Detailed Rationale

CRISIL Ratings' rating on the long-term bank facilities of Bajaj Electricals Ltd (BEL) continues on 'Rating Watch with Positive Implications'. The rating on the short-term bank facilities and short term debt has been reaffirmed at 'CRISIL A1+'

 

The rating was placed on watch following the improvement in the consolidated financial risk profile, as reflected in the absence of long-term debt, improvement in working capital cycle and strong liquidity. Working capital cycle improved substantially due to receivables realisation of ~Rs 1,300 crore in the engineering, procurement and construction (EPC) division over the last two fiscals. Business risk profile of the EPC division is also improving gradually, as seen in order book of above Rs 1,200 crore as on December 31, 2022, against Rs 800 crore as on March 31, 2022; and strong counterparties for new orders.

 

The rating remains on watch because of the impending demerger of the EPC division. On February 8, 2022, the company had announced that it will hive off the EPC division into a separate entity, Bajel Projects Ltd. Approvals from regulatory authorities are currently awaited. CRISIL Ratings will continue to monitor the transaction and take appropriate rating action after completion of the same.

 

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 product range; and improving financial risk profile, including strong liquidity. The company will continue to benefit from the financial flexibility derived from being a part of the Shekhar Bajaj group. These strengths are partially offset by a modest operating efficiency that is impacted by subdued return metrics of the EPC segment, and susceptibility to volatility in commodity prices and competition.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of BEL and its subsidiaries, Bajel Projects Ltd and Nirlep Appliances Pvt Ltd, to the extent of its shareholding in these entities. This is because these companies have a 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 appliances and lighting segment: BEL has leadership position 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 (mixers, irons and water heaters) and light categories, and among the top five in the fans segment. It has a vast network of 596 distributors and 230,000 retail outlets across India. As a result, the consumer products segment registered a healthy compound annual growth rate (CAGR) of 11% over the past five fiscals.

 

The company derives strength from its strong focus on research and development (R&D), resulting from consistent investment in people and infrastructure, and sound product development capabilities.

 

With continued focus on strengthening the product offerings, especially in the appliances and fan categories, the company is expected to register stable growth in the consumer appliances and lighting segments over the medium term.

 

• Diversified offerings in the consumer products segment: BEL is present across household appliances (which contributes around 46% to overall revenue), fans (24%) and lighting (24%). The balance 6% comes from the premium brand, Morphy Richards.

 

Within appliances, the company offers kitchen appliances such as mixers, juicers and sandwich makers; and home appliances such as water heaters, irons and coolers. Under fans, it caters to various price ranges. In the lighting segment, it is present in the light-emitting diode (LED) and lamps segments. It sells non-stick cookware through the subsidiary, Nirlep Appliances Pvt Ltd. Majority of these products are sold under the Bajaj brand. The company will increase its presence in the premium range through its Morphy Richards brand, which is witnessing healthy growth.

 

• Strong financial risk profile: Financial risk profile is supported by the absence of long-term debt, healthy networth, comfortable gearing and strong liquidity. Debt protection metrics will remain robust over the medium term in the absence of external debt. Capital expenditure (capex) of Rs 200 crore over the medium term will be funded by internal accrual. Comfortable gearing provides headroom for modest acquisitions without any material impact on financial risk profile and key debt metrics. That said, any significant debt-funded capex or sizeable acquisition will be closely monitored.

 

Working capital cycle improved with significant reduction in receivables in the EPC segment to Rs 453 crore as on December 31, 2022, from Rs 1,833 crore as on March 31, 2020. This resulted in healthy generation of cash flow, which is likely to improve further with completion of legacy projects.

 

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

 

Weaknesses:

• Modest operating efficiency owing to subdued return metrics of the EPC segment: Operating efficiency was weak due to volatility in operating margin, which has fluctuated between 3.8% and 6.5% over the past five fiscals because of changes in raw material prices, execution of low-margin EPC projects and amendments in regulatory policy. Margin in the EPC segment has remained negative and is expected to break even in fiscal 2023. As a result, return on capital employed was 5-15%. Return metrics and working capital cycle are improving gradually with focus on cash flows and profitability of the EPC division. The metrics should also improve after the implementation of the demerger process with shifting of the capital-intensive EPC segment to Bajel Products Ltd. CRISIL Ratings will continue to monitor the transaction, return metrics and working capital cycle after the demerger. 

 

• Susceptibility to volatility in commodity prices and increasing competition: Prices of key inputs such as copper and aluminium are highly volatile. Raw materials 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, which constrains profitability. 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.

 

Exposure to intense competition from large players such as Havells, Crompton Greaves Electricals, and V-Guard; as well as from unorganised players and cheaper imports from China limits pricing power.

Liquidity: Strong

Cash balance was healthy at Rs 380 crore as on December 31, 2022. High cash accrual of Rs 200-300 crore per annum over the medium term after yearly capex of Rs 80-90 crore will continue to support liquidity. Fund-based limit of Rs 380 crore remained unutilised for the six months through October 2022. The company became net term debt-free in fiscal 2022 and is expected to have minimal dependence on external debt over the medium term. Access to funding from the Shekhar Bajaj group, if required, also enhances fund-raising ability.

 

Environment, social and governance (ESG) profile:

The ESG profile of BEL supports its strong credit risk profile.

 

The durables and electrical sector has a moderate impact on environment and the society, led by its raw material sourcing strategies, waste-intensive processes, and direct impact on the health and well-being of its customers.

 

Key ESG highlights:

• BEL is continuously taking initiatives to reduce carbon footprint: there was 9.3 tonne of annual reduction in CO2 emission and 3.02% reduction in Scope 2 emissions in fiscal 2022
• BEL has recycled 99% of its waste material, and two of its factory sites are zero landfill certified
• The company is committed to ensuring the safety and security of its employees. There were no complaints of sexual harassment in fiscal 2022, and the lost time injury frequency rate (LTIFR) was zero for the consumer durables segment
• The governance structure is characterised by effectiveness in board functioning and enhancing shareholder wealth, presence of investor grievance redressal mechanism and extensive disclosures.

 

ESG is gaining importance among investors and lenders. The commitment of the company to ESG will play a key role in enhancing stakeholder confidence, given shareholding by foreign portfolio investors and access to both domestic and foreign capital markets.

Rating Sensitivity factors

Upward Factors:

• Sustenance of comfortable financial risk profile, including debt metrics; for instance, total outside liabilities to tangible networth (TOLTNW) ratio below 1-1.2 times
• Healthy 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 improved working capital cycle
• 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
• Sizeable debt-funded capex or acquisition, leading to total outside liabilities to tangible networth ratio remaining above 1.5-1.8 times on a sustained basis
• Weakening of liquidity affecting rated commercial paper or short-term debt rating

About the Company

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

 

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

 

BEL also sells premium range of appliances under the Morphy Richards brand.

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

*The company achieved operating income of Rs 3,939 crore and operating margin of ~6.9% in the nine months of fiscal 2023

Any other information: Not applicable