Tag - EBITDA margin

Lighting category is 2x that of fans category, see significant growth potential – Orient Electric

Update on the Indian Equity Market:

Nifty continued its losing streak, ending in the red for the fourth straight day ahead of the US Fed reserve policy statement on Wednesday. Nifty closed at 14721 (-1.3%), dragged by the PSU BANK (-3.8%), MEDIA (-3.0%), and REALTY (-3.0%) indices. None of the sectoral indices ended with gains. Among the stocks, only ITC (+1.5%), and INFY (+0.2%) closed in the green while BPCL (-5.0%), ONGC (-4.7%), TATAMOTORS (-4.5%) led the laggards.

Excerpts of an interview with Mr. Rakesh Khanna, MD, and CEO, Orient Electric with CNBC TV-18 on 16th March 2021:

  • The sales in 3QFY21 were good for the entire industry, due to pent-up demand, and staying at home has increased interest in home appliances.
  • The strong demand is continuing in 4QFY21, it is partly pent-up demand and partly due to change in behavior.
  • The management expects the EBITDA margin in 4QFY21 to be better than 3QFY21. This is due to operational leverage which comes with increased revenues with costs remaining stable, some good opportunities to help improve efficiencies. This efficiency improvement has largely been due to cost-cutting.
  • With raw material costs increasing, there could be some pressure on the margins in the time to come.
  • Recently, the company has diversified into lighting, switchgear, air coolers, and water heaters.
  • Lighting as a category is nearly twice in terms of size compared to the fans category, and the management expects significant growth in that segment.
  • Coolers are gaining traction as people are worried about getting fresh air. Water heaters adoption is going up due to change in consumer behavior.
  • The kitchen appliances are doing very well. Mr. Khanna is of the opinion the new categories the company has diversified into have a lot of potential.
  • To get a better brand recall in these new categories, the Ad spend could increase for the new categories.
  • They are operating at full capacity and the surge in demand has enabled the company to improve efficiencies at existing production facilities.
  • The company has been improving its EBITDA margin on a YoY basis for the last couple of years. As the company continues scaling up, they are confident of achieving operational efficiency to achieve better EBITDA margins.

Asset Multiplier Comments

  • During the lockdown period, consumer appliances and electrical sales were impacted. The pent-up demand and banning of certain items from China have helped the domestic electrical appliances companies. As a result, these companies are diversifying from their legacy categories to other categories.
  • Orient Electric already enjoys strong recall in the minds of consumers, being present in India for over six decades. Such a company will enjoy customer loyalty when it enters into new product categories.

Consensus Estimate: (Source: market screener website)

  • The closing price of Orient Electric was ₹ 313/- as of 17-March-2021. It traded at 61x/ 48x/ 39x the consensus earnings estimate of ₹ 5.1/ 6.5/ 8.0 per share for FY21E/FY22E/FY23E respectively.
  • The consensus target price of ₹ 310 implies a PE multiple of 39x on FY23E EPS of ₹ 8.0/-.

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