After zooming from Rs151 in April to Rs830, the Bajaj Electricals Ltd stock closed marginally lower on Wednesday at Rs787. The buzz then among fund managers was that the company had raised some Rs170 crore at around Rs785 per share through a qualified institutional placement (QIP).
While the company did not confirm this, it had earlier in the week announced its intent to raise Rs175 crore. Besides reduction in debt and increasing capex, the company said it would also look for acquisitions to increase the pace of growth.
Revenues grew at a compounded annual growth rate (CAGR) of around 29% from FY05 to FY09 across its five business segments—home appliances, fans, lighting, luminaries and engineering and projects (E&P). However, the E&P division, which comprises 30% of revenue, will be increasing its share. In FY09, business in this division expanded by 44% over the previous year, double that of all other divisions.
The E&P division has an order book of about Rs1,000 crore. It recently bagged a lighting order for the Commonwealth Games. It is also gaining visibility in rural infrastructure where it would construct power and telecom towers, high masts and poles. The management has indicated that it may hive off this business into a separate entity “at an appropriate time”.
Graphics: Sandeep Bhatnagar / Mint
Meanwhile, the other consumer durables businesses grew at 25-28% CAGR in the last five years. The strong retail distribution network of the 70-year-old entity is an advantage. But a key challenge in this segment is the influx of Chinese goods and other regional products, which will result in pricing pressures and consequently affect profit margins.
It is likely that the engineering division too will face margin pressures next year, given rising commodity prices and stiffer competition. Note that in FY09, the major part of the 2-3% expansion in the operating profit margin to 10% was on account of lower material costs. This may not be repeated in FY11.
While the QIP will dilute earnings in the immediate future, it will provide the capital to scale up the business. Lower interest costs following reduced debt through QIP proceeds could help maintain the net profit margins. Analysts reckon that the debt-equity ratio will improve from 0.9 to 0.5 by the end of FY10. This will help leverage equity for higher capital requirements in the engineering business.
Bajaj Electricals has targeted a 25% growth rate for FY10, which will take revenue up to around Rs2,200 crore. Hence, revenue momentum will drive earnings growth rather than an expansion in margins.
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