and 45k dealers

for Appliances across India. Manufacturing is entirely outsourced to 80 different

vendors across India, leaving the management free to focus on innovation,

brand building and distribution.

Stock Performance (1-year)

Bajaj Electricals

Sensex - Rebased

290

255

220

185

150

24 April 2014

Bajaj Electricals

Fans, Lighting and Luminaires on a steady growth trajectory

BJE is a leading player in fans, lighting and luminaires segments. Fans contribute

24%, Lighting 18% and Luminaires 14% to BJE’s Consumer-facing business

revenues. BJE has a 17% share in the INR35b organized Fans market in India, an

8% market share in the INR50b organized Lighting market and a 5% market

share in the INR25b organized Luminaires market in India. To capture the

premium end of the market, BJE has international tie-ups with Chinese

appliances major Midea (USD11b in revenues) to sell Fans, and with Walt Disney

for the sale and marketing of children’s fans using Disney characters and

designs. Going forward, BJE is focusing on new launches in the energy efficient

and premium category, which should further help in driving market share gains

and margins. Similarly, in the Lighting segment, BJE has witnessed shift in favor

of power saving, and high margin CFL lamps over the last few years, with

contribution rising from 7% in FY05 to 30% in FY12 and 50% currently. We

expect this proportion to improve further aiding margin accretion (CFL margins

stand at ~10% as against 7% margins reported by lighting division).

E&P business set for strong turnaround

Since FY11, BJE’s E&P business has been suffering. Slowdown in the Power

sector coupled with execution slippages led to revenue de-growth and decline in

EBIT margin from +10.5% in FY10 to -17.6% in FY13. BJE has taken a number of

steps in the last 12 months to revive the performance of the E&P division. Unlike

earlier, the division now reports to the central finance team, resulting in more

prudent supervision. The top management has been revamped, with industry

veteran, Mr Rakesh Markhedkar replacing internally-groomed Mr Lalit Mehta as

Business Head. The new management has implemented a strict project

monitoring process, which has ensured better timeliness in execution. We

expect the E&P business to post a strong turnaround in FY15, with revenues

growing at a CAGR of 13% over FY14-16 and EBIT margin expanding to +5%.

Earnings to quadruple over FY14-16

We expect BJE’s consolidated earnings to quadruple from INR587m to

INR2,469m over FY14-16 on the back of turnaround in the E&P division. We

expect revenues to post 14% CAGR, with 460bp accretion in EBITDA margin from

3.9% to 8.4%. Working capital should improve from 62 days to 44 days. We

expect substantial improvement in return ratios (RoCE / RoE) from 17.9%/7.9%

to 43.4%/24.5%.

Initiating coverage with Buy rating and price target of INR370

Over the last three years, the dismal performance of the E&P division has

clouded BJE’s robust underlying consumer franchise. Expected turnaround of

the E&P business will be a key re-rating catalyst. BJE is trading at 11.3x FY16E

earnings as against Havell’s 17.8x FY16E earnings. This steep discount should

narrow in our view as BJE delivers on the E&P turnaround. We value BJE at 15x

FY16E EPS of INR24.8 and arrive at a target price of INR370. We initiate

coverage with a

Buy

rating.

24 April 2014

Bajaj Electricals

Story in Charts: Earnings set to accelerate

Consumer-facing businesses contribute 80% of revenues…

…and boast strong capital efficiency (RoCE)

E&P business – The party spoiler

Management changes to aid turnaround in E&P business

Consolidated earnings set to quadruple…

…and consolidated capital efficiency should improve meaningfully

2) Segment Profitability (%)

Segment RoCE (%)

128%

1) Revenue Contribution (%)

Engineering

& Projects,

Lighting,

80%

Consumer

Durables,

Consumer Durables

Lighting

-26%

E&P

Source: MOSL, Company

3) E&P segment a drag on overall profitability

E&P division's contibution to operating profits (%)

11%

18%

4) Management changes to ensure turnaround

E&P EBIT (INR m)

3.2%

265

(1,191)

(1,243)

Margin

5.0%

672

5.0%

760

-114%

FY12

FY13

-97%

FY14E

FY15E

FY16E

-18.1%

FY13

-10.0%

FY12

FY14E

FY15E

FY16E

Source: MOSL, Company

5) Earnings to quadruple

PAT

2,469

2,133

6) Bajaj Electricals reports strong overall capital efficiency

RoCE (%)

1,179

512

587

FY12

FY13

FY14E

FY15E

FY16E

FY12

FY13

FY14E

FY15E

FY16E

Source: MOSL, Company

24 April 2014

Bajaj Electricals

Enviable consumer franchise

75-year history; leader in Small Appliances



With over 75 years of history, the

Bajaj

brand enjoys mass awareness, which helps BJE

to thrive with lower ad spends than peers. It is a market leader in Small Appliances,

selling 3.5m Irons, 1.6m Mixer Grinders and ~600k Water Heaters every year.

It has a wide distribution reach, with over 4,100 dealers and a 400k strong retail

network for Lighting, 86k dealers for Fans and 45k dealers for Appliances across India.

Manufacturing is entirely outsourced to 80 vendors across India, leaving the

management free to focus on innovation, brand building and distribution.

With an asset-light business model, coupled with huge product and distribution

presence, we believe BJE is well placed to ride the increasing penetration of Small

Appliances and Luminaires.

BJE is largely a consumer franchise deriving 80% of its revenues and its entire profits

from B2C businesses. E&P contributes 20% to revenues and has been a drag on

profitability.

Bajaj a strong brand; international brand tie-ups help drive premiumization

Bajaj

is a strong brand, with

over 75 years of history and

enjoys a strong first mover

advantage.

Bajaj

is a strong brand, with over 75 years of history and enjoys a strong first mover

advantage. Given the mass awareness of the

Bajaj

group, BJE’s ad spends are lower

than competitors (ad spends at ~1.6% of sales as against 5.8% spent by TTK Prestige,

4.6% by V-Guard, 3.2% by Havells and 2.8% by Hawkins. Bajaj is the only brand apart

from Havells that has a pan-India recall. TTK Prestige (60% South), Hawkins (70%

North), and V-Guard (75% South) derive majority of their revenues from a single

market.

While BJE has positioned

Bajaj

as a mass market brand, it has forged tie-ups with

international brands, like

Morphy Richards

and

Disney

to capture the opportunity at

the premium end of the market. While MR is amongst the largest Small Appliance

brands in UK (revenues of USD200m, selling over 5m units annually, with over 90%

of British homes owning an MR product),

Disney

is a popular brand addressing the

youth population. International tie-ups (only enjoyed by BJE) put BJE in favorable

position as against peers to ride the shift in demand in favor of premium products.

BJE thrives with lower ad spends than peers (%)

Ad spend to revenues (%)

5.8%

4.6%

2.8%

1.6%

3.2%

International tie-ups (only

enjoyed by BJE) put BJE in a

favorable position to ride

the shift in demand in favor

of premium products.

Bajaj Electricals

Hawkins

Havells

V-Guard

TTK Prestige

Source: Company, MOSL

24 April 2014

Bajaj Electricals

Morphy Richards

– successful re-entry post alliance with BJE

found an ideal partner

in BJE given its years of

experience in the Indian

Small Appliances market

and strong distribution

reach.

Morphy Richards (MR)

had withdrawn Indian markets in 1980s after it struggled to

expand its India business given difficulty in setting up distribution, uncompetitive

import duties (40%) and lack of understanding of Indian tastes and cooking habits. In

early 2000s, MR was looking at entering into an alliance with an Indian partner to

address these issues and gain scale in the highly promising Indian Appliances

market. At the same time BJE was looking to enter the premium end of the Small

Appliances market given influx of international brands like

Phillips, Braun, Kenwood,

Rowenta.

MR found an ideal partner in BJE given its years of experience in the Indian Small

Appliances market and strong distribution reach. BJE benefited by adding a premium

brand to its portfolio. MR entered into an agreement in 2002 to distribute MR

branded products in India for a royalty of 2.5%. Post 2002, there has been no

looking back for the MR brand in India.

is amongst the fastest

growing international

brands in the Indian Small

domestic appliances market

and has registered 33%

revenue CAGR over FY10-

13.

MR is now amongst the fastest growing international brands in the Indian Small

Appliances market (33% revenue CAGR over FY10-13) and is one of the best-selling

international brands in BJE’s portfolio (contributes 15% to BJE’s Appliances

revenues). It is a Number.1 brand in India in Kettles, Coffee Makers and Oven

Toaster Grillers. We expect growth momentum for MR to continue (20% CAGR) on

the back of entry into new product categories like Water Heaters, Water Purifiers

and Fans and scale-up in distribution from 12,000 retail outlets to 20,000 retail

outlets by FY16.

MR revenues have post strong growth

MR revenues (INR m)

2,512

1,820

1,430

450

570

776

1,040

2,093

3,014

100

FY04

250

FY05

350

FY06

400

FY07

FY08

FY09

FY10

FY11

FY12

FY13 FY14E FY15E FY16E

Source: Company, MOSL

Extending the

premiumization strategy to

the Lighting and Luminaires

business, BJE has forged

international tie-ups with

CREE Trilux, Disano and

Teleco.

International tie-ups in the Lighting and Luminaires business

Extending the premiumization strategy to the Lighting and Luminaires business, BJE

has forged international tie-ups with CREE Trilux, Disano and Teleco. It has executed

projects for interior luminaires for clients like TCS, Infosys, Google, Volkswagen, etc.

Company

CREE Lighting

Trilux Luminaires

Disano & Mareco Luce

Teleco

Country

USA

Germany

Italy

Service

Outdoor street lighting

Interior luminaires

Landscape lighting

Architectural outdoor lighting

Source: Company, MOSL

24 April 2014

Bajaj Electricals

Huge mass market product portfolio; market leader in Small Appliances

BJE has a huge product portfolio in the Appliances and Lighting segments, spanning

over 2,000 SKUs. The combined market size for BJE’s Consumer-facing segments is

pegged at over INR178b, with BJE’s revenues and market share standing at INR26b

and 15.2%, respectively. We believe BJE’s strategy of having a presence across

products gives it a great degree of clout amongst consumers as well as the

distribution channel, which has helped it to grow and sustain its market leadership.

Bajaj Electricals product portfolio

Segment

Sub-

Segment

Lighting

Luminaires

25,000

Mkt Size

(INR m)

50,000

Organized Mkt Share

Description

Competition

(%)

GLS lamps, fluorescent tube lights, compact

Philips, Crompton,

65%

fluorescent lamps, domestic luminaires, ballasts &

Surya, Havells, etc

starters, LED torches

Industrial, commercial, decorative, street light,

floodlight, LED, lighting electronics, lighting control, Phillips, Crompton,

65%

HID Lamps: Mercury & sodium vapor lamps,

Wipro, Thorn

halogen lamps, metal halide & fluorescent lamps

Ceiling, table, pedestal & wall mounted fans,

Crompton, Usha,

personal fans, Bajaj-Disney children’s fans,

Orient, Khaitan,

65%

17%

Industrial exhaust fans, commercial air industrial

Polar, Havells

fans, circulators, cooler kits and pumps

Mixers grinders, juicers, food processors, water

Philips, Kenstar,

heaters, air coolers, iron, ovens toasters grillers

(OTG), room heaters, toasters & S/W makers, hand Usha, Maharaja,

70%

20%

blenders, water filters microwave ovens gas stove Preeti, Prestige,

Kenwood

purifiers & filters, ovens, stoves, electric kettles,

coffee/tea makers

Source: Company, MOSL

Fans

Consumer Durables

Appliances

35,000

68,000

Break-up of BJE’s Consumer-facing business revenues (%)

Lighting, 18%

Appliances, 45%

Luminaries, 14%

Fans, 23%

Source: Company, MOSL

BJE is the only player with a

product portfolio

encompassing the

combined portfolio of other

domestic and kitchen

appliances leaders…

BJE’s product portfolio is a combination of Havells and TTK Prestige

Havells

Fans, Mixer Grinder, mixer grinder, juicer

grinder, toaster, induction cook top,

microwave oven, lighting, luminaires

TTK Prestige

Pressure cooker, nonstick cookware, gas stoves, mixer

grinder, juicer grinder, toaster, induction cook top, rice

cookers, microwave oven, microwave cooker

Source: Company, MOSL

24 April 2014

Bajaj Electricals

Number - 1 player in Kitchen and Domestic Appliances

Appliances contribute 45% to BJE’s Consumer-facing business. BJE offers a wide

range of Kitchen and Home Appliances under the ‘Bajaj’ brand. It has two verticals –

Kitchen Appliances (KAP; 52% of Appliance revenues) and Domestic Appliances

(DAP; 48% of Appliance revenues). BJE is the market leader in Small Appliances and

commands 20% market share in the INR68b organized appliances sector. Mixer

Grinders, OTGs and Induction Cooktops are key products in the KAP segment,

contributing ~60% to segment revenues while Irons, Water Heaters and Room Air

Coolers are key product categories in the DAP segment, contributing 50-60% of

segment revenues.

Appliances segment revenue mix (%)

Domestic

Appliances (DAP),

48%

Kitchen

Appliances (KAP),

52%

Source: Company, MOSL

Major products across KAP and DAP

BJE is a market leader in

Small Appliances, selling

3.5m Irons, 1.6m Mixer

Grinders and ~600k Water

Heaters every year…

Kitchen Appliances (KAP)

Domestic Appliances (DAP)

Irons, Storage Water Heaters, Gas Water Heaters,

Toasters, Mixer Grinders, Food Processors, Juicer

Instant Water Heaters, Emergency Lights, Room

Mixer Grinders, Wet Grinders, Juicers, Hand

Blenders, OTGs, Electric Kettles, Induction Cooktops, Coolers, Home UPS, Voltage Stabilizers, Non

Electric Kitchen Aids, Premium Glass Models,

Rice Cookers, Coffee Makers, Microwave Ovens,

Chimneys

Water Purifiers, Pressure Cookers, Gas Stoves

Source: Company, MOSL

Kitchen Appliances (KAP)

Mixer Grinders, OTGs and

Induction Cooktops are key

products in the KAP

segment contributing ~60%

to segment revenues…

Key Products

Mixer Grinder

OTGs

Induction

Cooktops

Microwave Ovens

Water Purifiers

Pressure Cookers,

Cookware, Gas

Stoves

Profile

No. 1 player, ~25% market share (1.6m units) in the 6m Indian mixer grinder

market. On a pan India basis, BJE is a market leader in mixer grinders.

Morphy Richards leads this category for BJE

Amongst Top 3 players in induction cooktops; outlook for this segment is soft and

hyper-growth witnessed over FY12-13 is not expected to repeat

Amongst Top 3 players

Entered the INR25b water purifier business in FY11, market dominated by Eureka

Forbes, Kent RO and Hindustan Unilever’s Pure It

Focused on developing this non-electrical portfolio given its brand and distribution

strength. With < 5% market share trails market leaders like TTK Prestige and

Hawkins; however this will entail a different distribution strategy

Source: Company, MOSL

Profile

Sells 3.5m pieces annually and is a No. 1 brand in irons

No. 1 player, Sells 600k water heaters annually, is market leader in this product

No. 3 player in organized air coolers industry with a market share of 18%, lags

Symphony, Kenstar, expected to post strong (>30% growth) in FY15E

Source: Company, MOSL

Irons, Water Heaters and

Room Air Coolers are key

product categories in the

DAP segment, contributing

50-60% of segment

revenues…

Domestic Appliances (DAP)

Key Products

Irons

Water Heaters

Air Coolers

24 April 2014

Bajaj Electricals

Multi-price and multi-brand strategy works in BJE’s advantage

Multi-price and multi-brand

strategy to help capture

demand from consumers

across socio-economic

status…

BJE’s strategy to be present across the entire consumer value spectrum (Majesty,

Platinum, Morphy Richards) is reflected in the wide price difference and range in

variants offered under each of the individual product categories. This strategy in our

view augurs well in capturing demand from consumers across socio-economic

status.

BJE’s product portfolio and price points

Bajaj Electricals Appliances

KAP

Mixer Grinder

Juicer/Juicer Mixer Grinder

Blender

Electric cooker

Electric oven

Pop up Toaster

Induction cooker

Sandwich maker

Kettle

DAP

Steam Iron

Dry Iron

Room Heater

Air cooler

Ceiling Fan

Table Fan

Price Points (INR/piece)

Min

3,190

1,150

999

3,990

999

2,699

3,049

999

Min

899

549

825

4,990

1,650

1,050

Max

4,720

3,460

2,799

4,999

10,490

1,549

3,999

7,349

1,899

Max

2,252

949

7,899

8,990

2,235

2,025

Source: Company, MOSL

Increase in penetration to drive demand; market leadership to sustain

Expect 17% revenue CAGR

in appliances division over

FY14-16…

In KAP, BJE faces competition from players like Preeti, Prestige, Hawkins while in

DAP it faces competition from Havells, Philips, Kenstar, Usha, Maharaja, Kenwood.

Revenues for the Appliances division have grown at a 19% CAGR over FY12-14. We

expect appliance segment to continue with its growth trajectory (17% revenue CAGR

over FY14-16) given increase in penetration levels (average penetration levels ~30%

for Appliances), launch of new products and distribution expansion.

Appliances segment revenues (INR m)

Appliances revenues (INR m)

15,031

12,229

9,498

12,926

17,736

FY12

FY13

FY14E

FY15E

FY16E

Source: Company, MOSL

24 April 2014

Bajaj Electricals

Leading player in Fans; one of the oldest and most reputed players

Fans contribute 24% to BJE’s consumer-facing business. BJE has a 17% share in the

INR35b organized Fans market in India. BJE manufactures Fans at its Chakan unit,

apart from procuring from vendors located at Hyderabad, Himachal Pradesh,

Uttarakhand and China.

The Fans division markets Ceiling Fans, Table Fans, Pedestal Fans, Wall Fans,

Personal Fans, Fresh Air Fans, Heavy Duty Exhaust Fans, Air Circulators, Water Lifting

Mono-block Pumps, Power Gensets, etc. To capture the premium end of the

market, BJ E has international tie ups with Chinese appliances major Midea (USD11b

in revenues) to sell Fans, and with Walt Disney for the sale and marketing of

children’s fans using Disney characters and designs.

BJE faces competition from players like Crompton Greaves, Orient and Havells in the

Fans segment. However, it has been able to maintain market share on the back of

new product innovations. Going forward, BJE is focusing on new launches in the

energy efficient and premium category, which should further help in driving market

share gains and margins. Revenues for the Fans division have grown at a 9% CAGR

over FY12-14 and we expect this segment to post 12% revenue CAGR over FY14-16.

Market share in Fans (%)

Market Share in Fans (%)

20.0%

New launches in the energy

efficient and premium

category should help in

driving market share gains

and margins in Fans

segment

17.1%

14.9%

13.5%

Crompton Greaves

Bajaj Electricals

Orient Fans

Havells India

Source: Company, MOSL

Fans segment to post steady growth

Fans revenues (INR m)

6,576

7,378

8,203

5,640

6,204

FY12

FY13

FY14E

FY15E

FY16E

Source: Company, MOSL

24 April 2014

Bajaj Electricals

Leading player in Lighting; increase in CFL contribution to aid margins

Lighting contributes 18% to BJE’s Consumer-facing business revenues. BJE has an 8%

market share in the INR50b organized Lighting market in India. A major portion of

GLS and FTL lamps are manufactured by Hind Lamps Limited (32% owned by BJE), a

Bajaj Group company, from its manufacturing facilities located at Shikohabad and

Kosi in Uttar Pradesh. Majority of CFL lamps are manufactured by Starlite Lighting

Limited (50% owned by BJE), from its manufacturing facility at Nashik, Maharashtra.

BJE has witnessed shift in

favor of power saving, and

high margin CFL lamps over

the last few years, with

contribution rising from 7%

in FY05 to 30% in FY12 and

50% currently…

The Lighting unit markets a wide range of Light Sources and domestic Luminaires.

The range includes General Lighting Service (GLS), Fluorescent Tube Lights (FTLs),

Compact Fluorescent Lamps (CFLs), Special Purpose Lamps and Luminaires. BJE has

witnessed shift in favor of power saving, and high margin CFL lamps over the last

few years, with contribution rising from 7% in FY05 to 30% in FY12 and 50%

currently. We expect this proportion to improve further from current levels, aiding

margin accretion (CFL margins stand at ~10%, as against 7% margins reported by

Lighting division). Additionally, BJE has forayed into the premium lighting segment

with a new range of home decorative lighting and portable LED glow lanterns, which

should aid in further margin accretion.

Lighting segment witnessing shift in favor of power saving CFL products

Incandescent Lamps

19%

Fluorescent Lamps

Compact Fluorescent Lamps

30%

15%

50%

10%

74%

56%

40%

FY14E

FY05

FY12

Source: Company, MOSL

Expect Lighting segment to post

16% revenue CAGR over

FY14-16

BJE faces competition from players like Philips, Crompton, Surya, Havells, etc in the

Lighting segment. Revenues for the Lighting division have grown at a 17% CAGR over

FY12-14 and we expect this segment to post 16% revenue CAGR over FY14-16.

Lighting segment revenues (INR m)

6,497

4,950

4,063

5,594

7,480

FY12

FY13

FY14E

FY15E

FY16E

Source: Company, MOSL

24 April 2014

Bajaj Electricals

Luminaires to post steady growth

Luminaires contribute 14% to BJE’s Consumer-facing business revenues. BJE has a

5% market share in the INR25b organized Luminaires market in India. Its

Luminaires product range covers Commercial Lighting, Industrial Lighting, Flood

Lighting, Street Lighting and Post-top Lighting, besides Special Luminaires.

Luminaires are sold largely through distributors who account for 80% of revenues.

Only 20% of luminaires’ business revenues come from direct bidding by BJE.

BJE faces competition from players like Phillips, Crompton, Wipro, Thorn, etc in the

Luminaires segment. Revenues for the division have grown at 6% CAGR over FY12-

14 and we expect this segment to post 9% revenue CAGR over FY14-16.

Major orders executed across industries

Industrial Customers

Tata Steel, Tata Motors,

TEC, Religare, L&T, Aditya

Birla group, Siemens,

Ranbaxy, etc

Government Customers

IT/ITES Customers Banks - Customers

Airports Authority of India,

Container Corporation of India, TCS, Infosys, Dell,

SBI, Axis, PNB, BoB

NTPC, Municipal corporations & Cognizant

councils, naval dockyards, HUDA,

Source: Company, MOSL

Luminaires segment revenues (INR m)

Expect Luminaires segment to

post 9% revenue CAGR over

FY14-16

3,580

Luminaires segment revenues (INR m)

4,015

4,420

4,799

3,650

FY12

FY13

FY14E

FY15E

FY16E

Source: Company, MOSL

24 April 2014

Bajaj Electricals

Robust distribution network, new initiatives to ensure better reach

BJE has a pan-India presence through a strong network of 2,200+ distributors and

4,100+ dealers. BJE has leveraged its brand to create a huge retail network of 45k

for Appliances, 86k for Fans and over 400k for Lighting across India.

‘Long armed salesmen’ and auto

replenishment of inventory to

drive secondary sales and

distributor incentive structure

Our interaction with the management suggests there are significant initiatives being

undertaken to improve the retail reach further from current levels. For instance, BJE

is appointing Direct Sales Officers under distributors which the company calls ‘Long

armed salesmen’. They will be responsible for managing each distribution region

allotted to them by personally visiting all stores (irrespective of whether they stock

BJE products or not) on a weekly basis. BJE is focusing on driving secondary sales

rather than primary sales. Further, inventory will be replenished on auto basis to

make sure that inventory at the distributor level is minimal (targeting 15 days of

inventory as against 45 days currently), ensuring higher capital churn for

distributors, reflected in 3x Return on Investment (ROI) for them.

BJE has a strong retail network

Retail Network

400,000

45,000

Appliances

86,000

Fans

Lighting

Source: Company, MOSL

BJE has the highest reach as

compared to peers like Havells

and TTK Prestige

BJE leads the distribution game…

Channel

Retail Network

EBOs

Bajaj Electricals

4,00,000

Havells

> 1,00,000

TTK Prestige

25,000

Source: Company, MOSL

40 'Bajaj World' Stores 210 'Havells Galaxy' Stores 500 'Prestige Smart Kitchen' Stores

26 pan-India distribution centers (19 branches, 7 depots)

Source: Company, MOSL

24 April 2014

Bajaj Electricals

Looking to aggressively ramp-up ‘Bajaj World’ stores

Plans to increase the number

of ‘Bajaj World’ stores to over

250 by FY16

To further leverage its strong brand, BJE has taken an initiative to directly reach the

consumer by opening the retail chain ‘Bajaj World’ (pure franchisee model) for

Appliances and Lighting Products. As at 31

March, 2013, BJE had 40 ‘Bajaj World’

stores across major cities in India. It plans to increase the number of stores to over

250 by FY16. BJE also plans to go international through franchisee agreements. It

has recently opened one store in Nepal and plans to open ‘Bajaj World’ stores in

Ghana, Nigeria, Sri Lanka and South Africa.

Bajaj World stores to be significantly expanded

Bajaj World Stores

250

200

100

FY13

FY14

FY15E

FY16E

Source: Company, MOSL

Asset-light business model – manufacturing outsourced to 80 vendors

95% of the Consumer and Lighting

products BJE markets are

outsourced to 80 different

vendors

BJE has an asset-light business model. 95% of the Consumer and Lighting products it

markets are outsourced. BJE has strong long-term relationships with ~80 vendors,

who have been supplying to the company over the last 15-20 years.

We highlight below the key reasons why vendors prefer to supply to BJE



BJE has an on-time payment policy to vendors



BJE extends trade advances to vendors to meet payments towards raw materials



BJE has lent additional financial support to vendors (which enhances the trust

factor in the partnership) recognizing their long-term development potential.



BJE employs centralized sourcing for vendors, which results in substantial

savings (100-150bp) as a result of economies of scale, better negotiation power

in pricing and payment terms

Our interaction with the management suggests that vendors highly appreciate BJE’s

above mentioned efforts which results in minimal churn amongst vendors.

Additionally, ~15% of products sold are imported from China. Specifically, 40% of

Morphy Richard’s revenues, ~20% of Appliances revenues, ~10% of Fans revenues,

and ~10% of lighting revenues are met through imports.

BJE’s Consumer facing Appliances

and Lighting businesses enjoy

RoCE of ~128% and 80%

respectively.

With this asset light business model, BJE’s Consumer facing Appliances and Lighting

businesses enjoy RoCE of ~128% and 80% respectively.

24 April 2014

Bajaj Electricals

Consumer-facing Appliances and Lighting businesses BJE’s mainstay

Consumer-facing business forms

80% of BJE’s business

Concerns on E&P, which

constitutes 20% of BJE’s business,

have clouded valuations for the

core Consumer business

BJE operates largely in three segments – Lighting & Luminaires (LL), Consumer

Durables (CD) and Engineering & Projects (E&P). The CD segment contributes ~55%

to revenues, while the LL segment contributes ~25% to revenues. Together,

Consumer-facing Appliances and Lighting businesses, for which BJE is known for,

contribute ~80% to revenues. The E&P segment contributes ~20% to revenues and

has recorded a CAGR of 15% over FY08-13. BJE diversified into the E&P business in

2002 with a view to capture the large capex opportunity India’s Infrastructure sector

provided. Strong growth in the Power sector led to significant growth in this division

over FY04-10. However, post FY10, performance of the E&P division began to suffer,

led by slowdown in the Power sector coupled with execution slippages. Revenue

declined and EBIT margin shrank from +10.5% to -17.6%. Losses in E&P clouded the

robust Consumer business, leading to de-rating in the stock.

BJE’s revenue mix (INR m, %)

Bajaj Electricals:

Revenues: INR33,875m

Lighting

Revenues: INR8608m

25% of total

Consumer Durables

Revenues: INR18377m

55% of total

Engineering and Projects

Revenues: INR6,879m

20% of total

Lighting

Revenues: INR4,854m

14% of total

Fans

Revenues: INR6083m

18% of total

Transmission Line Towers

Revenues: INR1,526m

5% of total

Luminaries

Revenues: INR3,579m

11% of total

Appliances

Revenues: INR11,911m

35% of total

Lighting Contracts

Revenues: INR2,500m

7% of total

High Masts

Revenues: INR3,342m

10% of total

Source: Company, MOSL

Sourcing of major products

Business

High Masts, Poles & Towers

Fans

Appliances

Electrical lamps and Tubes

CFL Lamps

Luminaires

Contract Manufacturing

Sourcing

Own Factories at Ranjangaon and Chakan near Pune.

Own Factory at Chakan and Sourcing from dedicated vendors situated at Hyderabad , Himachal and

imports from China

Sourcing from dedicated vendors situated at Noida, Delhi, Himachal and imports from China

Manufactured by sister concern Hind Lamps Limited, Shikohabad in Uttar Pradesh

Manufactured by sister concern Starlite Lighting limited, Nashik

Sourcing from dedicated vendors situated at Daman, Himachal and imports from China

80 dedicated vendor base, Pan-India

Source: Company, MOSL

24 April 2014

Bajaj Electricals

E&P business set for strong turnaround

Expect EBIT margin to expand from -18% in FY13 to +5% in FY16



Since FY11, BJE’s E&P business has been suffering. Slowdown in the Power sector,

aggressive-bidding coupled with execution slippages led to revenue de-growth and

decline in EBIT margin from +10.5% in FY10 to -17.6% in FY13.

BJE has taken key steps like centralization of financial decision making and change in

management to revive the performance of the E&P division

We expect the E&P business to post a strong turnaround in FY15, with revenues

growing at a CAGR of 13% over FY14-16 and EBIT margin expanding to +5% in FY16.

BJE entered E&P business with a view to capture infra-growth story

BJE diversified into the

Engineering & Projects (E&P)

business in 2002 as

management viewed E&P as a

logical extension of its

Luminaires business

BJE diversified into the Engineering & Projects (E&P) business in 2002 with the

intent to capture the large capex opportunity India’s Infrastructure sector provides.

The management viewed this business as complementary and as a logical extension

of its Luminaires business. It set up a plant at Ranjangaon near Pune to manufacture

High Masts and Transmission Line Towers (TLT). The business unit was divided into

three segments – High Masts, TLT and Special Projects.

E&P: Revenue contribution

Transmission Line

Towers, 21%

High masts and

poles, 45%

Special contracts,

34%

Source: Company, MOSL

E&P business profile and execution track record

Projects

High mast &

poles

Major customers

Reliance Group, Siemens,

BPCL, HPCL, IOCL, NHAI,

PWD, CPWD, municipal

corporations, port trusts,

L&T

Major Orders

Street light: PWD Delhi, MACD-Nagpur, Cidco Mumbai,

NH45 Tamil Nadu, Reliance Infra-Western Express

Highway Mumbai High masts/area lighting: BORL Bina-

Bina refinery, Bhilai steel plant, REL Krishnapatanam, RIL

Jamnagar Signages: HPCL, BPCL, Indian oil, Reliance etc

Power plant lighting: More than 20 power plants of NTPC,

Bhel, Reliance Infra, BSES Dahanu, etc. Sports Lightings:

National Games-2009 at Ranchi, Balewadi-Common wealth

youth games, Cricket stadium: Chennaswamy stadium-

Bangalore, Green park stadium- Kanpur, SMS Stadium-

Jaipur, National Games 2002- Hyderabad, National Games

2007

PGCIL- Almati, PGCIL-400 kv, Koldam, PGCIL-765 kv PK-A5,

PGCIL-765 kv PKA7, MSETCL PK- 801 A, MSETCL PK- 801 B,

Source: Company, MOSL

Special

Projects

NTPC, Bhel, SEBs, AAI

TLT

TLT-PGCIL, Tata, SEBs,

etc

24 April 2014

Bajaj Electricals

High Masts & Poles

The High Masts & Poles division executes turnkey projects, including design,

development, manufacturing and site erection of high masts and signage boards.

BJE is the market leader in the segment, and has executed street light projects on

the Western Express Highway, Mumbai (for Reliance Infrastructure), Bandra-Worli

Sea Link, Mumbai, and NH-45 in Tamil Nadu. Some of its key High Mast projects are

Reliance Industries, Jamnagar, Bina Refinery and signages for HPCL, BPCL, and IOCL.

High Mast is the most

profitable sub-segment

within the E&P

segment

High Mast business contributes 45% to E&P revenues and has grown at an 18%

CAGR over the last five years. High Mast is the most profitable segment within E&P.

High mast segment revenues

High mast revenues (INR m)

2,847

2,090

1,510

3,213

3,309

3,409

FY08

FY09

FY10

FY11

FY12

FY13

Source: Company, MOSL

In-house manufacturing facilities

BJE has in-house fabrication and galvanizing facilities with latest technology for

manufacturing of High Mast, Poles, Towers, Monopoles, etc. The facility is housed

by a team of over 750 engineers. It is certified ISO 9001 for quality systems, and ISO

14001 for environment management system, and OHSAS 18001.

High Mast and Poles in-house manufacturing facility

Source: Company, MOSL

24 April 2014

Bajaj Electricals

Special Projects

BJE’s Special projects division has competencies in three major segments, namely,

Power Plant Lighting, Sports Lighting and Rural Electrification. BJE has tied up with

UK’s Abacus for Sport Lightings. BJE is also working with all leading consultants like

MECON, TCE, MN Dastur, Howe India, EIL Design & P&D Consultants. BJE commands

~70% market share in Power Plant Lighting and Sports Lighting. In Power Plant

Lighting, BJE has executed large orders for major companies like NTPC and BHEL. In

Sports Lighting, it has executed prominent projects that include the lighting of

Mumbai’s Wankhede Stadium, Bangalore’s Chinnaswamy Stadium and Jaipur’s

Sawai Man Singh Stadium. In this segment, BJE faces competition from players like

GE, Crompton and Kalpataru.



Special Projects is the

second most profitable

sub-segment within

the E&P segment

The Special Projects business contributes ~34% to E&P revenues and has grown at

20% CAGR over last five years. This sub-segment has the highest profitability in E&P.

Special projects revenues

Special projects revenues (INR m)

2,179

1,600

1,017

2,451

2,500

2,550

FY08

FY09

FY10

FY11

FY12

FY13

Source: Company, MOSL

BJE is largely focusing on the government’s flagship social program of electricity to

all rural households under the Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY).

This scheme was started in 2005 with the target of illuminating ~600k villages

(according to census 2001) with capital subsidy allocation of INR45b in the Tenth

Plan, INR250b in the Eleventh Plan, and INR233b in the Twelfth Plan. We believe this

segment will continue to witness order book growth considering the government’s

endeavor to electrify rural India and expenses towards modernization of sports

stadiums in India.

Plan allocation on rural electrification

RGGVY Allocation (INRb)

250

233

10th Five Year Plan (2002-07)

11th Five Year Plan (2007-12)

12th Five Year Plan (2012-17)

Source: Company, MOSL

24 April 2014

Bajaj Electricals



Transmission Line Towers (TLT)

BJE entered the Transmission Line Tower (TLT) business in 2002 and accepts turnkey

projects, including design, supply, and erection and commissioning of transmission

lines largely for Power Grid. It manufactures a range of towers of 110kv, 132kv,

220kv, 400kv, 765kv for power transmission lines. Historically, largely present in

400kv, BJE is ramping up 765kv, which now contributes 20% to order book. The

primary driver for TLT is activity in the Power sector which has witnessed steady

growth of 5.3% in both generation and transmission. BJE is a small player with <5%

market share and faces competition from players like KEC, Kalpataru Power, Jyoti

Structures and L&T in this segment.

Power generation capacity has been added at a 5.3% CAGR…

Installed Power Generation Capacity (In GW, As per 5 Year plans)

132

105

200

6th Five Year Plan

(1982-87)

7th Five Year Plan

(1987-92)

8th Five Year Plan

(1992-97)

9th Five Year Plan

(1997-2002)

10th Five Year Plan

(2002-07)

11th Five Year Plan

(2007-12)

Source: Company, MOSL

…leading to subsequent expansion in transmission capacity which has been added at a similar rate of 5.3%

Transmission Line Network Strength (In ‘000 Circuit Kilometers, As per 5 Year plans)

190

116

146

243

6th Five Year Plan

(1982-87)

7th Five Year Plan

(1987-92)

8th Five Year Plan

(1992-97)

9th Five Year Plan

(1997-2002)

10th Five Year Plan

(2002-07)

11th Five Year Plan

(2007-12)

Source: Company, MOSL

Power Grid has an annual capex target of INR200b

Power Grid Capex Plan (INRB)

221

224

225

200

FY13

FY14

FY15

FY16

FY17

Source: Company, MOSL

24 April 2014

Bajaj Electricals

12th Plan Capacity Addition Plan targets

(GW)

Central

State

Private

Total

Hydro

Coal

Gas

Total Thermal

Nuclear

Total

Source: Company, MOSL

Plan-wise capex

INR b

Generation Capex

T&D Capex

T&D Capex as % age of Generation Capex

11thPlan

4,796

2,230

12thPlan

6,380

4,860

46%

76%

Source: Company, MOSL

Plan–wise transmission capacity additions

Transmission Capacity addition

Inter-regional capacity (MW)

HVDC capacity (MW)

Transmission Lines (ckt km)

- HVDC Bipole

- 765kva

- 400kva [A]

- 230/220kva [B]

Others (400/230/220kva) [A+B]

Total lines (all voltage) ckt kms

6,029

46,005

52,034

1,634

20,061

19,024

39,085

40,719

10,052

14,571

24,623

3,104

1,160

13,236

17,393

30,629

34,893

1,134

1,158

23,057

16,025

39,082

41,374

3,560

3,546

37,645

25,535

63,180

70,286

10,340

27,000

38,000

35,000

73,000

110,340

Upto 6th Plan 7th Plan

8th Plan

9th Plan

10th Plan

14,900

11th Plan

11,800

12th Plan

39,900

13,000

Source: Company, MOSL

Plan–wise transmission cumulative capacity

Transmission Capacity (end of Each Plan)

Inter-regional capacity (MW)

HVDC capacity (MW)

Transmission Lines (ckt km)

- HVDC Bipole

- 765kva

- 400kva [A]

- 230/220kva [B]

Others (400/230/220kva) [A+B]

Total lines (all voltage) ckt kms

6,029

46,005

52,034

19,824

59,631

79,455

1,634

36,142

79,600

115,742

117,376

3,138

971

49,378

96,993

146,371

150,480

5,872

1,704

75,722

114,629

190,351

197,927

9,432

5,250

106,819

135,980

242,799

257,481

19,772

32,350

151,367

174,945

328,955

381,077

6th Plan

7th Plan

8th Plan

9th Plan

10th Plan

14,050

XI Plan

25,850

Plan

65,550

26,500

Source: Company, MOSL

24 April 2014

Bajaj Electricals

Planned T&D capex of select states in 12 plan

States

Maharashtra

Bihar

Punjab

West Bengal

Karnataka

Andhra

Rajasthan

Chhattisgarh

J&K

Gujarat

Haryana

Delhi

Kerala

Odisha

Assam

Uttar Pradesh

Tripura

(INR b)

220

200

180

152

120

110

Source: Company, MOSL

TLT has been the worst

performing sub-

segment within the

E&P segment

TLT contributes ~21% to BJE’s E&P revenues and has been the worst performing

segment for BJE – both in terms of growth (4% CAGR over last 5 years as against

18% for High Mast and 20% for Special Projects) and in terms of profitability

(Majority of drag on E&P business has been led by huge losses suffered in TLT).

TLT segment revenues

TLT revenues (INR m)

2,650

2,356

1,730

1,290

2,730

1,556

FY08

FY09

FY10

FY11

FY12

FY13

Source: Company, MOSL

24 April 2014

Bajaj Electricals

E&P performance deteriorated significantly post FY10

Post FY10, E&P

witnessed de-growth in

revenues and decline in

EBIT margin from

+10.5% to -17.6%

Post FY10, performance of the E&P division began to suffer. Slowdown in the Power

sector, aggressive bidding coupled with execution slippages led to de-growth in

revenues and decline in EBIT margin from +10.5% to -17.6%. Profitability for peers

like Kalpataru (decline of 300bp) and KEC International (decline of 500bp) also got

hit during FY10-13, led by aggressive bidding during the period.

E&P segment revenues and margins

13%

12%

13%

E&P revenues (INRm)

13%

11%

EBIT Margin(%)

13,445 15,191

7,368

2,446

3,052

3,627

5,224

8,318

8,320

6,880

-10%

-18%

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14E

FY15E

FY16E

11,905

Source: Company, MOSL

Competitor margins also

came under pressure ,

reflective of bidding

irrationality

EBIT margins for competitors like Kalpataru and KEC also got hit due to over-bidding…

Kalpataru

KEC International

BJE

FY06

FY07

FY08

FY09

FY10

FY11

FY12

-18

FY13

Source: Company, MOSL

We highlight below key reasons why E&P division took a hit

Bidding irrationality and

lack of effective

monitoring key reasons

for deterioration in E&P

performance



Bidding irrationality

Post FY10, as the industry slowed down, competition increased. However, BJE’s E&P

division continued to bid aggressively. The division did not report to the CFO or the

central finance team. The consequent lack of financial supervision by the top

management allowed the aggressive bidding to continue unchecked.

Lack of effective monitoring mechanisms

Earlier, Power Grid had a payment mechanism whereby it cleared invoices based on

the material brought to the site. BJE and other industry players resorted to dumping

key and costly material (which was not even required upfront; in some cases,

required after a year) to the site, raising and encashing invoices even when project

execution had hardly commenced. Since they got most of their money upfront,

there was limited incentive to complete projects on time, which eventually resulted

in time delays. At the same time, the material on site was subject to

pilferage/damages, which resulted in significant cost overruns.



24 April 2014

Bajaj Electricals

Multiple structural initiatives to revive E&P business

Increased financial

supervision, change in top

management and stricter

focus on execution to

ensure E&P turnaround



BJE has taken a number of steps in the last 12 months to revive the performance of

the E&P division.

Increase in financial supervision

To curb aggressive bidding, BJE has now involved (effective July 2013) its central

finance team in the E&P division as well. The CFO is now empowered not to release

funds if there are any major deviations. For instance, if the norm is of having only

three months of inventory and if the inventory at the site has breached this, then

the CFO is empowered not to release funds. We believe centralization of financial

matters will result in more prudent supervision, reducing chances of aggressive

bidding / increase in working capital.

Change in top management

Top management of the E&P division has been revamped. In July 2013, Mr Rakesh

Markhedkar replaced Mr Lalit Mehta as Head of the E&P Business. Mr Markhedkar

has an Engineering degree from BITS Pilani and is an IIM Bangalore alumnus. He has

rich work experience, having worked with L&T in the EPC business (from July 1990

to August 2003), followed by successful stints with EMCO and KEI Industries. While

Mr Mehta was an internal expert, who started his career as an Intern with BJE and

rose to senior levels, Mr Markhedkar brings years of relevant industry experience.



Strict focus on execution

The new management has implemented a strict monitoring process, whereby

execution at all sites is monitored on a daily basis through FCCM software. The E&P

division now prepares detailed MIS reports, mapping progress on various aspects

like inventory levels at the site, actual v/s targeted progress on execution at the site,

progress on getting financial closure (as payment can be realized only once financial

closure is done), etc. This has ensured better timeliness in execution. The

management highlights that most new projects are now running ahead of schedule

by 7-8 months. In fact, Power Grid recently gave an award to BJE for on-time project

completion, testifying the marked improvement in timelines followed by the

company.



Tightening in pre-qualification norms by Power Grid has improved outlook

Power Grid (PWGR) has tightened bidding norms over the past 2 years to weed out

irrational bids. This has led to moderation in competitive intensity in the power

transmission orders (6-7 bidders per tender now bid and difference between L1 and

L2 is hardly 1-2% currently, reduction in total number of players bidding for PWGR

orders from 50 in FY12 to 19 in FY13), leading to better margins and higher market

share amongst existing players. Further, PWGR has changed the payment

mechanism. Earlier full payment used to be made for materials brought to the site,

along with the contractor’s embedded profit margin. Now only 60-65% of bills

pertaining to materials brought on site are cleared with the balance 40-35% being

linked to final execution. PWGR’s changes have led to filtering; with weaker players

now choosing to opt out.



24 April 2014

Bajaj Electricals

Most legacy projects concluded; improvement evident

We expect revenues to

grow at 13% CAGR over

FY14-16, with EBIT margins

improving from -17.6% in

FY13 to 5% in FY15/FY16

We believe that measures taken by the management over the last 12 months will

structurally improve the performance of the E&P division over the next couple of

years. Most legacy projects (8% of unexecuted order book), which were running

behind schedule, will be concluded in 4QFY14 and FY15 will see negligible drag of

legacy contracts. We expect revenues to grow at 13% CAGR over FY14-16, with EBIT

margins improving from -17.6% in FY13 to 5% in FY15/FY16.

E&P margins (%)

E&P Margins

10.2%

3.1%

9.4%

-6.7%

10.6%

3.9%

3.8%

5.6%

-5.1%

-17.8%

-27.1%

-13.7%

-17.0%

-5.7%

-20.2%

Source: Company, MOSL

While revenues for 9MFY14 have grown at 76%, capital employed is stagnant

E&P segment - 9M-FY14

BJE expects working capital

to improve further, as

INR3b stuck in retention

money is expected to get

released by 1HFY15

Revenue growth

Capital employed growth

76%

Source: Company, MOSL

Management is targeting 20% RoCE, led by 2.5x asset turn and 8% EBIT margin

Asset Turnover (x)

EBIT Margins (%)

RoCE (%)

2.5

15%

1.7

1.6

1.4

-14%

-18%

-26%

FY13

-10%

FY14

FY15

FY16

20%

2.5

20%

Management is targeting

working capital cycle of 5-6

months and plans to

achieve turnover of INR15b

on the same level of capital

employed of INR6b

23%

1.9

19%

13%

11%

FY09

FY10

FY11

FY12

Source: Company, MOSL

24 April 2014

Bajaj Electricals

Focus is on site closures; order book stands at INR21b

The E&P division has an order book of INR21b, which is expected to be executed

over the next two years. Order book is largely for TLT and Special Projects, as these

two segments have long gestation periods (2-2.5 years order execution cycle), while

High Mast which accounts for 45% of E&P revenues is a low gestation business (3-

month execution life cycle).

The management is focused on reducing the number of active sites and will be

closing 41 sites during FY14. At any given point in time, the number of active sites

will not exceed 40 as per the targets the management has set for itself. This, in our

view, will enable better monitoring mechanisms, resulting in better execution

quality.

Current order book size (INR b)

Gestation period of High

Mast is lowest; hence it

doesn’t form a major

proportion of order book

TLT, 5.2

High Masts, 0.8

Special projects,

15.2

Source: Company, MOSL

Segment-wise gestation period

Segment

High Masts

TLT

Special projects

Gestation period

3 months

2-2.5 years

18 months - 2.5 years

Source: Company, MOSL

Snapshot of sites execution cycle

Segment

Opening New Sites

added

Balance

(FY14) during FY14

Plan to close sites

during FY14

Transmission Lines

(TLT)

Station Lighting (Spl

Projects)

Power Distribution

(RE)

Total

Total sites to

be closed

(FY14)

Carry Forwards

Sites into FY15

24 April 2014

Bajaj Electricals

Earnings to quadruple over FY14-16

E&P turnaround to drive earnings growth



We expect BJE’s consolidated earnings to quadruple from INR568m to INR2,390m over

FY14-16 on the back of turnaround in the E&P division.

We expect revenues to post 14% CAGR, with 460bp accretion in EBITDA margin from

3.9% to 8.4% over FY14-16.

Working capital should improve from 62 days to 44 days, led by improved capital

efficiency in E&P

We expect substantial improvement in return ratios (RoCE / RoE) from 17.7%/7.7% to

41.5%/24.0% over FY14-16.

Expect revenue CAGR of 14% over FY14-16

We expect consolidated revenue to grow at a CAGR of 14%, led by 15% CAGR in the

Consumer Durables segment, followed by 13% CAGR in Lighting and E&P.

Revenues (INR m) to post 14% CAGR

Revenues

53,352

40,977

30,990

33,876

46,723

18,377

15,005

19,443

Consumer Durables to post 15% CAGR

Consumer Durables

25,861

22,341

FY12

FY13

FY14E

FY15E

FY16E

FY12

FY13

FY14E

FY15E

FY16E

Source: MOSL

Lighting and Luminaires and E&P expected to post 13% CAGR each

Lighting & Luminaires

12,286

8,604

9,613

10,922

11,905

8,320

6,880

13,445

15,191

E&P

7,648

FY12

FY13

FY14E

FY15E

FY16E

FY12

FY13

FY14E

FY15E

FY16E

Source: MOSL

24 April 2014

Bajaj Electricals

EBITDA to grow at 69% CAGR over FY14-16; margin to expand 460bp

Led by turnaround in the E&P segment, we expect EBITDA margin to expand 460bp

over FY14-16 from 3.9% to 8.4%.

EBITDA to post 69% CAGR, led by 460bp margin expansion Consumer Durables margins to expand 100bp

EBITDA (INR m)

7.7%

Margin

8.4%

10.1%

9.5%

3.3%

3.9%

9.0%

Consumer Durables EBIT (INR m)

10.0%

Margin

10.0%

2,372

FY12

1,108

FY13

1,588

FY14E

3,947

FY15E

4,507

FY16E

1,513

FY12

1,744

FY13

1,750

FY14E

2,234

FY15E

2,586

FY16E

Source: MOSL

Lighting and Luminaires margins expected to remain flat, E&P expected to post a strong turnaround

Lighting EBIT (INR m)

7.8%

Margin

3.2%

7.0%

265

(1,191)

(1,243)

594

FY12

584

FY13

673

FY14E

765

FY15E

860

FY16E

FY12

-18.1%

FY13

-10.0%

E&P EBIT (INR m)

Margin

5.0%

672

5.0%

760

6.8%

FY14E

FY15E

FY16E

Source: MOSL

PAT to grow four-fold over FY14-16

We expect PAT to grow four-fold over FY14-16 from INR587m to INR2,469m.

PAT (INR m)

PAT

2,469

2,133

1,179

512

587

FY12

FY13

FY14E

FY15E

FY16E

Source: MOSL

24 April 2014

Bajaj Electricals

Working capital cycle to improve

We expect consolidated working capital days to improve from 64 days in FY13 to 44

days in FY16. This improvement will largely be led by the E&P division.

Cash conversion cycle (days)

Inventory Days

109

101

Debtor Days

Creditor Days

Cash Conversion Cycle

-57

FY12

FY13

-62

FY14E

-62

FY15E

-62

FY16E

-62

Source: MOSL

Operating and free cash flows to improve; minimal capex required

Operating cash flows are expected to improve significantly to INR2,622m, while free

cash is expected to improve to INR2,111m.

Cash generation (INR m)

Operating Cash Flow

2,822

Free Cash Flow

2,622

2,312

2,111

1,279

614

1,331

1,030

818

FY12

FY13

FY14E

FY15E

FY16E

FY12

FY13

FY14E

FY15E

FY16E

Source: MOSL

Return ratios to improve substantially; debt-equity to decline

BJE’s return ratios deteriorated significantly post FY10 due to higher working capital

requirement coupled with EBIT losses in the E&P business. With turnaround in E&P,

return ratios will improve substantially over FY14-16. We expect RoCE / RoE to

improve to 43% / 25% respectively.

Return ratios (%)

RoCE (%)

RoE

FY12

FY13

FY14E

FY15E

FY16E

FY12

FY13

FY14E

FY15E

FY16E

Source: MOSL

24 April 2014

Bajaj Electricals

Initiating coverage with Buy rating

Price target of INR370 implies 32% upside

Attractively valued at 11.3x

FY16E earnings



Over the last three years, the dismal performance of the E&P division has clouded

BJE’s robust underlying consumer franchise. Expected turnaround of the E&P business

will be a key re-rating catalyst.

BJE is trading at 11.3x FY16E earnings as against Havell’s 17.8x FY16E earnings. This

steep discount of 36% should narrow, as BJE delivers on the E&P turnaround.

We value BJE at 15x FY16E EPS of INR24.8 and arrive at a target price of INR370,

implying 32% upside. We initiate coverage with a Buy rating.

Peer comparison

Company

Bajaj Electricals

Havells India

TTK Prestige*

V-Guard Industries

Average

* Bloomberg consensus

CMP

(INR)

280

920

3,080

490

Mcap

(USD b)

0.5

1.8

0.6

0.2

FY14

5.9

41.6

97.9

23.5

EPS (INR)

FY15E FY16E

21.4

24.8

45.4

51.8

125.0

150.0

31.7

39.3

FY14

47.6

22.1

31.5

20.9

30.5

PE (x)

FY15E

13.1

20.3

24.6

15.5

18.4

FY16E

11.3

17.8

20.5

12.5

15.5

RoE (%)

FY14 FY15E FY16E

7.9

25.5

24.5

32.1

28.9

27.7

22.9

23.2

24.3

27.1

27.4

21.8

26.1

25.7

Source: Company, MOSL

Assumptions

Segment Revenue Growth (%)

Lighting

Consumer Durables

Engineering & Projects

Total

Segment EBIT Margins(%)

Lighting

Consumer Durables

Engineering & Projects

Total

Segment Revenue Mix (%)

Lighting

Consumer Durables

Engineering & Projects

Total

Segment EBIT Mix (%)

Lighting

Consumer Durables

Engineering & Projects

Total

FY12

21.2

17.5

0.0

13.0

7.8

10.1

3.2

7.7

24.7

48.4

26.8

100

25.0

63.6

11.1

100

FY13

12.5

22.5

(17.3)

9.3

6.8

9.5

(18.1)

3.2

25.4

54.2

20.3

100

53.6

160.2

(114.2)

100

FY14E

11.7

5.8

58.4

21.0

7.0

9.0

(10.0)

3.0

23.5

47.4

29.1

100

54.6

142.0

(96.6)

100

FY15E

13.6

14.9

12.9

14.0

7.0

10.0

5.0

7.9

23.4

47.8

28.8

100

FY16E

12.5

15.8

13.0

14.2

7.0

10.0

5.0

7.9

23.0

48.5

28.5

100

20.8

20.4

60.9

61.5

18.3

18.1

100

Source: Company, MOSL

24 April 2014

Bajaj Electricals

Risks and concerns



Slowdown in economy may hamper growth prospects

Any slowdown in GDP growth may impact the Consumer Durables segment,

adversely affecting BJE’s prospects.

Highly competitive industry

Though BJE is a strong brand in the Consumer Durables segment, with a 75-year

history, the industry has faced regular competition from the unorganized sector

due to low entry barriers.

Currency risk

BJE’s import content (includes 40% of Morphy Richards, 20% of Appliances, 10%

each of Lighting and Fans) contributes ~15% of its revenues. INR depreciation

could put pressure on near-term margins.

Slippages in E&P business

Contrary to our expectations, if the E&P business does not recover, the stock

price may be adversely impacted.



24 April 2014

Bajaj Electricals

Management

Shekhar Bajaj

Chairman & Managing Director



Shekhar Bajaj, Chairman & Managing Director

Mr Shekhar Bajaj has served as the Managing Director since November 1987

and as CMD since 1994. He has over 25 years of varied and rich work experience

in a wide range of functions, with emphasis on Marketing and Sales. He is the

Chairman of Bajaj Group companies, Bajaj International and Hercules Hoist. He

is on the Board of Directors of Bajaj Auto and IDBI Bank. He was past President

of ASSOCHAM, Indian Merchants Chamber (IMC) and Council for Fair Business

Practices (CFBP). Mr Bajaj’s educational qualifications include BSc and MBA

(NYU).

Anant Bajaj

Joint Managing Director



Anant Bajaj, Joint Managing Director

Mr Anant Bajaj has been Joint Managing Director since April, 2012 and has been

an Executive Director since February, 2006. He has 11 years of experience. He

also serves as a Director of Hind Musafir Agency Ltd. He is a BCom and PGDM.

Madhur Bajaj

Non-Independent Director



Madhur Bajaj, Non-Independent Director

Mr Madhur Bajaj has around 30 years of industry experience and is the Vice

Chairman of Bajaj Auto. He holds board position in Bajaj International, Bajaj

Auto Finance and many other companies. He has been a Non-Executive Director

at Bajaj Electricals Limited since 1994.

24 April 2014

Bajaj Electricals

Industry overview

Demographics changes, rising incomes to create demand for appliances

The home appliances market in India will see significant growth due to lower

penetration, increasing incomes, and growing urbanization. The need for comfort

and convenience in urban households, as both partners work and will result in

change in perception of appliances from luxury to necessity, leading to rapid growth

in home appliance market.

Another major growth driver will be the growing middle class in India. According to

a McKinsey Global Institute (MGI) 2010 report, India’s fast growing cities will drive a

four-fold increase in the country’s per capita income over 2008 and 2030. Also, the

number of middle class households (earning between INR200k and INR1m a year)

will increase more than fourfold nationwide from 32m to 147m in 2030. With the

rising disposable income (per capita disposable income of the urban segment is

expected to grow at a CAGR of 6.4% over 2008-2030), consumer discretionary

expenditure is also likely to increase significantly. Rising disposable income would

provide more room for expenditure on discretionary items.

Consuming class expected to expand from 50% to 85% over FY10-30

Deprived <0.9 Lakhs

Strivers 5-10 Lakhs

31%

Aspirers 0.9-2 Lakhs

Globals > 10 Lakhs

12%

34%

50%

2010

25%

40%

32%

26%

2020

15%

2030

Seekers 2-5 Lakhs

17%

29%

64%

2000

Source: Company, MOSL

Small appliances set to grow at 15-18% annually

ASSOCHAM expects the Indian consumer durable industry to grow to USD 8.4b by

2015. The overall small appliances market is estimated at USD1.2b, growing 15-18%

a year. The premium segment is expected to grow at 30%. Penetration levels for

consumer goods across categories remains low.

Consumer goods penetration in urban regions (%)

Urban

Consumer goods penetration in rural regions (%)

Rural

Source: Industry, MOSL

24 April 2014

Source: Industry, MOSL

Bajaj Electricals

Key factors which will lead to double-digit growth in small appliances market

include:



Rise in number of nuclear families, with reduction in average household size

(has reduced from 5.6 in 1991 to 4.9 currently).

Rise in per capita income of middle class Indian households will lead to

consumer upgrading to branded products.

Higher growth (25

-30% pa) in under -penetrated rural market will help drive

overall growth momentum.

Increasing affordability and improving educational levels will lead to reduction in

replacement cycle to 2-3 years for small appliances.

Small appliances market size (INRb)

113

Small appliances market size (INR b)

130

CY13

CY14

CY15

CY16

CY17

Source: Industry, MOSL

Market size of major products

Lighting

Lighting is a INR50,000m market with 65% of the market dominated by the

organized sector and the balance 35% controlled by the unorganized sector. Major

players include Bajaj, Philips, Crompton, Surya, Havells, etc. Major product

categories include GLS lamps, fluorescent tubelights, compact fluorescent lamps,

domestic luminaires, ballasts & starters, LED torches.

Lighting industry market size (INR m)

Unorganized

17,500

35%

Organized, 32,500

, 65%

Source: Company, MOSL

Luminaires

Luminaires is a INR25,000m market with 65% of the market dominated by the

organized sector and the balance 35% controlled by the unorganized sector. Major

players include Bajaj, Phillips, Crompton, Wipro, Thorn, etc. Major product

categories include industrial, commercial, decorative, street light, floodlight, LED,

lighting electronics, lighting control, HID Lamps: Mercury & sodium vapour lamps,

halogen lamps, metal halide & fluorescent lamps.

24 April 2014

Bajaj Electricals

Luminaires industry market size (INR m)

Unorganized, 8,750 ,

35%

Organized, 16,250 ,

65%

Source: Company, MOSL

Fans

Fans is a INR35,000m market, with 65% of the market dominated by the organized

sector and the balance 35% controlled by the unorganized sector. Major players

include Bajaj, Crompton, Usha, Orient, Khaitan, Polar, Havells, etc. Major product

categories include ceiling, table, pedestal & wall mounted fans, personal fans,

Industrial exhaust fans, industrial fans, circulators, cooler kits and pumps.

Fans industry market size (INR m)

Unorganized, 12,250

, 35%

Organized, 22,750 ,

65%

Source: Company, MOSL

Appliances

Appliances is a INR68,000m market, with 70% of the market dominated by the

organized sector and the balance 30% controlled by the unorganized sector. Major

players include Bajaj, Philips, Kenstar, Usha, Maharaja, Preeti, Prestige, Kenwood,

etc. Major product categories include mixers grinders, juicers, food processors,

water heaters, air coolers, iron, OTG, room heaters, toasters, hand blenders, water

filters, microwave ovens, gas stove, purifiers & electric kettles, coffee/tea makers.

Appliances industry market size (INR m)

Unorganized, 20,400

, 30%

Organized, 47,600 ,

70%

Source: Company, MOSL

24 April 2014

Bajaj Electricals

Financials and valuation

Income statement

Y/E March

Net Sales

Change (%)

EBITDA

EBITDA Margin (%)

Depreciation

EBIT

Interest

Other Income

Extraordinary items

PBT

Tax

Tax Rate (%)

Reported PAT

Adjusted PAT

Change (%)

2011

27,414

23.0

2,549

9.3

108

2,441

367

161

2,185

748

34.2

1,438

1,471

22.5

2012

30,990

13.0

2,372

7.7

125

2,246

630

144

1,760

581

33.0

1,179

-19.8

2013

33,876

9.3

1,108

3.3

145

963

690

169

-247

690

178

25.8

512

329

-72.1

2014E

40,977

21.0

1,588

3.9

170

1,418

784

205

838

252

30.0

587

78.6

(INR Million)

2015E

46,723

14.0

3,947

8.4

194

3,753

804

233

3,183

1,050

33.0

2,133

263.4

2016E

53,352

14.2

4,507

8.4

218

4,289

814

266

3,741

1,272

34.0

2,469

15.8

Balance sheet

Y/E March

Share Capital

Reserves

Net Worth

Debt

Deferred Tax

Total Capital Employed

Gross Fixed Assets

Less: Acc Depreciation

Net Fixed Assets

Capital WIP

Investments

Current Assets

Inventory

Debtors

Cash & Bank

Loans & Adv, Others

Curr Liabs & Provns

Curr. Liabilities

Provisions

Net Current Assets

Total Assets

2011

198

5,913

6,111

1,170

-20

7,261

2,302

769

1,533

366

15,739

2,946

9,112

486

3,195

10,377

9,646

731

5,362

7,261

2012

199

6,799

6,999

2,091

-19

9,070

2,721

881

1,840

441

17,191

3,552

9,220

536

3,882

10,432

9,634

797

6,759

9,070

2013

200

7,087

7,286

1,659

-79

8,866

3,260

996

2,264

298

18,874

4,212

9,379

501

4,781

12,628

11,846

782

6,246

8,866

2014E

200

7,324

7,523

1,659

-79

9,103

3,760

1,166

2,594

298

21,438

5,056

10,665

389

5,327

15,298

14,287

1,010

6,140

9,103

(INR Million)

2015E

2016E

200

8,990

10,759

9,189

10,958

859

-79

9,969

10,879

4,260

4,760

1,360

1,578

2,901

3,183

298

23,892

27,163

5,433

6,204

11,521

13,155

864

868

6,074

6,936

17,203

19,857

15,936

18,197

1,267

1,660

6,690

7,306

9,969

10,879

E: MOSL Estimates

24 April 2014

Bajaj Electricals

Financials and valuation

Ratios

Y/E March

Basic (INR)

EPS

Cash EPS

Book Value

DPS

Payout (incl. Div. Tax.)

Valuation(x)

P/E

Cash P/E

Price / Book Value

EV/Sales

EV/EBITDA

Dividend Yield (%)

Profitability Ratios (%)

RoE

RoCE

Turnover Ratios (%)

Asset Turnover (x)

Debtors (No. of Days)

Inventory (No. of Days)

Creditors (No. of Days)

Leverage Ratios (%)

Net Debt/Equity (x)

2011

14.9

16.0

61.8

2.8

22.4

18.8

17.5

4.5

1.0

11.2

1.0

26.6

37.9

3.8

120.3

39.2

61.9

0.2

2012

11.8

13.1

70.2

2.8

27.5

23.7

21.4

4.0

1.0

12.4

1.0

18.0

29.2

3.4

107.5

41.8

47.4

0.3

2013

3.3

4.7

73.0

2.0

45.6

85.0

59.0

3.8

0.9

26.3

0.7

4.6

12.6

3.8

100.3

45.4

50.2

0.2

2014E

5.9

7.6

75.4

3.0

59.7

47.6

36.9

3.7

0.7

18.4

1.1

7.9

17.9

4.5

94.1

45.0

50.1

0.2

2015E

21.4

23.3

92.1

4.0

21.9

13.1

12.0

3.0

0.6

7.1

1.4

25.5

41.5

4.7

89.2

42.4

49.6

0.1

2016E

24.8

26.9

109.9

6.0

28.4

11.3

10.4

2.5

0.5

6.0

2.1

24.5

43.4

4.9

89.2

42.4

49.6

0.0

Cash flow statement

Y/E March

OP/(Loss) before Tax

Depreciation

Others

Interest

Direct Taxes Paid

(Inc)/Dec in Wkg Cap

CF from Op. Activity

(Inc)/Dec in FA & CWIP

(Pur)/Sale of Invt

Others

CF from Inv. Activity

Inc/(Dec) in Net Worth

Inc / (Dec) in Debt

Interest Paid

Divd Paid (incl Tax)

CF from Fin. Activity

Inc/(Dec) in Cash

Add: Opening Balance

Closing Balance

2011

2,186

108

368

806

-773

1,124

-215

-74

-290

-411

-315

-235

-961

-127

612

486

2012

1,760

125

607

600

-1,278

756

-660

-75

-676

840

-567

-278

-5

461

536

2013

690

145

671

398

171

1,422

-392

-70

461

-2

-500

-660

-279

-1,439

-18

519

501

2014E

838

170

580

252

-6

1,331

-512

205

-308

-784

-350

-1,135

-112

501

389

(INR Million)

2015E

2016E

3,183

3,741

194

218

570

548

1,050

1,272

-75

-613

2,822

2,622

-510

-511

233

266

-277

-245

-800

-859

-804

-814

-467

-700

-2,070

-2,374

475

389

864

868

E: MOSL Estimates

24 April 2014

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Bajaj Electricals

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Disclosure of Interest Statement

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BAJAJ ELECTRICALS LTD

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Motilal Oswal Capital Markets Singapore Pte Limited is acting as an exempt financial advisor under section 23(1)(f) of the Financial Advisers Act(FAA) read with regulation 17(1)(d) of the Financial

Advisors Regulations and is a subsidiary of Motilal Oswal Securities Limited in India. This research is distributed in Singapore by Motilal Oswal Capital Markets Singapore Pte Limited and it is only directed

in Singapore to accredited investors, as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time.

In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited:

Anosh Koppikar

Kadambari Balachandran

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Email : kadambari.balachandran@motilaloswal.com

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Motilal Oswal Securities Ltd

24 April 2014

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