Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL A+/CRISIL A1+’ ratings to the bank loan facilities of Bajaj Electricals Limited (BEL). These ratings have been placed on 'Rating Watch with Developing Implications' while the rating on the short-term debt programme of the BEL has been reaffirmed at ‘CRISIL A1+’.

 

The rating action takes into consideration the announcement made by the company on February 8, 2022 that its board of directors has approved restructuring of the business through a scheme of arrangement. As per this, part of the EPC business (Power Distribution and Power Transmission; contributing 16% to revenue) business will be demerged into a separate company, Bajel Projects Ltd (BPL), while BEL will continue to hold the Consumer Products and Illumination segments.

 

The demerger is likely to result in improvement in the credit profile of BEL (continuing business of consumer products’ segment) as the EPC business has lower operating profitability and high working capital intensive operations. 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 demerger process are awaited. The rating on short term debt of Rs 100 crore has been reaffirmed as it pertains to consumer products’ business that will continue in BEL post demerger. CRISIL will continue to monitor the progress of the transaction and will take appropriate rating action post completion of the same.

 

Also, the objective of this demerger is to explore growth opportunities separately as both the business segments have their own sets of strengths and dynamics in the form of risks, challenges and business models. Each shareholder of BEL would be issued shares of BPL in 1:1 ratio, in consideration for the demerger; and BPL will also be listed with its shareholding mirroring that of BEL. Appointed Date of the demerger is 1st April 2022 and is subject to receipt of regulatory and other approvals inter-alia approval from shareholders, creditors, NCLT etc. as may be applicable.

 

Of the overall revenue of Rs 4585 crore in fiscal 2021, the Consumer Products and Illumination segment business undertaking contributed Rs 3854 crore and is expected to have a margin profile ranging from 7.5-8% going ahead.

 
As per the proposed scheme, the Illumination segment, which is part of the EPC business segment. will continue to remain with BEL on account of similar business risk scenario of this segment with the consumer products line, and existing synergies.

 

After this restructuring, the existing BEL will have only working capital limits and have no reliance on long term borrowings, any major capex plans will be funded through internal accruals. The strong market position and performance of the consumer products segment coupled with increasing focus on high margin illuminations business will lead to improvement in the credit risk profile.

The management’s focus on deleveraging the balance sheet has borne fruit in recent years, as reflected in decline in gross debt to Rs 201 crore as on December 31, 2021, from Rs 1,911 crore as on March 31, 2019. This along with improved accrual has led to a sharp improvement in adjusted gearing (excluding channel financing) to 0.31 time from over 0.75 times during the same period. The company is expected to become net debt free in fiscal 2022, and dependence on external debt will likely remain minimal over the medium term backed by better receivables realisation in the EPC business, healthy cash flows (Rs 300-350 crore per annum) and BEL availing a non-recourse vendor financing limit.

 

The rating continues to reflect the company’s healthy business risk profile driven by its leading market position in the consumer electronics and durables segment in India, diversified range of products, improving financial risk profile and healthy liquidity. BEL also benefits from being part of the Bajaj group, which has provided financial support to the company in the past. These strengths are partially offset by modest operating efficiency driven by subdued return metrics of the engineering, procurement and construction (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 have significant business and financial linkages and common management.

 

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 industries:

BEL is one of the leading players in the consumer products industry. Over the years, through its strong distribution network, the company has built leadership position in several product categories. It is the top player in mixer grinders, water heaters and irons in terms of sales volume. It is also among the top 2-3 players in other products in the appliance category. It features in the top five players in the fans and lights categories. It has the largest distribution network in India with 543 distributors and 220,000 retail outlets. As a result, the consumer products segment has registered healthy 9% compound annual growth rate (CAGR) over the past five years and is expected to witness 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 bringing in new products in the illumination segment.

 

With continued focus on strengthening the product offering especially in appliances and fan category and brand position, company is expected to register healthy growth for the segment over the medium term.

 

• Diverse range of products within the consumer products segment:

Within this segment, BEL has diversified revenue profile having presence in household appliances contributing around 57% revenue, fans 24%, and lighting 12%, while the remaining 7% comes from the premium brand, Morphy Richards.

 

Within appliances category, 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. For lighting, 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 about 20% in fiscal 2022 and growth over the medium term to remain healthy in double digits.

 

• Adequate and improving financial risk profile:

Over the past 2-3 years, the company has focused on deleveraging its balance sheet. The financial risk profile was supported by comfortable debt protection metrics and gearing of 0.55 time as on March 31, 2021. The company has prepaid part of its debt, resulting in decline in net debt (excluding channel financing) to Rs 157-crore as on December 31, 2021, from Rs 471 crore as on March 31, 2021, resulting in further improvement in the gearing levels. Over the medium term, dependence on external debt will be modest while profitability will gradually improve, benefitting the debt protection metrics.

 

The improving operating profitability to also result in cash accrual of Rs 300-350 crore per annum which would be sufficient for funding capital expenditure (capex) and working capital requirement for the company. With stable cash generation and limited capex intensity, company is expected to build large cash surplus over the medium term. Cash surplus of Rs 250 crore and above is expected to remain with the company in form of cash and bank balance, fixed deposits and mutual fund investments.

 

Comfortable gearing and low debt will allow for modest bolt on acquisitions without materially impacting the financial risk profile and key debt metrics. That said, any significant debt-funded capex or any sizeable acquisition will be closely monitored.

 

BEL’s financial flexibility has benefitted from being part of the financially strong Bajaj group. In the past, BEL has received financial support by way of intercorporate deposits from Jamnalal Sons Pvt Ltd (key holding company of the Bajaj group) and through rights issue of Rs 350 crore in March 2020 from existing shareholders. With the improvement in the financial risk profile and low debt, further support from group entities may not be required over the medium term.

 

Weaknesses:

• 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 on account of 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 was 5-15%. Furthermore, the working capital cycle was stretched because of increased receivables under the EPC segment. The return metrics and working capital cycle is expected to improve post implementation of the demerger process with the shift of the capital-intensive EPC segments to BPL. CRISIL Ratings will keep monitoring the transaction and the 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 was 3.8-6.5% over the past five years, and is susceptible to fluctuations in raw material prices as raw material cost and purchases of traded goods constitute around 70% of the cost of sales. Because of intense competition, part of the increase in input prices needs to be absorbed or passed on with a lag, limiting the operating margin. However, to mitigate this risk, the company has been rationalizing 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, organized players such as Havells, Crompton Greaves Electricals, V-Guard, as well as 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 300-350 crore per annum and cash and equivalent of about Rs 61 crore as on September 30, 2021. The company has access to Rs 380 crore fund-based limit, which remained unutilized for the six months through October 2021. Utilization of the non-fund based limit averaged 40% for the three quarters ended September 30, 2021. The company has reduced overall debt this year, and dependence on external debt will remain minimal over the medium term. The short-term debt of Rs 100 crore is for continuing operations and is likely to remain with the same. 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 increase in revenue driven by market leadership across multiple large product segments, increase in product diversity and expansion of market share
• Improvement in the performance of EPC segment resulting in sustenance of overall profitability above 7- 9% and healthy accruals (above Rs 250 crore)
• Sustenance of comfortable financial risk profile and debt metrics; for instance, TOL/TNW 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 and is under the leadership of Mr Shekhar Bajaj.

 

The company was incorporated in 1938 as Radio Lamp Works; it was renamed as BEL in 1960. It was started as a marketing company 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 also has presence in the premium range of appliances with the brand, Morphy Richards.

 

In the first nine months of fiscal 2022, company has posted revenue of Rs 3448 crore against profit after tax (PAT) of Rs 109 crore, compared with Rs 3319 crore against Rs 128 crore in the corresponding period of the previous fiscal.

Key Financial Indicators - (Consolidated)

Particulars	Unit	2021	2020
Revenue	Rs.Crore	4585	4970
Profit After Tax (PAT)	Rs.Crore	189	-14
PAT Margin	%	4.12	-0.28
Interest coverage	Times	4.51	1.28
Adjusted debt/adjusted networth*	Times	0.55	1.00

*Debt includes channel financing

Any other information: Not applicable