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 products 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 appliance category and the top five players in the fans and lights categories. It has a vast network of 543 distributors and 220,000 retail outlets across India. As a result, the consumer products segment has registered healthy 11% compound annual growth rate (CAGR) over the past five years and is expected to witness 10-15% growth in this year.
Additionally, BEL derives strength from strong focus on research and development (R&D), resulting from consistent investment in people and infrastructure, and sound product development capabilities. The company has established its position in the illumination segment through completion of legacy electrification projects. It also 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 for the consumer electronics and illumination segment over the medium term.
Diversified offerings in the consumer products segment
BEL is present across various categories including household appliances (contributing around 54% revenue), fans (28%) and lighting (12%). The balance 6% 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 diodes (LEDs) and lamps. The company also has presence in non-stick cookware through its subsidiary, Nirlep Appliances Pvt Ltd.
BEL offers most of these products under its brand, Bajaj. The company will increase its presence in the premium range through its Morphy Richards brand, which is witnessing healthy growth momentum.
Overall, the segment is expected to register growth of 10-15% in fiscal 2023 and will continue to register double-digit growth over the medium term.
Adequate and improving financial risk profile
Over the past 2-3 years, the company has focused on deleveraging its balance sheet. Financial risk profile is supported by a healthy networth, comfortable gearing and adequate liquidity. Company has become net debt free in fiscal 2022. Debt protection metrics will remain healthy in the absence of any external debt.
Low gearing and debt will provide room for modest acquisitions without materially impacting 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.
BEL also derives financial flexibility from being part of the strong Bajaj group. The company has received support via 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 the existing shareholders in March 2020. With improvement in financial risk profile and low debt, further support from group entities may not be required over the medium term.
Weakness:
Modest operating efficiency driven by subdued return metrics of the EPC segment; albeit expected to improve post restructuring
Operating efficiency was modest owing to volatility in operating margin. The operating margin ranged between 3.8% and 6.5% over the past five years owing to volatility 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)% to (7.8)% over the past five years. As a result, return on capital employed ratio also ranged from 5% to 15%. Furthermore, the working capital cycle was stretched because of increased receivables under the EPC segment. Return metrics and working capital cycle should improve post implementation of the demerger process with the shift of the capital-intensive EPC segments to BPL. CRISIL Ratings will monitor the transaction, and 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. Operating margin has been in the range of 3.8-6.5% over the past five years. Raw material cost and purchases of traded goods constitute around 70% of cost of sales. Further, 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, and also from unorganised players and cheaper imports from China. Nevertheless, the company has maintained its market share in the kitchen appliances segment.