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The muted demand for kitchen and domestic appliances is not good news for Bajaj Electricals Ltd. Appliances form a large share of its portfolio, which is dominated by the consumer products segment, which includes fans, lights, electric cookers and mixers. This business formed nearly 80% of consolidated operating revenue in the June quarter (Q1FY23).

Over the last two financial years, restrictions imposed during the covid pandemic boosted demand for certain categories, including kitchen appliances. However, consumer spending shifted with the easing of restrictions. “Since household penetration has likely improved for kitchen appliances in the past two years, replacement demand will most likely return after 2-3 years," said analysts at ICICI Securities in a report on 19 September.

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Moreover, the high inflation level has weighed on consumers’ spending power, the impact of which is more pronounced in the low to middle income groups. “Our discussions with the company, industry, and channel checks suggest slow demand from tiers 3 and 4 and rural areas in July-August ’22. However, we note premium products and tier 1 and 2 cities continued to report healthy growth," said the ICICI Securities report.

Against this backdrop, Bajaj Electricals’ high exposure to rural markets poses a risk to its volumes. Demand could stage a recovery if rural cash flows improve. Further, the increasing electrification in rural areas augurs well for Bajaj Electricals’ products.

The upcoming festive season may also boost volumes. Hence, H2FY23 is expected to be better in terms of demand. This is true for margins as well, which faced headwinds from higher input costs. The consumer products segment’s Ebit margin in Q1 was 6%, flattish sequentially. Falling commodity prices may offer some respite, but the benefits can be expected to reflect from Q3 onwards.

Further, improvement in revenues in the high margin lighting segment would lift the overall margin profile of the company. Meanwhile, Bajaj Electricals continues to launch products across segments and is also focusing on premiumization. However, it remains to be seen if this translates into significant market share gains given the competitive intensity.

Capturing market share would be a key trigger for the Bajaj Electrical stock, which is almost 28% below its 52-week high seen in September 2021. Further, investors would do well to closely track the improvement in margin performance. The stock trades at 36 times estimated earnings for FY24, according to Bloomberg.

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