Detailed Rationale

CRISIL Ratings' ratings on the bank facilities of Bajaj Electricals Limited (BEL) continue on 'Rating Watch with Developing Implications'. Also, the rating on the short-term debt programme has been reaffirmed at 'CRISIL A1+'.

 

The ratings were placed on watch following the company's announcement on February 8, 2022, to restructure the business through a scheme of arrangement. Under this, a part of the engineering, production and construction (EPC) business (power distribution and transmission; contributing to around 9% of revenue in fiscal 2022) will be demerged into a separate company, Bajel Projects Ltd (BPL). The consumer products and illumination businesses will remain under BEL.

 

The demerger should enhance the credit risk profile of BEL (holding the consumer products segment) as the EPC business fetches a lower operating margin and is working capital intensive. The credit risk profile of the EPC business is likely to be weaker by not more than one rating category. The ratings have been put on watch as the bank limits are for the combined entity (consumer products and EPC businesses) and clarity on bifurcation of limits between continuing and demerging businesses is pending. Further, approvals for the demerger process are awaited. The rating on the short-term debt programme of Rs 100 crore has been reaffirmed as it pertains to the consumer products business that will be retained in BEL post demerger. CRISIL Ratings will continue to monitor the transaction and take appropriate rating action after completion of the same.

 

Operating income grew by around 14% on-year (consumer product segment by 19%, lighting by 9% and EPC contracted by 16%) in the first half of fiscal 2023. Growth in revenue was broad-based as both price hike and volumes contributed to overall growth of the consumer products segment. The operating margin remained moderate, as inventory was sourced at a high cost, but should improve from the second half of fiscal 2023, with softening of commodity prices. The financial risk profile is supported by comfortable debt protection metrics and liquidity.

 

The ratings continue to reflect the healthy business risk profile of BEL, driven by its leading market position in the consumer electronics and durables industry in India, diversified range of products, improving financial risk profile and adequate liquidity. The company will continue to benefit from the financial flexibility derived from being part of the Bajaj group. These strengths are partially offset by modest operating efficiency, driven by subdued return metrics of the EPC segment, and susceptibility to volatility in commodity prices and increasing competition.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of BEL and its subsidiaries, Nirlep Appliances Pvt Ltd and Starlite Lighting Ltd, to the extent of its shareholding in these entities. This is because these entities have common management and significant business and financial linkages.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Established presence in the consumer electronics and illumination segments

BEL has established itself as a leading player in the consumer electronics industry. Apart from being the top player (in terms of sales volume) in the mixer grinder, water heater and iron segments, the company is also among the top 2-3 players in the appliances category, and the top five players in the fans and lights categories. It has a vast network of 596 distributors and 230,000 retail outlets across India. As a result, the consumer products segment registered healthy compound annual growth rate (CAGR) of 11% over the past five years and is expected to witness around 10% growth in fiscal 2023.

 

The company derives strength from strong focus on research and development (R&D), resulting from consistent investment in people and infrastructure, and sound product development capabilities. It has established its position in the illumination segment through completion of legacy electrification projects. It plans to increase its focus on business-to-business (B2B) sales and has been launching new products in the illumination segment.

 

With continued focus on strengthening the product offerings, especially in the appliances and fan categories, and the overall brand, the company is expected to register healthy growth in the consumer electronics and illumination segments over the medium term.

 

Diversified offerings in the consumer products segment

BEL is present across various categories, including household appliances (contributing to around 46% revenue), fans (24%) and lighting (24%). The balance 5% comes from the premium brand, Morphy Richards.

 

Within appliances, the company has products ranging from kitchen appliances such as mixers, juicers and sandwich makers to home appliances such as water heaters, irons and coolers. Under the fan category, the company caters to a variety of price ranges. In the lighting segment, it is present in light-emitting diode (LED) and lamps segments. The company operates in the non-stick cookware category through its subsidiary, Nirlep Appliances Pvt Ltd.

 

BEL offers most of these products under the brand Bajaj. The company will increase its presence in the premium range through its Morphy Richards brand, which is witnessing healthy growth momentum.

 

The consumer products segment is expected to grow around 10% in fiscal 2023.

 

Adequate and improving financial risk profile

Over the past 2-3 years, BEL has focused on deleveraging its balance sheet. The financial risk profile is supported by healthy networth, comfortable gearing and adequate liquidity. The company turned net debt-free in fiscal 2022. Debt protection metrics will remain healthy over the medium term in the absence of external debt.

 

Low gearing and debt provide headroom for modest acquisitions without any material impact on the financial risk profile and key debt metrics. That said, any significant debt-funded capital expenditure (capex) or any sizeable acquisition will be closely monitored.

 

Also, BEL derives financial flexibility from being part of the Bajaj group. The company has received support by way of intercorporate deposits from Jamnalal Sons Pvt Ltd (key holding company of the Bajaj group) in the past and through rights issue of Rs 350 crore subscribed by existing shareholders in March 2020. With improvement in the financial risk profile and low debt, the company may not require additional support from group entities over the medium term.

 

Weaknesses:

Modest operating efficiency, driven by subdued return metrics of the EPC segment

Operating efficiency was modest owing to volatility in operating margin. The operating margin ranged between 3.8% and 6.5% over the past five fiscals, owing to fluctuation in raw material prices, execution of low-margin EPC projects and changes in regulatory policies. In the EPC segment, the operating margin was negative 4.1-7.8% over the past five fiscals. As a result, return on capital employed ratio ranged between 5% and 15%. Furthermore, the working capital cycle was stretched because of large receivables under the EPC segment. Return metrics and working capital cycle should improve post implementation of the demerger process with shifting of the capital-intensive EPC segment to BPL. CRISIL Ratings will continue to monitor the transaction, return metrics and working capital cycle post the demerger. 

 

Susceptibility of performance to volatility in commodity prices and increasing competition

Prices of key inputs such as copper and aluminium are highly volatile. The operating margin was 3.8-6.5% over the past five years. Raw material cost and purchases of traded goods account for around 70% of the cost of sales. Furthermore, in order to counter competition, BEL needs to absorb part of the increase in input prices or pass it on with a lag, and thus, profitability remains constrained. However, to mitigate this risk, the company has been rationalising its cost structure by adopting an asset-light production model and achieving higher economies of scale.

 

Intense competition limits the pricing power of organised players, including BEL. The company faces competition from large, organised players such as Havells, Crompton Greaves Electricals, V-Guard, as well as unorganised players and cheaper imports from China. Nevertheless, the company has maintained its market share in the kitchen appliances segment.

Liquidity: Strong

Liquidity will remain adequate, supported by cash accrual of around Rs 200 crore and cash and equivalent of around Rs 213 crore as on September 30, 2022, against capex of Rs 80-90 crore per annum. The fund-based bank limit of Rs 380 crore was unutilised for the six months through October 2022. The company became net debt-free in fiscal 2022 and will ensure minimal dependence on external debt over the medium term. Short-term debt of Rs 100 crore will be used to fund regular operations. Access to funding from the Bajaj group, if required, also enhances BEL's fund-raising ability.

Rating Sensitivity factors

Upward Factors

• Substantial growth in revenue driven by market leadership across multiple large product segments, better product diversity and increase in market share
• Improvement in the performance of the EPC segment, resulting in stable operating margin of 7-9% and healthy cash accrual (above Rs 250 crore)
• Sustenance of comfortable financial risk profile and debt metrics; for instance, total outside liabilities to tangible networth ratio below 1-1.2 times
• Successful completion of the demerger

 

Downward Factors

• Decline in profitability, along with lower market share in key product segments, and subdued performance of the EPC segment, leading to cash accrual below Rs 150 crore
• Sizeable debt-funded capex or acquisition, leading to gearing above 0.8 time and cash surplus below Rs 200 crore
• Moderation in liquidity backstop for rated commercial paper or short-term debt

About the Company

BEL is an established player in the consumer electronics and durables industry. It is part of the Bajaj group and is under the leadership of Mr Shekhar Bajaj.

 

The company was incorporated in 1938 as Radio Lamp Works and renamed as BEL in 1960. It was formed as a marketing arm for consumer durables and has now diversified into engineering projects to parlay its presence in the lighting segment, to capitalise on the growing infrastructure spend in India.

 

BEL is also present in the premium range of appliances with the brand Morphy Richards.

Key Financial Indicators (Consolidated)

Particulars	Unit	2022	2021
Revenue	Rs crore	4808	4585
Profit After Tax (PAT)	Rs crore	124	189
PAT Margin	%	2.59	4.12
Adjusted interest coverage	Times	3.98	4.51
Adjusted debt/adjusted networth*	Times	0.23	0.55

*debt includes channel financing

Any other information: Not applicable