Detailed Rationale

CRISIL Ratings continues its ratings on the bank loan facilities of Bajaj Electricals Limited (BEL) on ‘Rating Watch with Developing Implications’ and reaffirmed the ‘CRISIL A1+’ rating on the short-term debt programme.

 

The ratings were placed on watch after the company announced on February 8, 2022, that its board of directors has approved restructuring of the business through a scheme of arrangement. Under this, a part of the engineering, production and construction (EPC) business (power distribution and transmission; contributing ~9% to revenue in fiscal 2022) will be demerged into a separate company, Bajel Projects Ltd (BPL). The consumer products and illumination segments will remain under BEL.

 

The demerger should enhance the credit profile of BEL (holding the consumer products segment) as the EPC business fetches a lower operating margin and is highly working capital intensive. The credit profile of the demerging business (EPC) is likely to be weaker by not more than a rating category. Hence, the bank loan ratings have been put on Watch with developing implications as the bank limits are for the combined entity (ongoing consumer products business and EPC business) and the clarity on bifurcation of limits between continuing and demerging business 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 continue in BEL post demerger. CRISIL Ratings will continue to monitor the progress of the transaction and take appropriate rating action post completion of the same.

 

In fiscal 2022, revenue grew by 5% year-on-year, supported by recovery in demand and a low base. Earnings before interest, depreciation, tax and amortisation (EBIDTA) margin moderated to 5.20% in fiscal 2022, from 6.48% in the previous year, due to higher raw material cost; however, a hike in prices restricted the steep decline in margin. The consumer products and illumination segment contributed around Rs 4,400 crore (91%) to the overall revenue in fiscal 2022.

 

Financial risk profile has improved in fiscal 2022 as company became net debt-free as was estimated. Debt protection metrics were healthy and should remain strong over the medium term.

 

The rating continues to reflect the healthy business risk profile of BEL, driven by its leading market position in the consumer electronics and durables segment in India, the diversified range of products, improving financial risk profile and healthy liquidity. Being a part of the Bajaj group has also supported financial flexibility in the past. These strengths are partially offset by the modest operating efficiency, driven by subdued return metrics of the EPC segment and susceptibility of performance 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. These entities, which are under a common management, have 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 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.

Liquidity: Strong

Liquidity will remain adequate, supported by expected cash accrual of Rs 250-300 crore per annum and cash and equivalent of around Rs 140 crore as on March 31, 2022. The fund-based bank limit of Rs 380 crore was unutilised for the six months through March 2022. The company has become 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. Cash accrual along with cash and equivalent will sufficiently cover capex of Rs 80-90 crore per annum. Access to funding from 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 expansion of market share
• Improvement in performance of the EPC segment, resulting in steady operating margin of 7- 9% and healthy 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 outstanding commercial paper/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, 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 subsequently diversified into engineering projects, to parlay its presence in the lighting segment, for capitalising on the growing infrastructure spending 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	4813	4585
Profit After Tax (PAT)	Rs.Crore	124	189
PAT Margin	%	2.58	4.12
Adjusted Interest coverage	Times	3.89	4.51
Adjusted debt/adjusted networth*	Times	0.23	0.54

*debt includes channel financing

#as per abridged financials

Any other information: Not applicable