Kotak Securities is bullish on Bajaj Electricals and has recommended accumulate rating on the stock with a target price of Rs 240, in its research report dated February 13, 2015.
BAEL has reported Q3FY15 results below our estimates on profitability front; operating margins contracted YoY on account of 1) lower margins in consumer/lighting business and 2) incurred losses in E&P business. In view of recent correction in stock price, we change our recommendation to 'ACCUMULATE' from 'SELL' with DCF based unchanged price target of Rs 240.
In Q3FY15, BAEL revenues stood at Rs 10.2 Bn FLAT YoY on back of execution of non-profitable orders in project business. Consumer/lighting division reported sluggish YoY growth. E&P segment reported losses as margins continued to remain subdued on account of execution low margin legacy orders.
E&P segment reported revenue at Rs 2.9 Bn vis-à-vis Rs 2.6 Bn in Q3FY14. Operating loss for the segment stood at Rs 761 mn vis-à-vis loss of Rs 135 mn in Q3FY14 and Rs 281 mn in Q2FY15. In Q3FY15, company has made a provision of Rs 830 mn against losses in E&P segment.
Management has stated that most of the low margin orders have almost been cleared and company could post margin improvement for the E&P segment in FY16. Current order book in E&P segment stands at Rs 34.9 Bn including Rs 6.8 Bn of transmission orders and Rs 26.8 Bn of power distribution orders.
Consumer appliances division revenues stood at Rs 5 Bn vis-à-vis Rs 5.2 Bn in Q3FY14. Growth in consumer division has been affected by sub-optimal performance across all product categories. Morphy Richards revenues stood at Rs 730 mn flat YoY. BAEL consumer business has reported contraction in operating margin in Q3FY15 due to lower volumes and inability of the company to take price hikes.
Lighting/luminaries division remains subdued, reported 6% YoY de-growth in the quarter mainly due to lackluster performance in lighting part of the business. Luminaries sales stood at Rs 990 mn in Q3FY15, however lighting posted YoY revenue de-growth. Management believes that industry wide, CFL is losing sales to LED products. BAEL has been trying to gain capabilities in LED segment.
Advertising expenses would reduce to Rs 450 mn in FY15 against Rs 630 mn in FY14 (company ran advertising campaign for Bajaj 75 years). Management has guided for advertising expanses of Rs 630-650 mn range in FY16.
Valuation and recommendation
"At current price of Rs.222, company's stock is trading at 20.8x P/E and 9.9 x EV/EBITDA on FY16E earnings. In view of recent correction in stock price, we change our recommendation to 'ACCUMULATE' from 'SELL' with DCF based unchanged price target of Rs 240", says Kotak Securities research report.
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