Havells and Bajaj Electricals gaining interest

Last Updated: Fri, Oct 19, 2012 06:00 hrs

Both Havells India and Bajaj Electricals have outperformed the markets since the start of September, following upgrades by analysts and improving outlook. What's more, many analysts believe there is still room for the stocks to move up.

While the Havells' stock touched its all-time high of Rs 672 last Thursday after Bank of America-Merrill Lynch (BofA-ML) upgraded its target price for the stock by 28 per cent to Rs 800 driven by an expected re-rating, Bajaj Electricals is a shade below its 52-week high of Rs 234.

Says Sanjaya Satapathy, analyst of Bofa-ML, "Havells India's new business initiatives and distribution strategy will drive domestic business' earnings to grow 26 per cent between FY12-FY15." "We are confident about improving return on equity (to over 20 per cent) of the company's 100 per cent subsidiary, Sylvania, which contributes 45 per cent to consolidated revenues," he adds.

This will be following the reduction in net debt to equity ratio to 1.6 times by FY13 end (from 6.5 times in FY12) with inflow of $38 million from Osram after settlement of an old dispute went in Havells' favour.

On October 4, even Citi Research (Equities) had raised the target price by 16.7 per cent to Rs 739. Says Atul Tiwari of Citi, "Havells India's domestic business is on a strong footing thanks to strong competitive advantage (distribution reach, established brands) and ample room for the company's most products and its target markets to grow. While domestic business has demonstrated pricing power and ability to pass on cost rises to consumers, Sylvania's margins should stabilise (after recent price hikes) in FY13 and tapping new markets like South East Asia and South Africa should help boost growth."

However, a few analysts remain cautious. In a report dated October 8, Jasdeep Walia, analyst, Kotak Institutional Equities, downgraded the company to 'reduce' from 'add' as he thinks further optimism is unjustified since business' cash flow profile (adjusting for off-balance sheet liabilities) has been weak despite modest capex.

According to him, competition is going to increase further as new companies (Polycab, RR Kabel and Finolex) enter the consumer appliances business (nine per cent of Havells' FY12 consolidated revenues but 16 per cent in case of standalone) and regional companies (Pigeon, Butterfly and V-Guard) nurse national ambitions.

Misal Singh, analyst, Religare Institutional Research, in his report dated October 4, maintains 'hold' recommendation on the company as he sees limited upsides from the current levels (Rs 649 on the said date) though growth in consumer durables is expected to remain upbeat on the back of brand building and new product launches.

Sylvania's margin is also expected to improve following price hikes across products, improvement in Latin American operations along with other emerging markets and continued appreciation of the euro against the dollar.

However, Religare's Singh has upgraded Bajaj Electricals (Havells' closest competitor) to 'buy' as the overhang on the engineering and procurement business (27 per cent of consolidated revenues) is expected to subside as the management has decided to discontinue unprofitable projects in this business during FY13 and achieve higher efficiency at project sites through better on-site monitoring. Its order book has increased to Rs 600 crore compared to Rs 450 crore as on June 2012-end and the company is L1 for another Rs 400 crore worth of orders.

Business Standard had reported on October 8 that the company is trimming its low-margin E&P business to reduce pressure on the balance sheet. Shekhar Bajaj, chairman and managing director of the company, said he has decided to bid only for high-margin projects. The management has maintained its 20 per cent sales growth forecast for FY13, which is commendable.

The government putting a cap on LPG to six cylinders should help boost sales of induction cookers (company expects 50 per cent growth in FY13). Bajaj Electricals has also expressed interest in spending up to Rs 1,000 crore on acquisitions in home appliances, lighting and fans, which will further give a boost to sales.

A robust growth in consumer/lighting businesses and price hikes in July across consumer durable product lines are expected to aid margin profile in the short to medium term. The rupee appreciation will also help improve margins as the company is a major importer of fans, appliances and Morphy Richards portfolio (imports form 13 per cent of total purchases). Plans to introduce new range of microwaves and water heaters under the Morphy Richards brand (premium product) in order to expand product portfolio, will also be margin accretive.

At Rs 657,, Havells trades at 15 times FY14 estimated earnings, which looks reasonable given the bullish target price of Rs 770 (average) translating into an upside of around 17 per cent.

At Rs 230, Bajaj Electricals is also valued reasonably at 12 times with various positive triggers. Besides the company is expected to report a higher compounded annual growth rate in sales and net profit at 13.3 per cent and 23 per cent, respectively, between FY12-15 than Havells' 11.8 per cent and 10.7 per cent, respectively based on average estimates.

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