Orient Electric rating – Buy: Earnings don’t reflect value of business

By: |
March 16, 2021 3:15 AM

Margins likely to converge with its peers; coverage initiated with ‘Buy’ and TP of Rs 350

Since its demerger, OEL’s 13.5% revenue CAGR over FY18-20 has outpaced Havells (+7.6% CAGR) and Crompton (+5.9%).

Orient Electric (OEL), since its demerger from Orient Paper & Industries in FY17, is fast emerging as a serious competitor in the Electrical Consumer Durables (ECD) space. It is the third largest player in the fans segment and has been in operation for over 60 years. Recently, it diversified into related product categories like Lighting, Switchgears, Air Coolers, Water Heaters, etc. OEL’s 13.5% revenue CAGR over FY18-20 has outpaced Havells India (+7.6% CAGR) and Crompton Electricals (+5.9%).

OEL enjoys a similar gross margin as its peers, but has one of the lowest Ebitda margin. This is on higher employee cost and advertising spends, suggesting that OEL is perhaps in the investment phase. There is a strong case for margin convergence, with leading players like Havells and Crompton in a steady state. Despite higher investments in people and branding-related spends, and hence potentially lower margin at present, OEL generates a RoE of over 22%, which is superior to many peers. We forecast revenue/ Ebitda/PAT growth of 20%/18% /21% over FY21-23e. We initiate coverage on the stock with Buy rating, assigning a TP of Rs 350 per share.

New management, new energy: The biggest change in OEL’s ECD business has been appointment of new management. Rakesh Khanna was appointed MD & CEO from 23 Jan’18 for four-years and has been instrumental in building an altogether new team. Since its demerger, OEL’s 13.5% revenue CAGR over FY18-20 has outpaced Havells (+7.6% CAGR) and Crompton (+5.9%).

Established brand in the fans segment; new product offerings encouraging: The ECD segment, comprising Fans and other appliances, has grown by ~11% CAGR over FY11-20 and forms ~70% of the revenue, while the Lighting and Switchgear segment has grown at ~29% CAGR and constitutes the remainder of revenue. We expect revenue to grow by ~20% CAGR over FY21-23e, helped by a lower base. Over the longer term, we expect the product portfolio to witness 12% revenue CAGR structurally.

Initiate with a Buy rating
OEL’s near-term earnings don’t capture the true value of the franchise as the company is currently in the investment phase (brand building) and hence its margin is below peers. Earnings are also depressed on higher depreciation v/s peers due to greater in-house manufacturing content.

We value OEL at a target multiple of 45x on Mar’23e EPS to arrive at our TP of Rs 350/share. Note that our target multiple is at a discount of ~10% to Havells, but at a premium to Crompton (target multiple of 40x). At CMP, the stock trades at 25% discount to Havells on a FY23e P/E basis. However, the discount increases to 37% on an EV/Ebitda basis. While it trades at ~10% premium to Crompton on a P/E basis, our EV/Ebitda analysis suggests a discount of 17%

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