Turnaround expectations light up Bajaj Electricals

Bajaj Electricals' stock has been gathering momentum in recent times on the back of rising sales volumes, and touched Rs 375 this week, levels last seen in July 2014. All these things reflect heightened investor interest in the counter. Even after excluding Monday's rally, the stock has given 46 per cent returns in the past one year - much ahead of the 24 per cent gains posted by S&P BSE 500. Importantly, experts believe there are more legs to this rally. 

The optimism stems from the company taking a host of steps to drive operational efficiencies. One such step is implementation of the theory of constraint or ToC model, which aims to reduce inventory levels with dealers. (The guiding ideology of the theory of constraints is that a chain is only as strong as its weakest link. Advocates of the theory attempt to minimise how weak links affect a company's performance.) Management has implemented this model in 35 per cent of its network and expects full implementation by March 2018. This streamlining of distribution network towards distributors and retailers will drive operating profit margin gains for the company. (Operating margin is a measurement of what proportion of a company's revenue is left over after paying for variable costs of production such as wages, raw materials. It can be calculated by dividing a company’s operating income (also known as operating profit) during a given period by its net sales during the same period.)
Analysts at Ambit Capital expect a 110-basis-point improvement in margins over FY17 to FY19 due to this exercise. The company's investments in brand-building will help sustain margins at higher levels, they add. Focus on brand-building will also enable the company to compete efficiently with stronger peers such as Havells India and V-Guard. These steps will augur well for its consumer durables and lighting business, which together form about half of Bajaj Electricals' revenues. Meanwhile, as demonetisation blues fade away, the demand for consumer durables products is also coming on track, which should aid Bajaj Electricals' prospects. 
The company's engineering and projects (E&P) business, too, has seen improved order inflows in recent months on the back of higher growth in the power transmission and distribution business.
Overall, improvement in both its key businesses will drive healthy earnings growth for Bajaj Electricals. Analysts at Emkay Global believe the company's earnings could rise 34 per cent annually over FY17 to FY19 and return on equity too could improve to 18.4 per cent by then from 13.1 per cent in FY17. IIFL's estimates are not far behind with average profit growth pegged at 30 per cent in this period.
Against this backdrop, most analysts are positive on the company and believe current valuations appear sustainable. Key downside risks include continued attrition in the company, delay in ToC rollout, and any potential pressure on the E&P business.


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