BajajEletricals BUY Emkay 15.11.16

Bajaj Electricals
India Equity Research | Small & Mid Cap

November 15, 2016
Initiating Coverage Emkay
Your success is our success
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CMP Target Price
Unfolding growth story, Initiate at Rs222 Rs331
BUY Rating
BUY
Upside
48.9 %
Change in Estimates
 We initiate BUY on BJE and target a 49% upside in the stock price. BJE stock has lagged
EPS Chg FY17E/FY18E (%) NA
its peers in the past due to weak sales growth in its Consumer business. But we think this
will reverse as BJE is at cusp of an earnings upcycle Target Price change (%) NA
Previous Reco NA
 We believe that the Management’s decision to restructure the consumer distribution model
for deeper penetration is a bold step which would reap favorable results FY18 onwards.
Emkay vs Consensus
We forecast BJE’s overall earnings to double by FY19 on the back of recovery in consumer
EPS Estimates
business and sustained improvement in project business
FY17E FY18E
 BJE’s Consumer business is trading at 13x FY19E PER vs 28.3x for peers (assuming Emkay 10.2 14.5
project business is trading at our fair valuation of 10x PER). Such a steep discount is not
Consensus - -
justified, given the strong EPS CAGR of 34% over FY17-19E. Sharp improvement in
Mean Consensus TP Rs 271
ROE/ROCE in the next two years should narrow the valuation gap vs. peers
Stock Details
Consumer business growth to return in FY18
Bloomberg Code BJE IN
BJE’s Consumer business sales (51% of revenue, 56% of earnings in FY18E) have not
Face Value (Rs) 2
increased in the past three years as the company is in process of changing its distribution
model. This is to expand reach in underpenetrated markets through implementation of Theory Shares outstanding (mn) 101
of Constraint (TOC) model. BJE has successfully implemented this model in 35% of its 52 Week H/L 282 / 155
network with residual expected to complete by Jun-18. The full benefits will be visible FY18 M Cap (Rs bn/USD bn) 22 / 0.33
onwards and we forecast Consumer business revenue to resultantly increase 13% in FY18 Daily Avg Volume (nos.) 1,98,084
and 16% in FY19. Daily Avg Turnover (US$ mn) 0.8
Project business improvement to continue
BJE’s Project business (49% of revenue, 44% of earnings in FY18E) suffered from FY11 to Shareholding Pattern Sep '16
FY15 due to losses on low-margin contracts and execution delays. The company successfully Promoters 63.5%
turned the business profitable in FY16 by completing legacy contracts. The current Rs27bn FIIs 7.9%
backlog entails normal EBITDA margin of 6-7%. For FY17, we forecast the Project business’ DIIs 7.7%
EBITDA to rise 41% to Rs1.4bn backed by order book execution. Public and Others 20.9%
Overall net profit to double by FY19
We forecast 34% net profit CAGR over FY17-19F, backed by recovery in consumer sales and Price Performance
sustainable project revenue. We forecast EBITDA margin to increase 110bps to 6.5% in the (%) 1M 3M 6M 12M
next two years as the consumer business recovers. This will help earnings double to Rs1.8bn Absolute (14) (17) (4) (5)
in FY19 from Rs956mn in FY16. ROE will improve to 18.4% from 13.3%. Rel. to Nifty (10) (14) (9) (9)
Consumer discretionary stock available at 13x PER Relative price chart

BJE has underperformed peers in the past year due to weak consumer sales. We think these 275 Rs % 20
concerns will subside soon once the new distribution model stabilizes. We value BJE on 250 10
SOTP basis – FY19F PER of 23x for consumer business (peer avg. is 28.3x) and 10x for
225 0
Project business. Derived PER on our TP is 18x.
200 -10
Financial Snapshot (Consolidated)
175 -20
(Rs mn) FY15 FY16 FY17E FY18E FY19E
Net Sales 42,581 46,119 46,675 51,179 56,801 150
Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16
-30
Nov-16
EBITDA 890 2,594 2,519 3,124 3,698 Bajaj Electricals (LHS) Rel to Nifty (RHS)
EBITDA Margin (%) 2.1 5.6 5.4 6.1 6.5 Source: Bloomberg
APAT (140) 956 1,030 1,466 1,859
EPS (Rs) (1.4) 9.5 10.2 14.5 18.4
EPS (% chg) 0.0 0.0 7.8 42.3 26.8
ROE (%) (2.0) 13.3 13.1 16.7 18.4
P/E (x) (160.6) 23.5 21.8 15.3 12.1 Anubhav Gupta
EV/EBITDA (x) 36.0 12.1 12.1 9.6 8.0 anubhav.gupta@emkayglobal.com
P/BV (x) 3.3 3.0 2.7 2.4 2.1 +91-022-66121336
Source: Company, Emkay Research
Emkay Research is also available on www.emkayglobal.com, Bloomberg EMKAY<GO>, Reuters and DOWJONES. Emkay Global Financial Services Ltd.
Bajaj Electricals (BJE IN) India Equity Research | Initiating Coverage
1.0 At an inflection point

BJE stock has suffered severely in the past 5 years with 60% underperformance vs peer group.
The reasons were flat consumer business sales and trouble in project business in past few years.
But we expect this to reverse which will drive strong earnings performance for BJE in next three
years.
Exhibit 1: Worst is behind

What factors were holding the shares back? What has changed that will result in strong
earnings performance?
Flat consumer sales in FY15-17 Consumer sales growth to come back in FY18
BJE’s Consumer business sales have not BJE has successfully implemented TOC model in
increased in the past three years as the company is 30% of its network with further 30% to be
in process of changing its distribution model. This is completed by Mar-17 and residual by Mar-18. This
to expand reach in underpenetrated markets is a new inventory management strategy which
through implementation of Theory of Constraint focuses on controlling the inventory of distributors
(TOC) model. and dealers.
The margins in consumer business have declined The full benefits will be visible FY18 onwards and
to 4.2% from 8% in past 4 years due to lower sales we forecast Consumer business revenue to
volume and high fixed costs. resultantly increase 15% in FY18 and 19% in FY19.
EBITDA margin will recover to 5.8% in FY18 and
6.8% in FY19 from current 4.7%.
Trouble in project business in FY11-15 Turnaround in project business in FY16

Project business suffered because of: 1) slowdown The Project business turned profitable in FY16.
in the power transmission sector, 2) delayed BJE took a number of steps to revive the
execution in the case of some government-related performance of the project business: implemented
contracts (led to revenue decline and penalties) a strict project monitoring process and strong risk
and, 3) aggressive bidding which resulted in low- management system, which have ensured better
margin work in order book. timeliness in execution
Overall, EBITDA margin of project business The Project business’ EBITDA margin has already
declined to -11% from 7%. During these years, BJE recovered last year. We expect this to continue and
incurred operational loss of INR2b and paid an BJE to sustain EBITDA margin of 6.5%. This will be
extra INR1.5b towards interest costs the company supported by intake of more profitable orders and
borrowed more to fund working capital for stuck timely execution of order book.
projects
Exhibit 2: BJE’s stock performance vs BSE Consumer Durable stock
100.00
80.00
60.00
40.00
20.00
-
(20.00)
(40.00)
Feb/12
Feb/13
Feb/14
May/14
Feb/15
Feb/16
May/12
May/13
May/15
May/16
Aug/16
Nov/11
Aug/12
Nov/12
Aug/13
Nov/13
Aug/14
Nov/14
Aug/15
Nov/15
Nov/16
Bajaj Electricals BSE Consumer Durable Index

Source: Bloomberg, Emkay Research
Emkay Research | November 15, 2016 2

Exhibit 3: BJE’s earnings upcycle (Rsm)
1,964
1,448 1,489
1,179 1,116
956
265
FY11 FY12 FY13 FY14 FY15 FY16 FY17F FY18F FY19F

-53 -140
Initiate at BUY, 49% potential upside

 Reputation of the promoter Bajaj Group and Management team: The team has been able
to successfully achieve and maintain strong market share in the local consumer durables
market.
 Improving sales volume and EBITDA margin in the Consumer business on the back of the
rollout of TOC and sustained profitability in the Project business will act as catalysts to
growth.

2.0 Investment Rationale – Huge scope of rerating

BJE is a dominant player and a strong brand in the small consumer appliances & lighting
segments with an extensive distribution network across India. The company commands a 15-
20% market share across key categories in consumer durables (fans, heaters, mixers), and a
6% share in lighting products. It also has a Project business catering to three segments – high
masts, transmission line towers, luminaries and rural electrification.
2.1 Revival in consumer business

Consumer business revenue has been suffering since the past three years as the company is in
process of rolling out the Theory of Constraints approach in its distribution model. This is a new
inventory management strategy which focuses on controlling the inventory of distributors and
dealers. The company will complete the implementation by end-FY18 although part benefits will
be visible next year. We forecast consumer revenue to increase 13% in FY18 and 16% in FY19.
A better mix and volume growth will lead EBITDA margin expansion of 140bps over FY16-19F
to 6.4%.
2.2 Strong consumer franchise

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.
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 regional
markets.
2.3 Wide distribution reach in consumer business

BJE has a wide distribution reach across India with 2,200 distributors, 4,100 dealers, 45,000
retailers in appliances and 86,000+ retailers in fans. Further, the company has 104 exclusive
Bajaj World showrooms across the country and plans to increase them to 150 this year. This
should help the company capitalize on the demand revival opportunity and regain its market
share in the consumer durables segment. Besides this, the company also has strong presence
across 0.4mn retailers in the lighting segment.
2.4 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
Rs178bn, with BJE’s revenues and market share standing at Rs24bn and 14%, respectively. We
believe BJE’s strategy of having a diversified presence across products gives it a great degree
of clout amongst consumers as well as the distribution channel, which in turn has helped it to
grow and sustain its market leadership.
2.5 Worst over for Project business

After four year of continued losses, the Project business turned profitable in FY16. We believe
current profitability with EBITDA margin of 6.5% is sustainable. The company said that it will not
bid aggressively for new contracts. We have factored in moderate revenue growth of 6% for the
business in the next few years.
2.6 Strong earnings growth through FY19

Recovery in consumer sales and sustainable performance of Project business will drive BJE’s
overall earnings. We forecast net profit to rise at a CAGR 34% over FY17-19F. We forecast
EBITDA margin to increase 110bps to 6.5% in the next two years as the Consumer business
revives. This will help earnings double to Rs1.8bn in FY19 from Rs956mn in FY16.
2.7 ROE improvement will result in rerating

The improvement in profitability would significantly improve ROCE/ROE to 20%/18.4% in FY19E
vs. 15.3%/13.3% in FY16. It would also benefit from the asset light Consumer business model
and stable WC in the Project business.

3.0 Attractively valued vs peers; Strong growth to narrow

valuation gap
Assuming BJE’s Project business is trading at our fair valuation of Rs72/share (implied PER of
BJE’s consumer business is 10x FY19E), the Consumer business is trading at PER of 13x FY19E. This is at a 53% discount
trading at lowest valuations to the peer average. We believe given BJE’s strong consumer franchise and solid visibility for
compared to peers sharp recovery in Consumer business earnings over the next 2 years, the valuation gap should
get closed in.
BJE’s Consumer business is trading at lowest valuations compared to its peers (PER of 13x
Unjustified discount of 50% to FY19E). As the Consumer business recovers, earnings should rebound sharply in the next two
peer average years. We forecast BJE's overall earnings to double over FY16-19. We expect revenues to rise
at a 10% CAGR, with 90bps improvement in EBITDA margin to 6.5% from 5.6%.
This will also improve BJE's return rations significantly which were depressed in the past three
Earnings recovery will bring about years. We expect ROE to improve to 18.4% in FY19 from 13.3% in FY16 and ROCE to 20%
rerating from 15.3% in FY16. We believe this will lead to a re-rating in the stock as investors will assign
a higher multiple to the Consumer business. BJE's closest peers – Havells / Crompton Consumer
are currently trading at PER of 30x/28x FY19E (BJE at 13x). This steep discount should narrow
out in our view as BJE delivers on the Consumer business recovery.
Exhibit 4: Peer valuation comparison

Mcap EPS Growth (%) PER (x) EV/EBITDA (x) P/BV (x) ROE (%)
Companies (USDm) FY17F FY18F FY19F FY17F FY18F FY19F FY17F FY18F FY19F FY17F FY18F FY19F FY17F FY18F FY19F
Havells India 3,301 32.0 16.7 19.8 34.8 29.8 24.8 23.2 19.8 16.5 7.6 6.7 5.8 23.4 24.3 24.4
Crompton Cons 1,491 - 39.3 39.3 34.6 28.0 23.9 21.6 18.2 16.0 24.2 14.7 11.3 79.1 61.8 60.7
TTK Prestige 984 31.9 24.7 15.7 44.8 35.6 30.9 29.0 23.5 21.1 8.2 7.2 6.5 19.6 21.5 22.5
V-Guard Indus 888 32.8 21.0 14.3 38.2 31.3 27.3 25.7 21.3 18.5 10.1 8.0 6.8 16.5 16.6 -
Symphony 1,306 57.9 13.8 27.5 49.2 38.7 34.9 38.6 30.4 26.9 23.3 18.5 15.4 49.6 51.8 52.0
Average 38.7 23.1 23.3 40.3 32.7 28.3 27.6 22.6 19.8 14.7 11.0 9.1 37.6 35.2 39.9
BJE* 345 7.8 42.3 26.8 21.8 15.3 12.1 10.8 8.8 7.0 2.7 2.4 2.1 13.1 16.7 18.4
*Adj ROE for BJE (Acceptances included in debt)
SOTP valuation of Rs331/share

BJE is trading at an attractive PER of 15.3x FY18E and 12.1x FY19E. This is 47% and 43%
below the domestic sector average. In our view, this is undemanding given BJE's Consumer
business is now turning around. Even on P/BV and EV/EBITDA basis, BJE is trading below
sector averages.
Our implied target multiple of 23x for the Consumer business implies 20% discount to peer
average.
Exhibit 5: SOTP based TP

SOTP Valuation FY19E Comment
Consumer business EPS (Rs) 11.3 61% of BJE's earnings from consumer business
Target multiple (x) 23 Sector avg is 28.3x
Fair value (Rs/sh) 259
Consumer business EPS (Rs) 7.2 39% of BJE's earnings from consumer business
Target multiple (x) 10.0 Nominal PER of 10x based on growth and return ratios
Fair value (Rs/sh) 72
SOTP (Rs) 331


4.0 Financial improvement in Consumer business

4.1 Revenue mix (%)
In FY16, the Consumer business (lighting, durables and fans) contributed 52% to BJE’s revenue.
Majority of revenue from
We expect this contribution to rise to 53% by FY19 as sales volumes recover post the successful
Consumer business
implementation of new distribution policy. The contribution from Consumer business to BJE’s
EBITDA is high because of better margins compared to Project business.
Exhibit 6: BJE Revenue mix (%)
48 51 49 47
52 49 51 53
FY16 FY17F FY18F FY19F
Consumer business Project business

Exhibit 7: BJE Consumer durables revenue mix (%)
26 28 27 28
48 50 51 52
25 22 22 21
Lighting Domestic appliances Fans

4.2 Consumer business set for big turnaround

Sluggish demand, increasing competition and rollout of Theory of Constraints (TOC) approach
Flat revenue growth over FY13-
(inventory management strategy, which focuses on controlling the inventory of distributors and
16
dealers) has hurt the consumer durables business over the past three years. There has been flat
growth in revenue over FY13-16.
 A shift in the company’s marketing strategy from ‘push’ to ‘pull’ has been impacting its
primary sales. The material benefits of inventory rationalization (which has already been
implemented in 30% of Bajaj’s distribution network and intends to cover 60% by FY17)
would now start yielding benefits. We expect a gradual improvement in revenue growth
over the next two to three quarters and a meaningful revival from FY17.
 While Bajaj has witnessed market share erosion across most product categories in the past
2-3 years, it still has a strong brand recall and good connect with customers. The segment’s
future prospects look bright, given Bajaj’s continued focus on new launches, improved
quality, brand building, distribution expansion and demand revival. A wide distribution reach
and strong association with Morphy Richards (MR) for the past 12 years should help Bajaj
capitalise on opportunities emanating from a demand revival and regain market share.
 We expect the segment’s revenue growth to improve to 13% in FY18 and 16% in FY19. A
better mix and volume growth should aid in EBITDA margin expansion of 140bps over
FY17-19F to 6.4%.

Exhibit 8: BJE’s Consumer business revenue (Rsb)
30.2
24.8 25.7 26.0

23.6 24.2 23.0
19.3
FY12 FY13 FY14 FY15 FY16 FY17F FY18F FY19F
4.3 TOC can be the game changer for BJE

In 2014, BJE decided to implement a new distribution strategy (Theory of Constraints, TOC).
Set to change course for better in
The decision was undertaken after the Management found out that:
FY18
 The revenue growth was mainly coming from new product launches. The sales volume of
existing product portfolio was either growing at a moderate rate or was declining.
 The penetration level in any market was far below Management’s expectations.
 The working capital cycle for the company’s wholesalers/distributors was very high due to
high inventory levels.
Successful with companies like Under the new strategy, BJE decided not to dump its products to distributors/wholesalers at the
Pidilite, Relaxo and Britania month-end in order to protect its gross margin. ToC is a good marketing concept with companies
such as Britannia, Pidilite, and Relaxo having witnessed improvement in their respective
operating performances and profitability post its successful implementation.
BJE undertook following steps to implement TOC:
First time in consumer electricals
industry  It downsized the number of wholesalers in a city/town and rationalized to a large single
distributor.
 Asked each distributor to appoint a BJE-specific salesperson to penetrate deeper into
retailer segment.
 Replenishing inventory every 15 days for its distributors, thereby improving working capital
cycle.
 Creating “pull” factor by increasing its customer-connect through quality scale-up in
advertisement and ramp-up in the product portfolio.
Initial pain has gone The implementation of ToC led to BJE losing market share as the primary sales growth was flat.
The main challenges were: 1) Sudden weakening of the distribution network through mass dis-
empanelment of wholesalers, 2) slow pace of implementation in key markets, 3) resistance from
both internal employees and external channel partners.
Implementation to complete by BJE has rolled out TOC in 30% of the sales area and the impact of inventory rationalization is
end-FY18 already visible. As distributors in non-TOC adopted areas also start rationalizing inventory in
anticipation of TOC rollout, we expect primary sales to pick up from FY18 to 15%. TOC stabilizing
will also support margin expansion over FY17-FY19. Our channel check suggests that the sales
volume growth in a few product categories has already started to come to 7%.
4.4 Consumer revenue growth to return to 13% in FY18, 16% in FY19

After the successful implementation of TOC, we forecast BJE’s revenue growth to recover to
13% in FY18. The growth will accelerate in FY19 as TOC impact would be fully visible coupled
TOC will help recover lost
with a pick-up in local consumption. The company will get a boost as confidence with an upturn
revenue in next 2 years
in urban spending due to low inflation, cut in interest rates and increased employment.

Exhibit 9: BJE’s Domestic Appliances revenue (Rs bn)
15.6
14.0 13.3
13.1
12.4
11.6 11.5
9.8
2 brands to cater to different BJE has two brands: Bajaj positioned for mass market and Morphy Richards positioned for the
segments premium end of the market. The company has a strong product portfolio in the small appliances
and lighting segments. Combined market size for product segments in which BJE operates is
expected to be Rs180bn. With BJE’s revenue of Rs26bn, we derive BJE's market share at 15%.
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 has a wide distribution reach across India with 2,200+ distributors, 4,100+ dealers, 45,000+
Wide distribution reach retailers in appliances and 86,000+ retailers in fans. Further, the company has 104 exclusive
Bajaj World showrooms across the country and plans to increase them to 150 in FY16. This
should help the company capitalise on the demand revival opportunity and regain its market
share in the consumer durables segment. Besides this, the company also has strong presence
across 4 lakh retailers in the lighting segment.
Exhibit 10: BJE’s Fans revenue (Rs bn)
8.3
7.1
6.6 6.4 6.3
6.1 6.2
5.5
Asset-light business model 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.
Association with Morphy Richard (MR), the UK’s top domestic appliances brand and No.1 brand
Presence in high end segment in India over the past 12 years also adds value. MR has been a consistent performer in India
through Morphy Richards with 22% revenue growth over FY11-15. Its revenue share to the consumer durables business
association has improved from 8% in FY11 to 11% in FY15. Going forward, MR plans to revamp its product
portfolio with new models in mixer, juicer mixer grinder, juicer, food processor, dry iron and water
heater categories. It also introduced a new range of water heaters, which contributed significantly
to its performance.

Exhibit 11: BJE’s Lighting revenue (Rs bn)
6.2 6.2
5.5 5.6
5.1 5.1 5.1
4.1
New product launches in MR is planning to launch a new range of personal care products in men’s grooming. It is also
premium segment expanding its network (to 15,000 retail outlets) and distribution coverage in the top-360 urban
markets across the country. The new launches and distribution expansion will bolster BJE’s
revenue in the appliances segment. We highlight that the term agreement with Morphy Richards
is due for renewal next year. The Management is hopeful of availing an agreement renewal at
existing terms & conditions.
In order to capture share in the premium end of the market, BJE has forged ties with other global
Association with other global brands as well. These include Nardi (Italy) in appliances, Disney (US) and Media (China) in fans,
brands Trilux Lenze (Germany) in luminaries, CREE Lighting (USA) and Disano (Italy) in street lights
and RUDD (US) in LED.
In kitchen appliances segment, BJE faces competition from players like Preeti, Prestige and
Increase in penetration to drive Hawkins while in domestic Havells, Philips, Kenstar, Usha, Maharaja and Kenwood pose as
demand; market leadership to close competition. We expect revenue from this division to increase 17% in FY18 and 22% in
sustain FY19 backed by increase in penetration levels, launch of new products and distribution
expansion.

5.0 Stable project business to drive overall revenue

BJE successfully turned the Project business profitable in FY16 after four years of losses. The
Worst over for project business business suffered during FY11-15 due to: 1) slowdown in the power transmission sector, 2)
delayed execution of some government-related contracts (led to revenue decline and penalties)
and, 3) aggressive bidding which resulted in low-margin work in backlog.
The worst is over for the Project business. The business witnessed a sharp turnaround in FY16,
Moderate 7% revenue CAGR helped by the centralisation of activities through a system that tracks the status of projects. BJE
has taken a number of steps to revive the performance of the Project business which includes a
change in the top Management to inculcate a more experienced team. The new Management
has implemented a strict project monitoring process and strong risk management system, which
have ensured timeliness in execution. We expect the segment’s revenue to grow at 7% CAGR
over FY16-19E. The execution of high-margin orders should result in EBITDA margin expansion
to 6.5% by FY17.
Exhibit 12: Project business revenue (Rs bn)
26.6
25.1
23.7
22.0
17.4
15.5
11.9
10.8
Focus on high-margin work BJE has become selective in site selection (order intake down 39% YoY); working only on 40
sites vs 100 in FY15. In power distribution, the strategy is to take orders only in Bihar and Madhya
Pradesh given central warehouses there which ensure timely inventory replenishment.
Monitoring of sites is now on a weekly basis; further, 25% of the backlog is running ahead of
schedule.
We feel the Management is unlikely to bid aggressively for new projects and will focus on high-
Quality growth rather than volume margin orders. The project business order book position stands at Rs27bn (57% power
growth distribution; 37% transmission line and 6% illumination projects). This has improved revenue
visibility for over the next few years. Most of the old sites are now closed and have been handed
over to clients.
Exhibit 13: Project business order book (Rs bn)
33.4
27.2
24.8
22.4
14.9
6.0
FY12 FY13 FY14 FY15 FY16 1HFY17
EBITDA margin to sustain at Since Q4FY15, the project business has been reporting an impressive performance with EBITDA
6.5% margin of 6-6.5% in FY16 and H1FY17. Improvement in the performance has been led by closure
of the loss making legacy projects. We believe the profitable performance will continue as there
are no pending legacy orders and the rollout of TOC has led to processes and systems getting
tightened as explained earlier. We expect EBITDA margin to sustain at 6.5% as the company is
not willing to concede margins for growth.

We forecast overall revenue growth of 10% CAGR over FY17-19E. This will be mainly driven by
Overall revenue growth of 10% strong recovery in consumer revenue along with stable project business. This year, the growth
CAGR over FY17-19F would be moderate at 4% due to a flat performance in the Consumer business.
Exhibit 14: BJE’s overall revenue and growth
60.0 20
16
50.0
12
8
40.0
4
30.0 0
LHS - Revenue (Rsb) RHS - Growth (%)


6.0 Sharp recovery in EBITDA margin over FY17-FY19E

We forecast BJE’s EBITDA margin to rise to 6.5% from 5.4% in the next two years. This will be
EBITDA margin to rise to 6.5% by supported by sharp recovery in consumer business margins and improved profitability in the
FY19 from 5.4% project business.
Exhibit 15: Overall EBITDA Margin (%)
7.6
6.5
6.1
5.6 5.4
3.2
2.0 2.0
Consumer business margin to The consumer business EBITDA margins will recover to 6.6% by FY19 from 4.6%, backed by:
recover sharply from FY18  Implementation of TOC which will result in sales volume recovery. The margins in consumer
business have declined to 4.6% from 8% in past 4 years due to lower sales volume and high
fixed costs. As the revenue recovers, the EBITDA margin will also improve.
 BJE has introduced a uniform pricing policy in 60% of its customer base since it started
implementation of TOC strategy in the past 3 years. It is no more offering discounts to its
distributors to dump stock every month-end. This will also result in improvement of EBITDA
margins.
Exhibit 16: Consumer business EBITDA Margin (%)
8.9
7.8
6.6
5.8
4.7 5.1
4.3 4.6
The Project business’ EBITDA margin has already recovered last year. After four years of
Sustainable project business
continued losses, the Project business turned profitable last year. We expect this to continue and
margin
BJE to sustain EBITDA margin of 6.5%. This will be supported by intake of more profitable orders
and timely execution of order book.
Exhibit 17: Project business EBITDA Margin (%)
6.7 6.2 6.5 6.5

4.1
-3.8 -3.8
-14.4

7.0 Earnings to double over FY16-FY19E

We forecast BJE’s overall earnings to double to Rs1.8bn from Rs956mn over FY16-19E on the
Strong earnings growth of 34% back of recovery in Consumer business. We forecast revenue CAGR of 10% in FY17-19E.
CAGR in FY17-19F However the significant improvement in EBITDA margin and lower interest cost will boost
earnings.
Exhibit 18: BJE’s net profit (Rs mn)

1,859
1,466
1,179
956 1,030
265

-53 -140
2H seasonally strong for BJE For BJE, H2 accounts for 60%+ of full-year earnings because consumers generally buy home
appliances during the festive months of October/November. Moreover, a major backlog for
Project business is executed in H2.
BJE has lowered its debt by 16% in past 2 years backed by strong FCF. This will result in low
Interest cost to decline interest cost going forward. We expect BJE’s interest cost to decline by 12% to Rs793mn. The
FCF will be used to repay debt which will further ease interest costs.
Exhibit 19: BJE’s net margin (%)
3.8
3.3
2.9
2.1 2.2
1.5
-0.1
-0.3

8.0 Significant improvement in return ratios

8.1 ROCE/ROE to improve to 29%/19.2% in FY19E from 24.5%/13.2% in FY16
We expect BJE's ROCE to improve, led by strong earnings growth and solid FCF. We expect
Improvement in return ratios in
ROCE to improve to 16.7% in FY18 and 18.4% in FY19 from 13.3% in FY16.
next 2 years
Exhibit 20: Return Ratios – ROE (%)
18.0 18.4
16.7
13.3 13.1
3.7
-0.7
-2.0
Efficient capital allocation The capital employed for the Consumer business would decline led by reduction in inventories
and debtors. Capital employed turnover in the Projects business may not improve further as
benefits of the release of retention money on old legacy projects have already played out.
Exhibit 21: Return Ratios – ROCE (%)
19.8 20.0
17.9
15.3 14.8
8.2
4.6 4.9
Exhibit 22: Peer ROCE (%)
80
60
40
20
0
FY12 FY13 FY14 FY15 FY16
Havells Symphony V-Guard Inds.

TTK Prestige Crompton Consumer Bajaj Electricals
*BJE debt includes acceptances value as per new accounting norms

8.2 FCF and debt-equity to improve

The timely order execution in Projects business has resulted in better collections for BJE. Many
Lower WC requirements
contracts are running ahead of schedule. The receivables and inventory levels (helped by the
rationalisation strategy) have improved in the Consumer business.
BJE lowered its working capital borrowings in FY16 due to improvement in working capital cycle.
We expect this scenario to persist over the next two years with steady improvement in working
capital requirement.
Exhibit 23: FCF (Rs mn)
1,180
828 821
534

-239
-414
-1,475
-2,314
Solid FCF generation of Rs2.1bn Strong earnings growth would result in cash flow generation (free cash flows likely to improve to
in FY17-19F Rs2.1bn by FY19), reduction in borrowings (debt:equity ratio to further improve to 0.7x in FY19
from 1.2x in FY16).
Exhibit 24: D/E (x)
1.4
1.3
1.2
1.0
0.8 0.9
0.8
0.7

9.0 Consumer sector – Witnessing recovery

9.1 Favorable ecosystem for BJE’s Consumer business
The Indian appliance segment is estimated at US$50bn pa and is expected to increase at 12-
Sector poised for strong growth in
15% pa over the next 10 years, according to industry estimates. The market is a play on
long term
improving discretionary spending with favorable lifestyle changes in urban centers, new housing
construction and reducing replacement cycles being some of the key drivers of business.
We compared the growth in the consumer durables sector vis-à-vis GDP growth to comprehend
Sector’s growth averages 2.5x the correlation between the two variables. On analyzing consumer discretionary sector’s
GDP growth rate performance across different economic situations over the past 15 years, we observed that
consumer discretionary sector’s sales growth, on an average, is 2.4x of GDP growth.
Interestingly during phases of high & sustainable GDP growth, the consumer durables sector’s
growth was 3x of GDP growth. Therefore, if the economy undergoes a prolonged period of
growth, then we can expect a robust outperformance in the consumer durables sector going
ahead.
Exhibit 25: Cons disc revenue growth and GDP growth correlation (%)
35 12
30 10
25 8
20
6
15
10 4
5 2
- -
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
H1FY15
Sales Growth (LHS) GDP Growth (RHS)
Source: RBI, Bloomberg, Emkay Research
Challenges can be overcome Challenges to consumer durables companies originate from increasing competition, fast
technology changes, increased innovation in new launches and growing penetration of e-
commerce (thus reducing the franchise value of existing distribution channels). However,
experienced companies like BJE have been able to overcome such challenges in the past.
Exhibit 26: India's Per capita annual disposable income (Rs)
120,000
100,000
80,000
60,000
40,000
20,000
-
2010 2011 2012 2013 2014 2015
Source: Ministry of Statistics and Programme Implementation, Emkay Research

9.2 Small appliances space looks attractive

We think the domestic appliances space looks the most attractive in India due to:
Rising affordability, increasing pie
for organized players, less  Rising affordability among consumers across product segments should lead to first level of
competition from foreign firms consumer up-trading in the small appliances space.
 Market share gains by the unorganized segment can be countered by the organized
segment through increased branding and marketing measures. Higher tax compliance
norms should also hurt the unorganized segment.
 Competition from large domestic and global MNC players is relatively low as they tend to
focus more on high-end segments (however, of late, some MNCs like Philips have started
targeting lower segments).
 The level of technology changes is manageable as opposed to in the large appliances
space. Some segments have had a discontinuous shift (think CRT to LCD to LED TVs vs
the change in configuration in juicer/mixers).
 Point of purchase decisions are far quicker for small appliances and purchase decisions
often tend to be impulsive as opposed to high-end appliances where research/purchasing
decisions are slow and more deliberate.
Exhibit 27: Household spending trends

3%
5% Recretion & Education
5% Health
30%
6% Personal Care
Furniture, Appliances
8%
Clothing & Footware
Rent, Fuel & Power
9% Transport & Comm.
Others
17% Foods & Beverages
17%

10.0 Strong presence in consumer durable space – 75 year old brand

10.1 BJE’s Product Portfolio and Market Positioning
Exhibit 28: Market share of large players

Market Size Organized Market
Segment Description Competition
(INR m) % Share %
GLS lamps, fluorescent tube lights, compact
Lighting 50,000 65% 6% fluorescent lamps, domestic luminaires, ballasts & Philips, Crompton, Surya, Havells, etc
starters, LED torches
Ceiling, table, pedestal & wall mounted fans, personal
fans, Bajaj-Disney children’s fans, Industrial exhaust Crompton, Usha, Orient, Khaitan,
Fans 35,000 65% 16%
fans, commercial air industrial fans, circulators, cooler Polar, Havells
kits and pumps
Mixers grinders, juicers, food processors, water
heaters, air coolers, iron, ovens toasters grillers (OTG),
Philips, Kenstar, Usha, Maharaja,
Appliances 68,000 70% 17% room heaters, toasters & S/W makers, hand blenders,
Preeti, Prestige, Kenwood
water filters microwave ovens gas stove purifiers &
filters, ovens, stoves, electric kettles, coffee/tea makers
10.2 BJE’s Consumer Products
Exhibit 29: Home & Kitchen Appliances

Food Processing Water Purifier Cooking Appliances Garment care
Beverages Room Heaters & Coolers Air Fryer Water Heaters

10.3 Competitive scenario
Exhibit 30: BJE and its competitors

Companies Comments
Leading player in domestic appliances, kitchen appliances, fans and lighting. Strong
BJE
pan India presence across segments.
Diversified presence across switchgear, cables, fans, appliances and lighting segment.
Leading fans players and incrementally scaling up presence in appliances segment
Havells
(fairly small as of now vs BJE). Havells has depicted a better growth trend in recent
times across comparable lighting & durable segment than BJE.
Leading player in kitchen appliances space, especially pressure cookers and cookware
segment (35-40% market share). TTKP has a large product portfolio under the
TTK Prestige
appliances segment too although cooktops are the largest contributors to its revenues
(Rs5bn).
Larger player in stabilizers, PVC cables, UPS, motor pumps and power cables. Large
V Guard presence in South but now scaling up presence in non-south markets. Also increasing
focus on growth in appliances–fans segment.
Whirlpool India is the leading and one of the largest Home Appliance players in India.
Whirlpool The company provides variety of household products – refrigerators, washing
machines, air conditioners, microwave ovens, water purifiers etc
Symphony Largest player in air coolers–50% market share in branded air cooler market.

11.0 Multiple growth opportunities in consumer space

11.1 Domestic appliances (48% of BJE’s Consumer revenue)
BJE is the market leader in domestic appliances (17% market share)

The market size for domestic appliances is Rs65bn and has increased at a CAGR of 20% in the
No 1 player in Kitchen and
past five years. Domestic appliances consist of: 1) home appliances like irons, water heaters and
Domestic Appliances (17%
room coolers, 2) kitchen appliances like OTG, mixer grinders, food processors, coffee/sandwich
market share)
makers, toasters, electric kettles, gas stoves, water purifiers, cookers/cookware, induction cooktop,
choppers and hand blenders. BJE has a 17% market share in this overall product segment.
Exhibit 31: Domestic appliances market size (Rs bn)

65
50
28
FY11 FY13 FY15
Exclusive Bajaj World showrooms BJE is the largest player in the small appliances market, commanding leadership in irons, water
to improve brand recall heaters, OTGs and mixers, It has implemented its own 'theory of constraints' strategy
(rationalizing dealer inventory levels), which could benefit the Consumer business in the long
run. It has a target of increasing its number of exclusive Bajaj World showrooms to 150 by FY16.
For the premium segment, BJE has exclusive distribution rights for UK based Morphy Richards.
Tie-up with Morphy Richards It plans to revamp its portfolio with new models in mixer grinder, juicer, food processor, dry iron
brand for premium segment and water heater categories and introduce new range of personal care products in men’s
grooming. It also plans to expand its retail outlets and distribution reach.
Exhibit 32: BJE’s domestic appliance revenue (Rs bn)
15.6
13.3
11.6 11.5
11.1.1 Water Heaters

Water heaters is a Rs12bn market in India with organized market cornering 55% of the total. The
Low penetration levels will help
branded market is held by Bajaj, VGuard, Havells, Usha, Crompton, Racold & AO Smith. Electric
market grow faster
water heaters dominate the organized market while gas water heaters are still at a nascent stage.
Electric water heaters are available in two types, ie instant water heaters and storage type water
heaters. The penetration of the category is very low at 10% but generates healthy margins for
consumer durable companies.
11.1.2 Air Coolers

The total air-cooler market in the country is of Rs30bn, of which Rs12bn is accounted by the
Organized players eating up
branded segment. India is a traditional air cooler market with a huge unorganized player
unorganized share
presence, dominated by window installed metal body coolers (viewed as a commoditized
product). Residential air cooler volume market size is estimated at 6m units wherein the share
of organized players is at 1.1m units. In the last few years, branded segment growth has been
more dominant; Symphony was the pioneer in defining the branded air cooler market.

Exhibit 33: Air cooler market volume break up
Organised, 1.1m
Unorganised, 4.9m
Exhibit 34: Air cooler penetration (market wise)

80 (%) (%) 32
67
27 62 60
58
60 24
40 16
18 11
20 8
6
2 2
1 2
- 0
North East West South
HH (LHS) HH Owning Air Cooler (LHS) Penetration of Air Cooler (RHS)

Exhibit 35: Air cooler market share data
60 (%)
50
40
30
20
12
8
-
Others Bajaj Kenstar Symphony
11.1.3 Mixer, Grinder & Juicer

The market size for this segment is Rs30bn with key players like Philips, Bajaj, Kenstar, Usha,
Bajaj is the market leader
Havells, TTK, and Panasonic. Philips & Bajaj combined own 30% market share. The market size
for mixer grinder (ex-juicer) is Rs16bn with the organized share currently at 70% levels.
Improvement in power availability has been the key demand driver for this segment. Also,
replacement demand in this market is fairly high.
11.1.4 Microwave Ovens

Microwave ovens is a Rs11bn market, largely dominated by brands like LG, Samsung, Morphy,
Low penetration, still considered
Bajaj, IFB, and Whirlpool. LG and Samsung dominate the market with a combined market share
as high-end product
of 50%. In metro cities, microwave ovens are becoming an integral part of household kitchens.
The wide ranging and easy to use features of modern microwave ovens have led to their
increased popularity. Moreover, busy schedules of the urban population, rise in the number of
working women and with the concept of ‘ready-to-eat’ meals gaining popularity across the globe,
the usage of microwave ovens is increasing rapidly. There is a high growth potential in rural
markets as well where penetration is still very low.

11.2 Lighting products (26% 6 BJE’s Consumer revenue)
BJE has 6% market share

The current Indian lighting market is of Rs160bn (2.3% of global lighting market) and is expected
16% CAGR growth expected for
to rise at a 16% CAGR over the next five years led by a strong 40% growth in LEDs. CFL was
next 10 years
the key driver of the lighting industry in the last eight years wherein CFL volumes grew by 25%.
With cost efficiency and environmental advantage associated with LEDs, the Indian government
has also started promoting LED based home and street lighting. Globally too, the lighting industry
is shifting towards LEDs; global penetration is expected to move up from 11% to 60% by 2020.
Exhibit 36: Lighting market size (Rs bn)
160
135
117
101
85
2010 2011 2012 2013 2014
BJE has 6% market share in About 67% of the lighting industry is organized, dominated by Philips (leader with 22% market
lighting market share), Syska, Surya Roshni, Crompton Greaves, Bajaj and Havells (commanding 5-7% market
share each). In the LED space, which as per our analysis is 73-75% organized, Philips (26-30%
market share) and Syska (15%) are the leaders, followed by Crompton (9%) and Havells (6%).
Exhibit 37: Lighting market share for main players (%)
1% 1% 4% Eveready Industries
4%
Osram India
4% FIEM
NTL Electronics
33% 5% Wipro
6% Havells
Bajaj Electricals
6% Crompton
7% Surya Roshni
Syska
22% 7%
Philips India
Others (unorganised)
Exhibit 38: BJE’s Lighting revenue (Rs bn)
6.2 6.2
5.6
5.1

The Indian LED market is set to touch Rs200bn by 2020, ie growing at a CAGR of 35% from
Indian LED market to touch Rs34bn in 2014 (revenue share of the total lighting industry likely to rise to 60%). Continuing
INR200bn by 2020 price fall in LEDs is rapidly bridging the price gap between CFL bulbs. With anticipated revival in
housing and increasing access to electricity, demand for LED products is likely to remain robust.
Exhibit 39: LED Lighting market size (Rs bn)
34
18
13
9
5
2010 2011 2012 2013 2014
EESL orders helping BJE in Recently, BJE has been participating aggressively in the government’s LED bulb orders, which
revenue growth has helped it report revenue growth in the last 2 years. BJE’s participation in EESL orders has
increased significantly although the margin on these orders is low compared to retail sales. But
the high volume allows the company to bargain with suppliers.
Exhibit 40: Lighting market growth trends (Rs bn)

376
216
160
34
2014 2020
Total Lighting Market LED Market
11.3 Fans (26% of BJE’s Consumer business revenue)
BJE has 16% market share

Fans is a Rs70bn market in India wherein the organized segment holds 75% of the total market.
One of the oldest and most
The organized market is dominated by brands like Bajaj, Usha, Crompton, Havells and Orient
reputed players – Market leader
with a combined market share of 80%. Crompton is the market leader with 25% market share,
followed by Bajaj and Usha with 16% market share each, while Havells has a 14% market share.
The total fan market has been growing at 9% in the last three years and is one of the highest
penetrated categories in domestic appliances.
Exhibit 41: Fan market growth trends (Rs bn)
53
48
44
38 38
FY11 FY12 FY13 FY14 FY15

BJE is positioned as a mid-market brand in the fans segment (priced at ~Rs1,800/unit). Recently,
BJE has 16% market share we have been witnessing premium fans priced in the Rs2,200-3,000/unit range gaining traction.
BJE is yet to gather momentum in this segment; nevertheless, the Management has a strategy
in place to increase sales in this category and sustain its current market share.
Exhibit 42: Break-up of Fan market
Unorganised and small

players
35%
Leading Brands
65%
Exhibit 43: Market share of main players

Khaitan
Crompton 10%
28%
Usha
15%
Havells
15%
Orient
16% Bajaj
16%
Exhibit 44: BJE’s Fan revenue (Rs bn)
8.3
7.1
6.4 6.3

12.0 Risks and concerns

 Delay in TOC implementation. Any further delays in TOC implementation could lead to
market share loss for BJE’s Consumer business.
 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.
 Execution risk in Project business. The execution in Project business is subject to
approvals from various government authorities. Any delay could lead to slowdown in
execution.

Key Financials (Consolidated)

Income Statement
Y/E Mar (Rs mn) FY15 FY16 FY17E FY18E FY19E
Net Sales 42,581 46,119 46,675 51,179 56,801
Expenditure 41,691 43,526 44,156 48,055 53,103
EBITDA 890 2,594 2,519 3,124 3,698
Depreciation 290 272 296 320 344
EBIT 600 2,321 2,222 2,804 3,353
Other Income 243 229 229 229 229
Interest expenses 1,051 1,014 905 834 793
PBT (208) 1,536 1,546 2,199 2,788
Tax (69) 580 515 733 929
Extraordinary Items 0 0 0 0 0
Minority Int./Income from Assoc. 0 0 0 0 0
Reported Net Income (140) 956 1,030 1,466 1,859
Adjusted PAT (140) 956 1,030 1,466 1,859
Balance Sheet
Equity share capital 202 202 202 202 202
Reserves & surplus 6,668 7,307 7,998 9,123 10,642
Net worth 6,870 7,509 8,199 9,325 10,844
Minority Interest 0 0 0 0 0
Loan Funds 10,070 9,409 8,409 8,009 7,609
Net deferred tax liability 0 (504) 0 0 0
Total Liabilities 16,940 16,415 16,608 17,334 18,453
Net block 2,808 2,829 2,933 3,013 3,069
Investment 561 516 542 569 598
Current Assets 24,928 24,729 25,142 26,920 29,712
Cash & bank balance 410 588 400 393 375
Other Current Assets 1,013 3,463 3,560 3,693 3,839
Current liabilities & Provision 11,357 11,866 12,009 13,168 14,925
Net current assets 13,571 12,863 13,133 13,752 14,786
Misc. exp 0 0 0 0 0
Total Assets 16,940 16,415 16,608 17,334 18,453
Cash Flow
PBT (Ex-Other income) (NI+Dep) (451) 1,307 1,317 1,970 2,560
Other Non-Cash items 0 0 0 0 0
Chg in working cap 562 383 45 (626) (1,052)
Operating Cashflow 1,520 2,397 2,048 1,765 1,717
Capital expenditure (581) (500) (193) (400) (400)
Free Cash Flow 939 1,897 1,855 1,365 1,317
Investments (234) 45 (26) (27) (28)
Other Investing Cash Flow 146 23 0 0 0
Investing Cashflow (426) (204) 9 (199) (200)
Equity Capital Raised 2 0 0 0 0
Loans Taken / (Repaid) 55 (661) (1,000) (400) (400)
Dividend paid (incl tax) (236) (340) (340) (340) (340)
Other Financing Cash Flow 2 0 0 0 0
Financing Cashflow (1,228) (2,015) (2,246) (1,575) (1,534)
Net chg in cash (134) 178 (188) (8) (17)
Opening cash position 544 410 588 400 393
Closing cash position 410 588 400 393 375

Key Ratios
Profitability (%) FY15 FY16 FY17E FY18E FY19E
EBITDA Margin 2.1 5.6 5.4 6.1 6.5
EBIT Margin 1.4 5.0 4.8 5.5 5.9
Effective Tax Rate 33.0 37.8 33.3 33.3 33.3
Net Margin (0.3) 2.1 2.2 2.9 3.3
ROCE 4.9 15.3 14.8 17.9 20.0
ROE (2.0) 13.3 13.1 16.7 18.4
RoIC 3.7 14.9 14.4 17.5 19.8
Per Share Data (Rs) FY15 FY16 FY17E FY18E FY19E

EPS (1.4) 9.5 10.2 14.5 18.4
CEPS 1.5 12.2 13.1 17.7 21.8
BVPS 68.2 74.4 81.2 92.4 107.4
DPS 0.0 0.0 0.0 0.0 0.0
Valuations (x) FY15 FY16 FY17E FY18E FY19E

PER (160.6) 23.5 21.8 15.3 12.1
P/CEPS 148.5 18.3 16.9 12.6 10.2
P/BV 3.3 3.0 2.7 2.4 2.1
EV / Sales 0.8 0.7 0.7 0.6 0.5
EV / EBITDA 36.0 12.1 12.1 9.6 8.0
Dividend Yield (%) 0.0 0.0 0.0 0.0 0.0
Gearing Ratio (x) FY15 FY16 FY17E FY18E FY19E

Net Debt/ Equity 1.4 1.2 1.0 0.8 0.7
Net Debt/EBIDTA 10.9 3.4 3.2 2.4 2.0
Working Cap Cycle (days) 112.8 97.1 99.6 95.3 92.6
Growth (%) FY15 FY16 FY17E FY18E FY19E

Revenue 5.7 8.3 1.2 9.7 11.0
EBITDA 8.8 191.4 (2.9) 24.1 18.3
EBIT 5.1 287.1 (4.3) 26.2 19.6
PAT 0.0 0.0 7.8 42.3 26.8
Quarterly (Rs mn) Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17

Revenue 11,221 11,466 13,572 9,594 10,058
EBITDA 518 786 744 564 452
EBITDA Margin (%) 4.6 6.9 5.5 5.9 4.5
PAT 177 293 347 221 159
EPS (Rs) 1.8 2.9 3.4 2.2 1.6
Shareholding Pattern (%) Sep-15 Dec-15 Mar-16 Jun-16 Sep-16

Promoters 63.6 63.6 63.6 63.6 63.5
FIIs 11.6 11.7 8.7 6.7 7.9
DIIs 4.8 4.4 5.9 7.0 7.7
Public and Others 20.0 20.3 21.8 22.8 20.9

Emkay Rating Distribution

BUY Expected total return (%) (Stock price appreciation and dividend yield) of over 25% within the next 12-18 months.
ACCUMULATE Expected total return (%) (Stock price appreciation and dividend yield) of over 10% within the next 12-18 months.
HOLD Expected total return (%) (Stock price appreciation and dividend yield) of upto 10% within the next 12-18 months.
REDUCE Expected total return (%) (Stock price depreciation) of upto (-) 10% within the next 12-18 months.
SELL The stock is believed to underperform the broad market indices or its related universe within the next 12-18 months.
Emkay Global Financial Services Ltd.

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Bajaj Electricals

India Equity Research | Small & Mid Cap

CMP Target Price

Unfolding growth story, Initiate at Rs222 Rs331

Consumer discretionary stock available at 13x PER Relative price chart

1.0 At an inflection point

Exhibit 1: Worst is behind

Trouble in project business in FY11-15 Turnaround in project business in FY16

Exhibit 2: BJE’s stock performance vs BSE Consumer Durable stock

Bajaj Electricals BSE Consumer Durable Index

Emkay Research | November 15, 2016 2

Exhibit 3: BJE’s earnings upcycle (Rsm)

FY11 FY12 FY13 FY14 FY15 FY16 FY17F FY18F FY19F

Initiate at BUY, 49% potential upside

Emkay Research | November 15, 2016 3

2.0 Investment Rationale – Huge scope of rerating

2.1 Revival in consumer business

2.2 Strong consumer franchise

2.3 Wide distribution reach in consumer business

2.5 Worst over for Project business

2.6 Strong earnings growth through FY19

2.7 ROE improvement will result in rerating

Emkay Research | November 15, 2016 4

3.0 Attractively valued vs peers; Strong growth to narrow

Exhibit 4: Peer valuation comparison

SOTP valuation of Rs331/share

Exhibit 5: SOTP based TP

SOTP (Rs) 331

Emkay Research | November 15, 2016 5

4.0 Financial improvement in Consumer business

Exhibit 6: BJE Revenue mix (%)

FY16 FY17F FY18F FY19F

Consumer business Project business

Exhibit 7: BJE Consumer durables revenue mix (%)

FY16 FY17F FY18F FY19F

Lighting Domestic appliances Fans

4.2 Consumer business set for big turnaround

Emkay Research | November 15, 2016 6

Exhibit 8: BJE’s Consumer business revenue (Rsb)

24.8 25.7 26.0

FY12 FY13 FY14 FY15 FY16 FY17F FY18F FY19F

Source: Company, Emkay Research

4.3 TOC can be the game changer for BJE

4.4 Consumer revenue growth to return to 13% in FY18, 16% in FY19

Emkay Research | November 15, 2016 7

Exhibit 9: BJE’s Domestic Appliances revenue (Rs bn)

FY12 FY13 FY14 FY15 FY16 FY17F FY18F FY19F

Source: Company, Emkay Research

Exhibit 10: BJE’s Fans revenue (Rs bn)

FY12 FY13 FY14 FY15 FY16 FY17F FY18F FY19F

Source: Company, Emkay Research

Emkay Research | November 15, 2016 8

Exhibit 11: BJE’s Lighting revenue (Rs bn)

FY12 FY13 FY14 FY15 FY16 FY17F FY18F FY19F

Source: Company, Emkay Research

Emkay Research | November 15, 2016 9

5.0 Stable project business to drive overall revenue

Exhibit 12: Project business revenue (Rs bn)

FY12 FY13 FY14 FY15 FY16 FY17F FY18F FY19F

Source: Company, Emkay Research

Exhibit 13: Project business order book (Rs bn)

FY12 FY13 FY14 FY15 FY16 1HFY17

Source: Company, Emkay Research

Emkay Research | November 15, 2016 10