Edelweiss Professional Investor Research Insightful. Independent. Decisive.
Orient Electric Ltd
Date: 17th January 2019
Utkarsh Nopany
Research Analyst
Praveen Sahay
Research Analyst
Edelweiss Professional Investor Research
Long Term Recommendation Orient Electric Ltd
Spreading out its wings
1
Utkarsh Nopany Research Analyst [email protected] Praveen Sahay Research Analyst [email protected]
CMP INR: 144
Rating: BUY
Target Price INR: 180
Upside: 25%
Bloomberg: ORIENTEL:IN
52-week
range (INR): 177.00 / 103.25
Share in issue (cr): 21.2
M cap (INR cr): 3,053
Avg. Daily Vol.
BSE/NSE :(‘000): 42/214
Promoter
Holding (%) 38.52
Date: 17th January, 2019
Orient Electric Ltd (OEL), a part of CK Birla group, is the second-largest fan manufacturers in India. Over the last one decade, OEL has transformed from a single product (fans) company into a complete lifestyle home solutions provider in the electrical segment (fans, light, appliances and switchgears). We believe OEL to clock higher-than-industry average operating profit growth (at 22.9% CAGR over FY18-20 vs industry growth of 20.7%) riding potent catalysts like: a) favourable macro environment; b) superior execution of new management under the leadership of Mr. Rakesh Khanna (appointed as CEO in Mar 2015) led by successful launch of innovative products across segments, deepening distribution reach and building strong connect with its distributors; and c) benefits of operating leverage. OEL’s ROCE is also projected to improve from 30.4% in FY18 to 37.6% in FY20 and it is trading at an attractive valuation at 25.4x of FY20E EPS. Hence, we initiate coverage with ‘BUY’ and TP of INR 180 (25% upside).
Potent catalysts in place to spur consumer durables sector We prefer consumer durables (CD) over consumer staples (CS) on strong revenue visibility, superior ROCE and reasonable valuation (trading at 17% discount to staples on FY18 P/E). Our conviction of CD’s improved revenue visibility is mainly based on expectation of: a) demand revival for discretionary products led by good monsoon, sharp hike in MSP prices & implementation of 7th Pay Commission’s recommendations; b) government’s thrust on household electrification, Housing for All & use of energy efficient electrical products; and c) recent GST rate cut & rising premiumisation trend among urban consumers shifting market share from unorganized to organized players.
OEL to outstrip industry on market share gains and operating margin improvement Post induction of Mr. Rakesh Khanna as MD & CEO in Mar 2015, OEL has gained market share across segments. The new CEO has vast experience and proven track record in CD industry. After joining OEL, his key focus areas were: a) building a right team which fits with organization culture; b) launch of innovative products (Aero series fans, 5-star rated LED bulbs, modular coolers, etc) to give a better experience to consumers in a fiercely competitive market; and c) deepening market penetration by strengthening distribution network and building strong connect with its existing distributors. Hence, we expect OEL’s growth and returns to outstrip industry over FY18-20 propelled by rising proportion of revenue from premium fans and operating leverage benefits in non-fan segments.
Premium offerings to spur fan market share; eyeing pole position in new segments OEL is the 2nd largest fan player and largest exporter of fans from India. With successful launch of Aero series in the premium fan category, we expect the company to continue to gain market share in the fan segment over the medium-term. Moreover, in a short span of time, it has become one of the top 3 manufacturers of LED bulbs in the domestic market and aims to double its market share in residential LED lights (growing at >25-30% p.a.) by FY22. OEL is the 5th largest player in air coolers and is eyeing place among the top 3 players on expectation of improved demand for its recently launched products and deepening market penetration from 90 towns to 300 towns by FY21.
Outlook and valuation: Bright prospects; Initiate coverage with ‘BUY’ and TP of INR 180 We initiate coverage on OEL with ‘BUY’ recommendation and TP of INR 180, entailing 25% upside potential. Our TP is based on a 32x of FY20E EPS. We have valued the company at a 20% discount to 4-year industry average multiple as it generates lower-than-industry average operating margin. However, the valuation discount could narrow in case of better-than-estimated improvement in operating margin in the future. Key risks include exit of key management personnel, failure of launches and disruption from technology advancement (ex- shift from incandescent to CFL/ LED).
Year to March FY16 FY17 FY18 FY19E FY20E
Revenues (INR Cr) 1,296 1,364 1,600 1,841 2,111
Rev growth (%) 8.9 5.2 17.3 15.1 14.7
EBITDA (INR Cr) 87 103 139 169 210
PAT (INR Cr) 29 41 64 90 120
EPS (INR) 1.4 1.9 3.0 4.2 5.7
EPS Growth (%) NM 34.0 57.9 40.3 33.6
P/E (x) 100.9 75.3 47.7 34.0 25.4
P/B (x) NM 14.3 11.6 9.7 8.0
RoACE (%) NM 22.5 30.4 33.5 37.6
RoAE (%) NM 19.0 26.9 31.1 34.3
Edelweiss Professional Investor Research
2
Table of Contents
Structure ............................................................................................................................. 3
Business Value Drivers ........................................................................................................ 5
Focus Charts 1 ..................................................................................................................... 6
Focus Charts 2 ..................................................................................................................... 7
Focus Charts 3 ..................................................................................................................... 8
I. Consumer Durables are placed better than Staples in all investment parameters ......... 9
II. OEL favorably placed in Consumer Durable Universe .................................................... 12
III. New management initiatives revitalised OEL ................................................................ 13
IV. OEL gaining market share across product segments .................................................... 18
V. Premiumisation & rising scale of non-fan operations to boost margin ......................... 21
VI. Improving return ratios along with strong balance sheet............................................. 24
Outlook and Valuations ...................................................................................................... 25
Peer comparison - Valuations ............................................................................................ 25
Business Overview ............................................................................................................. 26
Key Management ............................................................................................................... 27
Timeline .............................................................................................................................. 28
Financials ............................................................................................................................ 29
Edelweiss Professional Investor Research
Structure
Structure
Orient Electric Ltd
Orient Electric Ltd
3
OEL is expected to deliver PAT growth of 36.9% CAGR over FY18-FY20 mainly driven by higher sales growth (due to favorable macro factors coupled with market share gains), improvement in operating margin (due to rising sales of premium-fan and operating leverage benefits in non-fan segment) and reduction in interest cost (due to gradual repayment of term loan).
PAT growth will be mainly driven by higher sales growth in all the segments,
improvement in operating margin and lower interest cost
OEL’s ROCE is also projected to improve from 30.1% in FY18 to 37.6% in FY20 on healthy cash accrual, limited capex and
high dividend payout
We recommend a ‘BUY’ with target price of INR 180/share, valuing the stock at 32x on FY20 EPS estimates
FY17 FY18 FY19E FY20E FY17 FY18 FY19E FY20E P/E multiple FY20E EPS CMP/Target
Revenue 1,364 1,600 1,841 2,111 ROE (%) 19.0 26.9 31.1 34.3 32x 5.7 180
EBITDA margin 7.6 8.7 9.2 10.0 ROCE (%) 22.5 30.4 33.5 37.6
Interest 27 24 19 14
PAT 41 64 90 120
EPS growth of 36.9% over FY18-FY20 FY18-20E RoE of 27-34% At 32x of FY20E P/E
Upside of 25%
Edelweiss Professional Investor Research
Structure
Structure
Orient Electric Ltd
Orient Electric Ltd
4
Risk-reward Extremely Favourable
Price Target INR 180 Based on revenue CAGR of 15%, EBITDA margin of 10% and applying a P/E multiple of 32x
Bull Case
{CD industry traded at
40x on 1 year forward
P/E multiple for the
past 4 years}
INR 268 Based on revenue CAGR of 18%, EBITDA margin of 12% and applying a P/E multiple of 36x
Base Case
{OEL is valued at a
discount to its peers
on expectation of
lower-than-industry
average operating
margin of 12-13%}
INR 180 Based on revenue CAGR of 15%, EBITDA margin of 10% and applying a P/E multiple of 32x
Bear Case
{OEL would continue
to trade at a steep
discount to its peers in
case of no
improvement in
operating margin}
INR 115 Based on revenue CAGR of 12%, EBITDA margin of 8% and applying a P/E multiple of 28x
Edelweiss Professional Investor Research
Business Value Drivers
Business Value Drivers
Orient Electric Ltd
Orient Electric Ltd
5
Bu
sin
ess
Val
ue
Dri
vers
Nature of Industry
OEL operates in four consumer durables products—fans, lighting, small appliances and switchgears. While the industry structure of fans is concentrated, the other segments are highly fragmented.
Opportunity Size
The fan segment is projected to grow in high-single digits due to high penetration in India. The LED light segment is growing at ~25% led by replacement of non-LED to LED. The appliances segment is also clocking high growth rate due to rising disposable incomes and increasing electrification. OEL is expected to post better-than-industry growth due to improved demand for its recently launched innovative products and increasing geographical reach.
Capital Allocation
OEL has been prudent in capital allocation as it has diversified from a single product to complete lifestyle home solutions in the electrical segment in a span of one decade. Moreover, it has successfully enhanced the scale of operations of new product segments (i.e. lighting and appliances), which requires high cost in terms of setting up infrastructure, workforce and marketing & promotion expenses.
Predictability
OEL is expected to benefit from: a) favourable macro factors; b) successful launch of new products across segments; c) deepening distribution reach; d) benefit of higher marketing & sales promotion campaign through the Orient Connect programme; and e) benefit of operating leverage due to rising scale of operations of the non-fan segment.
Sustainability OEL is one of the oldest players in the fan segment and has maintained/improved its market share due to strong R&D capabilities and distribution network. In a short period, the company has become one of the top 3 manufacturers of LED bulbs (started manufacturing in FY14) in India.
Disproportionate Future
OEL is expected to clock higher-than-industry average growth in operating profit over FY18-FY20 on expectation of market share gains across segments. Furthermore, the company’s margin is expected to gradually improve to industry average level with increase in scale of operation of new segments—lights, appliances and switchgears.
Business Strategy & Planned Initiatives
The company is planning to grow its market share in each of the segments over the medium term.
Near-Term Visibility
OEL’s EPS is estimated to clock 36.9% CAGR during FY18-20 primarily due to: a) increase in scale of operations; b) benefit of operating leverage; and c) reduction in interest cost due to gradual repayment of term loan.
Long-Term Visibility
Over the long term, OEL is expected to benefit due to improving business risk profile with rising revenue share of non-fan segment (up from 34% in FY18 to 41% in FY20).
Near Term Risk Risks of political uncertainty in key exporting countries of OEL (Middle East, Africa), steep competition in LED light segment, failure of new launches, sharp volatility in commodity & forex, etc
Long Term Risk Exit of key managerial personnel, disruption from technological advancement, etc
Edelweiss Professional Investor Research
Focus Charts
Focus Charts
Orient Electric Ltd
Orient Electric Ltd
6
Part I - Story in a Nutshell: CD are placed better than consumer staples in all investment parameters
CD registers better revenue growth than staples since FY14 CD demand to grow on favourable macro factors
Government targets 100% HHs electrification by Mar 2019 Government targets to build 5 crore houses by Mar 2022
CD ROCE profile better than staples since FY11 CD valuation discount to staple narrows down since FY13
Source: Ministry of Finance, Edelweiss Professional Investor Research
0%
10%
20%
30%
40%
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
Revenue Growth
Durables Staples
0%
5%
10%
15%
20%
25%
30%
35%
40%
FY0
4
FY0
5
FY0
6
FY0
7
FY0
8
FY0
9
FY1
0
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8
FY1
9
Consumer Durable revenue growth (%)
Drought Drought & 6th
pay
Drought
Good monsoon, GST rate
cut & 7th pay commission
2000
4000
6000
8000
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Govt spending on Rural Electrification (INR cr)
Village Electrification Household Electrification
0
10000
20000
30000
40000
FY16 FY17 FY18 FY19
Govt spending on Housing for All (INR cr)
PMAY-Urban PMAY-Rural
25%
35%
45%
55%
65%
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
ROCE Profile
Durables Staples
0.50
2.50
4.50
0
10
20
30
40
50
60
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
P/E multiple
Durables Staples Staples P/E premium over Durables
Edelweiss Professional Investor Research
Focus Charts
Focus Charts
Orient Electric Ltd
Orient Electric Ltd
7
Part II - Story in a Nutshell: OEL is sweetly placed in CD pack
OEL register highest growth in operating profit in CD universe.. ..and to witness better-than-industry growth over FY18-20
OEL register better-than-industry improvement in ROE in FY18.. ..and to witness further improvement over the next two years
OEL is trading below industry avg P/E multiple on FY20.. ..and also trading below industry avg FY20 EV/EBITDA multiple
Source: Bloomberg, Edelweiss Professional Investor Research
-10%
0%
10%
20%
30%
40%
Ori
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Hav
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Baj
aj
TTK
Pre
stig
e
V-G
uar
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Sym
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on
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Cro
mp
ton
Haw
kin
s
EBITDA growth - FY18
0%
6%
12%
18%
24%
30%
Baj
aj
V-G
uar
d
Hav
ells
Ori
ent
Sym
ph
on
y
TTK
Cro
mp
ton
EBITDA growth (FY18-FY20)
EBITDA growth Industry average growth
15.7%10.2% 7.9%
0.8%
-2.7% -6.6%
-27.5%
Baj
aj
TTK
Ori
ent
Hav
ells
V-G
uar
d
Sym
ph
on
y
Cro
mp
ton
Change in ROE - FY18 over FY17
7.46%4.50% 4.10%
-7.10% -7.27% -7.60% -8.67%
Ori
ent
V-G
uar
d
Hav
ells
Baj
aj
Sym
ph
on
y
Cro
mp
ton
TTK
Change in ROE - FY18-FY20
0.0
10.0
20.0
30.0
40.0
50.0
Baj
aj
Ori
ent
Cro
mp
ton
Sym
ph
on
y
V-G
uar
d
TTK
Hav
ells
(x)
P/E - FY20 Industry Average Multiple
0.0
5.0
10.0
15.0
20.0
25.0
30.0
Baj
aj
Ori
ent
Cro
mp
ton
TTK
Sym
ph
on
y
Hav
ells
(x)
EV/EBITDA - FY20 Industry Average Multiple
Edelweiss Professional Investor Research
Focus Charts
Focus Charts
Orient Electric Ltd
Orient Electric Ltd
8
Part III - Story in a Nutshell: OEL Investment Hypothesis
OEL revenue growing at better-than-industry pace.. ..due to market share gains across the product segments
OEL has a better gross margin profile than its peers.. ..but EBITDA margin is significantly lower than its peers
*refer to FY17
OEL EBITDA margin to reach industry average level on expectation of improvement in profitability in lighting/appliances segment
OEL B/S position to remain highly comfortable in the future OEL return ratios to improve over the next two years
Source: Edelweiss Professional Investor Research
-20%
0%
20%
40%
1QFY18 2QFY18 3QFY18 4QFY18 Q1FY19 Q2FY19
Net Sales growth (y-o-y)
Orient Crompton Bajaj (consumer)Havells (ex Lloyd) V-Guard
High growth on weak base
66%
24%
8% 1%
Fan Lighting Appliances Switchgears
37.0%*
29.6% 29.1%
32.8%
Havells Crompton V-Guard Orient
Gross Margin - FY18
13.5%*14.4%
8.1%8.7%
Havells Crompton V-Guard Orient
EBITDA margin - FY18
100% 93% 87% 90% 85% 80% 72% 76% 70% 71% 66% 64% 61%7% 12%
9%12%
13%16%
18% 23% 20%24%
25%28%
3%6%
13%6% 6% 8%
8%
9%
9%
0%
2%
4%
6%
8%
10%
12%
14%
16%
0
300
600
900
1200
1500
1800
2100
2400
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19P FY20P
EBIT
DA
mar
gin
(%
)
Rev
enu
e (I
NR
cro
re)
Fans Lighting Appliances Switchgear EBITDA margin
1.50
1.120.92
0.75
0.00
0.30
0.60
0.90
1.20
1.50
1.80
0
30
60
90
120
150
180
FY17 FY18 FY19P FY20P
Net Debt (INR crore) Net Debt/EBITDA (x)
15.0
20.0
25.0
30.0
35.0
40.0
FY17 FY18 FY19P FY20P
ROE (%) ROCE (%)
Ventured into lighting segment
Ventured into appliances segment
Ventured into LED lighting segment
Rationalised appliances segment by exiting small appliances and ventured into switchgear segment
Exited non-LED segment
Edelweiss Professional Investor Research
Investment Hypothesis
Investment Hypothesis
Orient Electric Ltd
Orient Electric Ltd
9
I. Consumer Durables are placed better than Staples in all the parameters Consumer durables the safest bet on growth, returns and valuation parameters
Our evaluation of past 10 years’ data indicates that CD is much better placed compared to CS on all
investment parameters—growth, returns and valuations. For our study, we compiled data of 8 CD
companies [Havells (excluding Lloyd), Bajaj Electricals, Crompton Consumer, V-Guard, TTK Prestige,
OEL, Symphony and Hawkins Cooker] and 5 domestic CS companies (Godrej Consumer, Dabur,
Marico, Emami and Jyothy Laboratories). Aggregate FY18 revenue of companies compiled for the
CD industry classification is INR 22,634 crore and INR 28,190 crore for the CS industry.
List of sample companies for industry classification
Consumer Durable Net Sales
(INR crore) Consumer Staple
Net Sales (INR crore)
Havells (standalone excl Lloyd) 6725 Godrej Consumer 9843
Bajaj Electricals 4687 Dabur 7748
Crompton Consumer 4080 Marico 6322
V-Guard 2321 Emami 2531
TTK Prestige 1871 Jyothy Laboratories 1746
OEL 1600
Symphony 798
Hawkins Cooker 553
Total 22,634 Total 28190
Source: Edelweiss Professional Investor Research
A. Revenue Growth
The CD industry’s revenue growth has surpassed that of CS since FY14 (refer to below chart).
Furthermore, the difference in revenue growth of both the industries has been widening over the
past 4 years—from 0.2% in FY15 to 2.8% in FY16, 4.2% in FY17 and 4.8% in FY18.
Durables have been registering superior revenue growth than staples since FY14
Source: Edelweiss Professional Investor Research
Going ahead, CD industry is expected to grow at a faster pace than CS on account of: a) demand
revival for consumer discretionary products due to good monsoon coupled with sharp increase in
MSP prices & implementation of the 7th Pay Commission recommendations; b) government push
on household electrification, ‘Housing for All’ scheme & use of energy-efficient electrical products;
and c) shift in market share from unorganised to organised players due to recent reduction in GST
rate & premiumisation trend among urban consumers spurred by rising disposable incomes.
0%
5%
10%
15%
20%
25%
30%
35%
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
Revenue Growth (y-o-y)
Durables Staples
Edelweiss Professional Investor Research
Investment Hypothesis
Investment Hypothesis
Orient Electric Ltd
Orient Electric Ltd
10
Key revenue drivers for consumer durable industry are:
I. Good monsoon, GST rate cut and 7th Pay Commission hike to boost demand
Good monsoon during FY19 and sharp hike in MSP prices are anticipated to boost rural sentiments,
spurring consumers to spend more on consumer discretionary products. Evaluation of data since
FY04 indicates that the CD industry clocks lower revenue growth during droughts as the agriculture
sector accounts for 17% of GDP and employs over 50% of India’s workforce. Moreover, recent
reduction in GST rate (from 28% to 18%) and implementation of the 7th Pay Commission hike (w.e.f
January 2016, but implemented in FY18 & FY19) for government employees is expected to bolster
demand for CD products in the near term.
CD demand to grow on favourable macro factors
Source: Edelweiss Professional Investor Research
II. Increased government spending on electrification and housing scheme
Though India has achieved 100% village electrification status, about 2.5 crore households (11% of
total) were still unelectrified till Oct 2017. A village is declared electrified if at least 10% of the
households have an electrical connection, apart from public institutions. The current government
pushed for 100% household electrification through its Saubhagya scheme, which finances the cost
of last-mile connectivity to willing households. Since launch of Saubhagya scheme in Sep 2017, 2.3
crore households have already received electricity connections and the balance 0.2 crore
households are expected to get by March 31, 2019. Through Saubhagya scheme, the government
targets to provide free electricity connections to households below the poverty line and balance
unelectrified households (which are not covered under ‘below poverty line’) will also be provided
electricity connections on nominal payment of INR 500 in 10 instalments through the electricity bill.
Government spending on electrification program (INR cr) Government spending on ‘Housing for All’ scheme (INR cr)
Source: Ministry of Finance, Edelweiss Professional Investor Research
0%
10%
20%
30%
40%
FY0
4
FY0
5
FY0
6
FY0
7
FY0
8
FY0
9
FY1
0
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8
FY1
9
Consumer Durable revenue growth (%)
Drought Drought & 6th pay
commission
Drought
Good monsoon, GST rate
cut & 7th pay commission
2000
3000
4000
5000
6000
7000
8000
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Village Electrification Household Electrification
0
5000
10000
15000
20000
25000
30000
35000
FY16 FY17 FY18 FY19
PMAY-Urban PMAY-Rural
Edelweiss Professional Investor Research
Investment Hypothesis
Investment Hypothesis
Orient Electric Ltd
Orient Electric Ltd
11
The government launched Pradhan Mantri Awaas Yojana (PMAY)– Housing for All in June 2015 with
an aim to provide 5 crore affordable houses by March 2022 (3 crore in rural and 2 crore in urban
areas). While there has been good progress in terms of the number of houses sanctioned (65 lakh
in urban and 92 lakh in rural areas) after 3 years of launch of the scheme, a limited number of
houses have been constructed till Dec 2018 (13 lakh in urban areas + 63 lakh in rural areas). Given
that a housing project takes around 2-3 years to complete, the pace of delivery is expected to
improve during FY20-21. Higher number of housing projects getting delivered under PMAY scheme
and enhanced spending by the government on SMART cities will also drive demand for electrical
products in the future.
III. Government push on use of energy-efficient CD products
Demand for energy-efficient electrical products is expected to improve due to launch of schemes
such as Unnat Jyoti by Affordable LEDs for All (UJALA) and Street Light National Programme (SLNP).
Furthermore, the government has disincentivised use of inefficient electrical products (such as
phasing out of incandescent bulbs by 2020, end of subsidy on CFL-based solar lighting system in
2015, etc). These schemes have led to expansion of the LED market.
Scheme Target Progress till Dec 2018 % of Target
UJALA LED Bulbs 77 crore 32 crore 42% LED Tube 37 lakh 68 lakh >100% Fans 13 lakh 21 lakh >100% SLNP Street Lights 3.5 crore 79 lakh 23%
Source: UJALA, EESL, Edelweiss Professional Investor Research
IV. Shift from unorganized to organized led by GST implementation and premiumisation
We envisage demand to shift from unorganised to organised players in the CD industry due to GST
implementation (rendering the former uncompetitive) and consumers becoming more brand
conscious & moving to premium products (offered by only large organised players) spurred by rising
disposable incomes.
B. Return and Valuation
Evaluation of historical data indicates that the CD industry enjoys superior RoCE compared to the
CS industry. In contrast, the former has consistently traded at a discount to the valuation multiple
enjoyed by the CS industry. However, the valuation discount has narrowed over the past few years
due to muted revenue growth of CS. Given expectation of moderate growth in staples and improved
outlook for durables, we believe CD can trade at almost par with CS over the medium term.
CD ROCE profile better than staples since FY11 CD valuation discount to staple narrows over past 5 years
Source: Edelweiss Professional Investor Research
20%
30%
40%
50%
60%
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
ROCE Profile
Durables Staples
0.001.002.003.004.005.00
020406080
100
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
P/E multiple (x)
Durables Staples Staples P/E premium over Durables
Edelweiss Professional Investor Research
Investment Hypothesis
Investment Hypothesis
Orient Electric Ltd
Orient Electric Ltd
12
II. OEL is sweetly placed in CD pack OEL favorably placed in CD universe on all investment parameters
In FY18, OEL has posted maximum growth in operating profit and witnessed better-than-industry
improvement in ROE in the CD universe. Despite a strong base, we expect the company to witness
better than industry growth and further improvement in ROE over FY18-FY20. OEL also trades at an
attractive valuation — 25.4x on FY20E EPS.
OEL register highest growth in operating profit in FY18.. ..and to witness better than industry growth over FY18-20
OEL register sharp improvement in ROE in FY18.. ..and to witness further improvement during FY18-FY20
OEL is trading below industry P/E multiple (x) on FY20.. ..also trading below industry EV/EBITDA multiple (x) on
FY20
Source: Bloomberg, Edelweiss Professional Investor Research
-10%
0%
10%
20%
30%
40%
Ori
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Hav
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Baj
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TTK
Pre
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V-G
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Sym
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on
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Cro
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Haw
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EBITDA growth - FY18
0%5%
10%15%20%25%30%35%
Baj
aj
V-G
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Hav
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Ori
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Sym
ph
on
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TTK
Cro
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EBITDA growth (FY18-FY20)
EBITDA growth Industry average growth
15.7%10.2% 7.9%
0.8%
-2.7% -6.6%
-27.5%
Baj
aj
TTK
Ori
ent
Hav
ells
V-G
uar
d
Sym
ph
on
y
Cro
mp
ton
Change in ROE - FY18 over FY17
7.46%4.50% 4.10%
-7.10% -7.27% -7.60% -8.67%
Ori
ent
V-G
uar
d
Hav
ells
Baj
aj
Sym
ph
on
y
Cro
mp
ton
TTK
Change in ROE - FY18-FY20
0.0
10.0
20.0
30.0
40.0
50.0
Baj
aj
Ori
ent
Cro
mp
ton
Sym
ph
on
y
V-G
uar
d
TTK
Hav
ells
P/E - FY20 Industry Average Multiple
0.05.0
10.015.020.025.030.0
Baj
aj
Ori
ent
Cro
mp
ton
TTK
Sym
ph
on
y
Hav
ells
EV/EBITDA - FY20 Industry Average Multiple
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Orient Electric Ltd
Orient Electric Ltd
13
III. New management initiatives revitalised the organisation OEL transformation journey started before the induction of a new management
OEL had predominantly been a single product (electric fans) company and maintained its No.2
position (after Crompton Consumer) in the domestic fan market. The company embarked upon its
transformation journey with the start of lighting segment in 2007 and home appliances in 2011.
With rapid change in technology (CFL to LED), OEL could not grow its lighting segment meaningfully.
It entered LED lighting in 2014 and consciously decided to exit the CFL segment in FY17. In FY15, it
also rationalised its appliances portfolio by exiting small appliances and decided to focus primarily
on high-growth products—air coolers, heaters, mixer grinders, etc. It entered the switchgear
segment in 2015 in collaboration with a technology partner, Slovenia-based ETI Group.
OEL transformation journey from a single product (fan) to complete home lifestyle solution provider (i.e. fan, lighting, home appliances and switchgears) started from FY08
Source: Company, Edelweiss Professional Investor Research
As part of its business consolidation plan, OEL changed its name from Orient Electricals to Orient
Electric in FY15 due to transformation from a single product company to a complete lifestyle home
solutions provider—fans, lights, appliances and switchgears.
New management instrumental in scaling up operations
During FY08-15, the company’s fan revenue jumped 3.2x, which could fund the initial set up cost of
the new segments. While it had already embarked upon its transformation journey, Mr. Rakesh
Khanna (CEO) played a pivotal role in scaling up operations of all the company’s segments. With
rising scale of operations of non-fan revenue segments, OEL’s operating margin has also improved
over the past three years.
New CEO has a vast experience and proven credentials
Mr. Rakesh Khanna joined OEL in Dec 2014 and was appointed CEO in Mar 2015. He has over three
decades of working experience in the CD industry including two decades of experience at senior
positions. He was initially associated with Wipro, then joined Johnson Controls-Hitachi Air-
Conditioning India (JCH) in 1994 and was elevated to Vice President, Sales in Sep 2003 and from
there he moved as Head of Sony division of Jumbo Electronics in Dubai in May 2007. After the
elevation of Mr. Khanna as Vice President, sales in Sep 2003, JCH’s EBITDA margin gradually
improved from -3.8% in FY04 to 7.3% in FY07.
100% 93%87%
90% 85% 80% 72% 76% 68% 69% 66%
7%12%
9%12%
13%16%
18%23%
20%
24%
3%
7%
17%8%
6%8%
8%
0%
2%
4%
6%
8%
10%
12%
14%
16%
0
200
400
600
800
1000
1200
1400
1600
1800
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
(Re
ven
ue
INR
cr)
Fans Lighting Appliances Switchgear EBITDA margin
Ventured into lighting segment
Ventured into appliances segment
Ventured into LED lighting segment
Rationalised appliances segment by exiting small appliances and ventured into switchgear segment
Exited non-LED segment
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Orient Electric Ltd
Orient Electric Ltd
14
JCH EBITDA margin improved after elevation of Mr. Rakesh Khanna to VP, Sales in Sep 2003
OEL also experiences improvement in EBITDA margin post appointment of Mr. Khanna as CEO in Mar 2015
Source: Company, Edelweiss Professional Investor Research
Key common initiatives taken by Mr. Khanna at JCH and OEL are as follows: S. No. Key initiatives JCH OEL
1
Strengthening of distribution network & service centre
“We would be investing in developing the existing dealer service centres, developing on the product range and infrastructure, and therefore we are not looking at the profits being very high," Mr. Khanna said in August 2004. JCH proposes to expand its export basket by foraying into Africa by Feb 2005.
Retail network and service centres has gone up from around 80,000 retailers and ~150 centres in FY15 to ~100,000 retailers and 350 centres in FY18. Going ahead, OEL plans to increase its retail network by 15-20% in the near-future. It has expanded its reach in the international market from exporting to 30 countries in 2015 to 35 countries in 2018 and plans to further expand its presence in US, EU in the near-future to reduce its dependency on domestic real estate activity.
2
Launch of innovative products and refrain from resorting to aggressive pricing in low-end products
JCH launched air condition with twin turbo technology which reduces the noise and distributes the air uniformly. It also offers a new removable front cover which is available in four different colour, Mr. Khanna said in Aug 2004. “The company was looking at innovations and `next generation' products to keep its market share” and not resort to aggressive pricing in the low-end product segment,” Mr. Khanna said in Sep 2004.
OEL launched Aero series fans with winglet technology which reduces the noise and increases the air delivery. This apart, the company has launched innovative products in LED lighting (i.e. multi-coloured LED Battens), modular air coolers and better technology water heaters. For detailed information on product innovation, please refer next page. “We would like to see ourselves as clear innovator in the category and complete leader in the premium segments, which would help increase our share from 24% to 25% in the next two years,” Mr. Khanna said in Feb 2018.
3 Venture into a new segment
"The company is seriously discussing a launch of refrigerators as Hitachi is very strong in the international refrigeration market. However, it is yet to be decided when to enter the refrigeration market in India," Mr. Khanna said in August 2004.
Entered into switchgear segment in Oct 2015 in collaboration with a technology partner, Slovenia-based ETI Group and LED battens in Aug 2017. In Nov 2018, it entered into a strategic partnership with Italy-based De’Longhi Group to exclusively market the latter’s 3 brands in India—De’Longhi (coffee vending machines), Kenwood (kitchen appliances) and Braun (blenders & irons).
During our interaction, Mr. Khanna highlighted his key focus areas:
a) Building a good team which fits with the organization culture: The key managerial team of
OEL has seen a complete overhaul change (of 10 KMPs, 7 are fresh hires) after Mr. Khanna took
the charge as CEO in March 2015. Apart from this, he has also made several senior level
appointments for various functions (i.e. product innovation, R&D, branding & corporate
communication, procurement, logistics & supply chain, marketing, etc). Details of the newly
hired key senior management over the past 3 years are as follows:
-4.7%-3.8%
2.5%
7.0% 7.3%
FY02 FY04 FY05 FY06 FY07
5.3%
6.7%
7.6%
8.7%
FY15 FY16 FY17 FY18
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Orient Electric Ltd
Orient Electric Ltd
15
S. No. Name Joining
Date Designation Education
Years of Experience
Previous Employment
Key Managerial Personnel (KMPS)
1 Mr. Ashok Kumar Singh Jun-2015
SBU Head (Switchgear) B.Tech. (Electricals), M.Tech. (Electricals)
28+ Havells India P. Ltd.- VP -Industrial Product
2 Mr. Pushp Saurabh Baishakhia
Oct-2015
SBU Head (Appliances) B.Sc. (Electronics), MBA (Marketing)
20+ LG Electronics India Pvt. Ltd - Business Head
3 Mr. Rakesh Chawla Apr-2016
Head - Business Development & Exports
B.Com, PGDBM 25+ Nokia India (a subsidiary of Microsoft OY) - Head - Sales Operations (North)
4 Mr. Arvind Kumar Singh May-2016
VP & Head - Manufacturing – Fans B.E. (Mechanical) 29+ Hero Cycles Ltd. - Director – Operations
5 Mr. Ravi Chopra Jul-2016 VP - Human Resources B.Sc., Masters (HRM) 19+ Samsung India Electronics Pvt. Ltd – Director- HR
6 Mr. Atul Jain Jul-2017 SBU Head (Fans) B.Tech (Mechanical), MBA 28+ LeEco Technology – COO & Head of India Operations
7 Mr. Saibal Sengupta Apr-2018
CFO CA 29+ Usha International - CFO; Dabur – VP (Finance)
Other Senior Management Personnel
1 Mr. Arijit Dutta Dec-15 Marketing Head - Branding & Corporate Communication
B. Com, MBA 18+ Greenlam - Marketing Head; Sony - Marketing Head
2 Mr. Alok Kushwaha Apr-16 Project & Institutional Business, Sales
B.E. (Electronics) 22+ GM - LED/Solar Lighting; Goldwyn Ltd - LED lighting Marketing Head
3 Mr. Vikas Arora Jun-16 Marketing Head - Switchgear B.Tech (Mechanical), MBA 18+ MTS Group - Head Retail Operations
4 Mr. Vishal Yadav Jul-16 Head - Procurement, Planning and Control
B. Tech (Mechanical) 20+ Hero Cycle - Head - Procurement, Planning and Control
5 Mr. Benzon John Apr-17 Supply Chain Head M. Com, MBA 25+ Haier - GM - Logistics
6 Mr. Amit Srivastav Nov-17 National Head - Warehousing, Logistics and Distribution
B.Tech (Mechanical), MBA 15+ Eureka Forbes Ltd - National Head - Warehousing, Logistics and Distribution
7 Mr. Siddharth Haridas Dec-17 Zonal Head B. Com, MBA 16+ Lenovo India - Regional Sales Manager
8 Mr. Rajkumar Prakasam Jan-18 Zonal Business Head (TN & Kerela)
B. Sc., MBA 21+ KAIL Ltd - Regional Business Head; Panasonic - Business Head
9 Mr. Srihari Madhava Rao Mar-18 Chief Innovation Officer B.Tech, ECE 24+ Philips Lighting India – VP & Global R&D Head – Professional Lightings
Source: Company, LinkedIn, Edelweiss Professional Investor Research
b) Launch of innovative products in premium segment: OEL, being the second largest player in
the fan segment, plans to cater to all the categories (unlike Havells, which focuses primarily on
the medium-premium segment) to benefit from the government’s electrification & housing
push. However, Mr. Khanna focused majorly on launching innovative products to provide
better experience to its customers, predominantly in the premium segment, versus previous
strategy of launching several products with low differentiating features.
OEL’s Aero fans series in the super premium category, LED batten with multi-coloured models and
modular air coolers have gained good traction in the market in a short span of time. Details of key
product innovations are as follows:
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16
S. No. Date Description of Product Innovations
Fan Segment
1 Mar-2015 Launched premium range of BLDC (Brushless direct current motor) fans 2 Oct-2016 Launched Aeroquiet fan 3 Jan-2016 Launched Aerostorm fan 4 Feb-2018 Launched Aerocool fan 5 May-2018 Launched a 5-blade portable fan 6 Jan-2019 Launched first internet of things (IoT) enabled smart fan, Aeroslim
LED Lighting Segment
1 Jul-2016
OEL becomes India’s first brand to get BEE (Bureau of Energy Efficiency) rating for its LED lamps, which later has become mandatory for all
2 Aug-2017 Launched new range of LED Batten products (5W, 10W, 18W, 20W and 22W) 3 Jan-2018 Expanded LED Batten range of products with launch of three new multi colored models (18W, 20W and 24W) 4 Aug-2018 Orient Electric has become the first Indian lighting brand to have been awarded 5-Star rating for its 9W LED bulb by BEE.
Home Appliances
1 May-2017 Launched new range of air coolers 2 Nov-2017 Launched 18 new models of water heaters 3 Nov-2018 Entered into small kitchen appliances segment through partnership with De’Longhi
Switchgears
1 Oct-2015 Enters low-voltage switchgear products
Source: Company, Edelweiss Professional Investor Research
c) Deepening market penetration by expanding distribution reach: OEL increased it fans’ retail
network from 80,000 to 100,000 over the past 3 years and is planning to increase it further by
15-20% in the near-future to gain market share. It is also eyeing higher market share in the non-
fan segment by expanding its distribution reach to new geographies. Apart from normal retail
trade channels (70-80% of total fan sales), OEL has entered the modern retail format, online
retailing (Amazon, Flipkart, etc), launched its online platform and opened 7 exclusive retail shops
under the franchise model (provide all the company’s products under one roof).
OEL has a strong distribution network, which is in-line with its peers
Source: Company
OEL’s near-term distribution strength across major segments is provided below:
Fans: OEL has a strong presence in North and South region. It is planning to increase its presence
in West and East region. According to the management, OEL has a market share of 16% in
Maharashtra and 19% in South India. It is planning to increase it to 25% in the near-future via
deepening market penetration. The company is also planning to enhance penetration in East
and North-East states due to rising electricity connections and increasing incomes.
LED light: OEL is planning to double its market share from current 10% in the residential LED
lighting market by FY22. In the commercial lighting market, the company is planning to cater
primarily to 3 sectors—IT, banking and healthcare—over the next 3 years. It is also eyeing
presence in the global market starting with Africa and Middle East over the next 1-2 years.
Appliances: OEL is targeting to be among the top 3 players in the air-coolers segment and aims
to increase market share from current 6-7% to 20% by FY21. It will achieve this via launch of
innovative products and expand distribution reach from 90 towns to 300 over the next 2 years.
Switchgears: The Company has expanded its retail network from 7 states in FY18 to 14 by Nov
2018 and is planning to have pan-India presence by FY20.
>30000
~100000 >100000 ~100000
>152000
0
100000
200000
V-Guard Orient Crompton Havells Bajaj
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Orient Electric Ltd
Orient Electric Ltd
17
d) Renewed focus on marketing & sales promotion: OEL launched the Orient Connect programme
in April 2016 to strengthen relationships with last-mile channel partners. The programme aims
to increase retailer participation via promotional schemes. Around 25% of the company’s
existing retail network is currently covered under this programme. OEL also organises dealer &
salesman meet after launching new products across India to provide first-hand experience and
explain the differentiating features of newly launched products. This apart, OEL’s advertisement
& sales promotion expense has jumped 37% y-o-y to INR 75 crore in FY18, accounting for 4.7%
of sales revenue. The company’s target is to spend around similar level on marketing expense
over the next 2 years.
OEL marketing expense up 37% in FY18 and projected to remain at elevated level by FY20
OEL marketing expense forms 4.7% of net sales in FY18, which is in-line with its peers
Source: Edelweiss Professional Investor Research; * refer to FY17
3.4%
3.6%
3.8%
4.0%
4.2%
4.4%
4.6%
40
50
60
70
80
90
100
FY16 FY17 FY18 FY19P FY20P
(IN
R c
r)
Adv & sales promotion expense Adv exp as a % of sales
3.1%*
2.6%
4.4%
4.7%
Havells Crompton V-Guard Orient
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Orient Electric Ltd
Orient Electric Ltd
18
IV. Gaining market share across product segments OEL sales have outpaced peers over past 6 quarters
OEL’s sales growth have outstripped peers over the past 6 quarters. This, we believe, is a result of
a combination of various initiatives: a) launched innovative products to provide differentiating
features to customers in the premium segment; b) expanded distribution reach to deepen market
penetration; c) strengthened relationships with channel partners via Orient Connect programme;
and d) improved marketing campaign through higher spending on advertisement & sales
promotion. As a result, the company has gained market share across product segments in FY18.
OEL revenue growing at better-than-industry pace OEL revenue break-up in FY18
Source: Company, Edelweiss Professional Investor Research
The information related to OEL’s market share gain by product wise in FY18 is provided below:
A. Fans (accounted for 66% of net sales in FY18)
OEL is the second-largest player in the electrical fan segment in India and the largest exporter of
fans. In the category, the company has good presence in North & South and a growing presence in
East and West.
Domestic fan market to clock high-single digit growth led by electrification, premiumisation
India’s fan market is estimated at ~INR 7,500 crore, primarily catered to by organised players
(market share of >80%). With GST implementation and reduction in GST rate from 28% to 18%, the
share of organised players is expected to improve further in the near-future. The domestic fan
market was growing only in high-single digit in the past due to high penetration (~95% in urban and
~70% in rural areas). However, currently it has dipped to mid-single digit due to weak real estate
activities over the past few years. Going ahead, the domestic fan market is expected to resume
high-single digit growth due to rising electrification of rural areas, government’s housing push and
replacement demand in urban areas shifting to premium products.
The domestic fan market can be slotted in three categories—ceiling fans; table, pedestal & wall
mounted fans (TPW); and exhaust & industrial fans (EIF). Ceiling fans is the largest category,
accounting for 75% of the total domestic fan market, followed by TPW fans (at 17%) and EIF (at 8%).
OEL has presence in all the three categories.
-20%
0%
20%
40%
60%
1QFY18 2QFY18 3QFY18 4QFY18 Q1FY19 Q2FY19
Net Sales growth (y-o-y)
Orient Crompton Bajaj (consumer)
Havells (ex Lloyd) V-Guard
High growth on weak base
66%
24%
8% 1%
Fan Lighting Appliances Switchgears
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19
OEL gained market share of 119 bps in fans during FY16-FY18
Our analysis of major fan players (accounting for ~80% of India’s fan market) indicates that OEL’s
market share in the fan category has increased by 119 bps during FY16-18 as its fan segment’s
revenue growth outpaced industry’s (at 9.4% CAGR vs industry’s 5.7% CAGR). This, we believe, was
primarily due to enhanced distribution reach and successful launch of superior products in the
premium segment (Aero series). According to the management, OEL’s market share in the premium
segment has jumped from 19% to 40% with the launch of Aero series and targeted to increase to
over 50% by FY20. The premium segment currently accounts for 10% of OEL’s total fan revenue and
target to increase it to 20% by FY20.
OEL fan mkt share* improved by 119 bps during FY16-FY18 due to successful launch of premium fans
OEL fan market share to improve in the future due to harp growth in premium fan sales revenue
*Change in market share is based on study of few major fan players (which accounts for 80% total fan market in India)
Source: Edelweiss Professional Investor Research
B. Lighting (24% of FY18 net sales)
OEL ventured into lighting in FY08 and in LED in FY14. The company exited the non-LED lighting
business in 2017 in anticipation of LED products completely replacing the former. In a short span,
the company has become one of the top 3 manufacturers of LED bulbs in the domestic market.
Green shoots of revival sign visible in domestic lighting market
According to our analysis, the market share of few major lighting companies fell to 50% in FY17
from 67% in FY13 due to entry of several organised and unorganised players in the fast-growing
LED market (which grew ~11.5x over FY13-18). However, the industry’s concentration ratio
improved to 54% in FY18 due to sharp erosion of LED product prices. As a result, it has become
difficult for marginal and unorganised players to remain afloat. While the recent decline in LED
prices could lead to fall in the lighting segment’s margin in the near term, we believe large organised
players will benefit over the long term due to elimination of marginal /unorganised players.
Lighting Industry FY13 FY14 FY15 FY16 FY17 FY18
Conventional light mkt size (INR cr) 10,469 11,679 12,931 13,119 9,557 6,662
LED mkt size (INR cr) 1,250 1,825 3,395 5,092 10,449 14,277
Total mkt size (INR cr) 11,719 13,504 16,326 18,211 20,006 20,939
Conventional light growth % (y-o-y) 12.7% 11.6% 10.7% 1.5% -27.2% -30.3%
LED light growth % (y-o-y) 47.1% 46.0% 86.0% 50.0% 105.2% 36.6%
Industry Concentration Ratio* 67% 65% 55% 53% 50% 54%
*It is calculated as total revenue of 10 major players as a % of total domestic lighting market
203
119 109
-168
-266 Usha Orient Havells Crompton Bajaj
4%
10%
FY18 FY20
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20
OEL gained 49 bps market share in lighting in FY18
Our analysis of major LED lighting players (~60% of India’s LED market) indicates that OEL’s market
share in the segment has jumped 49 bps in FY18. According to the management, the company has
10% market share in the residential LED light segment (accounts for 40% of LED market) and OEL aims
to double it over the next 2 years. It is also planning to increase presence in commercial lighting and
street light segments in the future.
OEL market share in lighting segment improved by 49 bps in FY18
Source: Edelweiss Professional Investor Research earch
*Change in market share is based on study of few major lighting players (which accounts for ~60% of LED market in India)
Targeting higher market share over medium term
OEL has appointed Mr. Srihari Madhava Rao as Chief Innovation Officer (ex-Global R&D Head -
Professional Lighting System at Philips Lighting India) in Mar 2018. This reflects management’s
seriousness in increasing market share in the LED lighting segment by launching innovative
products. OEL has also ventured into the LED batten segment in Aug 2017 and has become the first
domestic lighting brand to bag the 5-star rating for its 9W LED bulb in Aug 2018.
C. Appliances (8% of net sales in FY18)
OEL ventured into the appliances segment in FY11. In FY15, the company rationalised its portfolio
by exiting small appliances and focusing primarily on high-growth home appliances (air coolers,
heaters, mixer grinders, etc). The company has launched new range of air cooler and water heaters
in 2017, which has got good response from the market.
In Nov 2018, it entered into a strategic partnership with Italy-based De’Longhi Group to exclusively
market the latter’s 3 brands in India—De’Longhi (coffee vending machines), Kenwood (kitchen
appliances) and Braun (blenders & irons) through its distribution network. This would enable the
company to enter into premium range of kitchen appliances products.
D. Switchgear (1% of net sales in FY18)
OEL entered switchgear products in 2015 in collaboration with a technology partner, Slovenia-
based ETI Group. The company’s revenue grew 163% YoY in FY18 on a small base. It has rapidly
expanded its retail network for the switchgear segment in 7 states in FY18 to 14 states in Nov 2018
and is eyeing pan-India presence by FY20.
58 57
49 47
17 15
-6 Havells Crompton Orient Philips Eveready Surya Bajaj
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21
V. Premiumisation & rising scale of non-fan operations to boost margin Revenue to clock 15% CAGR to INR 2,111 crore over FY18-FY20
We estimate OEL’s revenue to post 14.9% CAGR to INR 2,111 crore over the next 2 years on
expectation of improved growth across segments. The CD industry was significantly impacted
during Nov 2016-Dec 2017 due to demonetisation and GST implementation. However, demand has
started reviving from Jan 2018. We believe the company will benefit due to favourable macros and
sustained market share gains across segments.
IIP Consumer Durable sector trending up since Oct 2017 OEL revenue to grow at a 14.9% CAGR during FY18-FY20
Source: Central Statistics Office (CSO) Source: Edelweiss Professional Investor Research
OEL has better gross margin, but weak EBITDA margin compared to peers
OEL has a better gross margin profile compared to peers due to long established brand name in the
fans segment, high proportion of manufacturing revenue and good proportion of revenue from
premium segments. However, the company’s operating margin is well below the industry average
due to lower absorption of fixed cost overheads (employee cost and selling & distribution cost) of
non-fan segment on the back of small scale of operations.
OEL gross margin better than most of its peers in FY18.. ..due to high proportion of manufacturing revenue
Source: Edelweiss Investment Research; *refers to FY17 Source: Edelweiss Professional Investor Research; *refers to FY17
-15
-10
-5
0
5
10
15
20
Jan
-14
May
-14
Sep
-14
Jan
-15
May
-15
Sep
-15
Jan
-16
May
-16
Sep
-16
Jan
-17
May
-17
Sep
-17
Jan
-18
May
-18
Sep
-18
IIP - Consumer Durable Growth Rate (%) (y-o-y)
0.0
4.0
8.0
12.0
16.0
20.0
1000
1300
1600
1900
2200
FY16 FY17 FY18 FY19P FY20P
Net Sales (INR crore) % change (y-o-y)
37.0%*
29.6%29.1%
32.8%
Havells Crompton V-Guard Orient
Gross Margin - FY18
72%*
53%
57%
74%
Havells Crompton V-Guard Orient
Manufacturing sales proportion - FY18
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22
OEL EBITDA margin profile well below its peers in FY18.. ..due to high employee expense for non-fan segment..
Source: Edelweiss Investment Research; *refer to FY17 Source: Edelweiss Professional Investor Research
..high packing & distribution cost.. ..and higher ad & sales promotion expense
Source: Edelweiss Investment Research Source: Edelweiss Professional Investor Research
EBITDA margin to improve to 10% by FY20 on benefit of operating leverage
On an average, OEL was reporting EBITDA margin of ~11% till FY10 primarily due to presence in only
one segment (fans). The company’s operating margin gradually declined to 5.3% in FY15 due to high
initial cost in setting up operations of new product segments (lighting, appliances and switchgears)
in the form of hiring employees, setting up a new distribution team, spending heavily on
advertisement & marketing campaign, etc. However, with rising scale of revenue from the non-fan
segment, OEL’s EBITDA margin gradually improved to 8.7% in FY18 and is estimated at 10% by FY20.
OEL EBITDA margin to improve from 8.7% in FY18 to 10 % in FY20 on rising non-fan sales
Source: Edelweiss Professional Investor Research
ECD margin to improve on premiumisation and rising appliances revenue
OEL’s electrical consumer durables (ECD) reported 9.8% EBITDA margin in FY18, well below peers
(15-17%). We estimate the company’s operating margin to improve due to rising proportion of
premium fan sales (to increase from 4% of fan sales in FY18 to 20% in FY20) and better absorption
of fixed cost overheads of the appliances segment with rising scale of operations. The appliances
segment (trading business) generates better operating margin compared to the fan segment.
13.5%*
14.4%
8.1%8.7%
Havells Crompton V-Guard Orient
8.2%
5.5%
8.5%8.9%
Havells Crompton V-Guard Orient
4.9%
2.4% 2.2%
3.6%
Havells Crompton V-Guard Orient
3.1%
2.6%
4.4%4.7%
Havells Crompton V-Guard Orient
100% 93% 87% 90% 85% 80% 72% 76% 70% 71% 66% 63% 59%
7%12%
9% 12% 13% 16% 18% 23% 20%24%
25%28%
3%6%
13% 6% 6% 8%8%
9%9%
0%
5%
10%
15%
0
300
600
900
1200
1500
1800
2100
2400
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19P FY20P
EBIT
DA
mar
gin
(%
)
Re
ven
ue
(IN
R c
rore
)
Fans Lighting Appliances Switchgear EBITDA margin
Edelweiss Professional Investor Research
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Orient Electric Ltd
Orient Electric Ltd
23
Electrical Consumer Durables (FY18) Revenue (INR cr) EBITDA margin Fan as a % of ECD Revenue
Crompton 2828 17.2% 61%
Havells 1570 15.1% 70%
Orient 1218 9.8% 89%
Source: Company, Edelweiss Professional Investor Research
Lighting segment’s margin to improve, despite decline in LED prices
OEL’s lighting & switchgear (L&S) segment reported EBITDA margin of 5.7% in FY18, well below
peers (10%). We believe the LED lighting industry has now stabilised due to sharp erosion of LED
prices on account of intense competition (making it difficult for small organised and unorganised
players to compete with large organised players). While the lighting industry’s margin could decline
due to intense competition, we believe OEL’s lighting segment’s margin will improve due to benefit
of operating leverage in the near-future.
Lighting (FY18) Revenue (INR cr) EBITDA margin LED as a % lighting
revenue
Philips India 3513 10.5% 73%
Crompton 1277 10.3% 78%
Havells 1169 17.1% ~90%
Surya Roshni 1166 10.0% 58%
Orient Electric 407 5.7% >85%
The company’s business risk profile is also expected to improve due to rising proportion of revenue
of the non-fan segment from 34% in FY18 to 41% in FY20. This will mitigate the risk of any weak
demand for fans in the future.
Edelweiss Professional Investor Research
Investment Hypothesis
Investment Hypothesis
Orient Electric Ltd
Orient Electric Ltd
24
VI. Improving return ratios along with strong balance sheet OEL’s operating cycle higher than industry average on strong Q4 and push-based distribution
OEL’s operating cycle improved from 92 days in FY17 to 73 days in FY18. However, it remained
higher than the industry’s average cycle of 61 days due to continued reliance on push-based
distribution model and a seasonally strong Q4 (accounted for 39% of total revenue in FY18). This is
predominantly due to strong fan demand (accounting for 66% of OEL’s revenue) in Q4 before
commencement of the summer season. With expectation of increasing proportion of non-fan
revenue in the future (which is not seasonal in nature) and start of channel financing from FY19,
OEL’s operating cycle is expected to gradually dip to industry’s average level over the medium term.
OEL operating cycle higher than industry average on seasonally strong Q4 – FY18
Source: Edelweiss Professional Investor Research
Balance sheet to remain strong with sharp improvement in return ratios
OEL’s net debt/EBITDA is estimated to improve to 0.75x in FY20 from 1.12x in FY18 due to healthy
cash flow from operations and gradual repayment of term loan. Given limited capex requirement
in the CD industry, we believe the company’s balance sheet will remain comfortable over the long
term. With improved earnings profile, OEL’s RoE and RoCE are also estimated to improve to 34.3%
and 37.6% in FY20 from 26.9% and 30.1% in FY18, respectively.
OEL B/S position to remain highly comfortable in the future OEL return ratios to improve over the next two years
Source: Edelweiss Professional Investor Research
20%
24%
28%
32%
36%
40%
0
30
60
90
120
150
Crompton Symphony Hawkins Havells V-Guard Orient TTK Bajaj
Operating Cycle (Days) Industry Average (Days) Q4 as % of total revenue
1.50
1.12
0.92
0.75
0.00
0.30
0.60
0.90
1.20
1.50
1.80
0
30
60
90
120
150
180
FY17 FY18 FY19P FY20P
Net Debt (INR crore) Net Debt/EBITDA (x)
15.0
20.0
25.0
30.0
35.0
40.0
FY17 FY18 FY19P FY20P
ROE (%) ROCE (%)
Edelweiss Professional Investor Research
Outlook and Valuation
Outlook and Valuations
Orient Electric Ltd
Orient Electric Ltd
25
We initiate coverage on OEL with ‘BUY’ recommendation and TP of INR 180, entailing 25% upside
based on current market price. Our TP is based on 32x FY20E PAT. We have valued the company at
20% discount to 4-year industry average multiple of around 40x as it generates lower-than-industry
average operating margin. However, the valuation discount will narrow in case of better-than-
estimated improvement in operating margin in the future.
Relative Valuation
Name Market Cap (INR crore)
Sales (INR crore) EBITDA margin (%) P/E (x) EV/EBITDA (x) ROE (%)
FY18 FY19E FY20E FY18 FY19E FY20E FY19E FY20E FY19E FY20E FY18 FY19E FY20E
Havells 43,720 8,139 9,887 11,736 12.9 13.1 13.6 49.9 40.0 32.2 25.8 20.0 21.8 24.1
Crompton 14,074 4,080 4,554 5,147 13.0 13.4 14.0 36.3 29.5 23.7 19.8 49.0 43.0 41.4
V-Guard 9,815 2,312 2,670 3,237 9.4 10.0 11.1 48.9 36.2 36.0 26.7 23.5 24.3 28.0
TTK Prestige 8,738 1,871 2,137 2,464 13.2 13.6 14.1 45.3 37.6 28.6 23.9 28.1 18.0 19.5
Symphony 7,611 798 1,055 1,294 27.5 24.2 24.0 39.8 32.7 31.5 25.6 35.8 29.5 28.5
Bajaj Electric 5,200 4,708 6,560 6,679 6.2 6.8 7.5 20.8 18.5 13.9 12.1 28.9 23.4 21.8
OEL 3,116 1,600 1,841 2,111 8.7 9.2 10.0 34.0 25.4 19.0 15.3 26.9 31.1 34.3
Average 13.0 12.9 13.5 39.4 31.5 26.5 21.4 30.3 27.3 28.2
Key Risks Exit of key management personnel: Exit of senior management (i.e. Mr. Rakesh Khanna and
senior management employees) is a key risk for OEL as it has played an important role in
turning around the company over the past 3 years.
Technology advancement: The lighting industry has seen disruptions in the past (such as shift
from incandescent bulbs to CFL and then to LED) due to development in technology. Thus,
OEL needs to continuously upgrade its technology to maintain market share.
Intense competition: OEL may face intense competition from existing players in the form of
aggressive pricing, increased spending on marketing & distribution, launch of improved
products with attractive features, etc. Furthermore, entry of large international companies in
the home appliances segment can lead to intense competition in the industry in the future.
Slowdown in economy: Rise in disposable incomes is a key driver of consumer discretionary.
Hence, any slowdown in economy could pose downside risk to OEL’s earnings.
Edelweiss Professional Investor Research
Business Overview
Business Overview
Orient Electric Ltd
Orient Electric Ltd
26
Company Description
OEL (erstwhile Calcutta Electrical Manufacturing Company), incorporated in 1939, became a part of the CK Birla Group in 1954
and was subsequently rechristened Orient Electric post demerger of consumer electric business of Orient Paper & Industries w.e.f.
March 1, 2017. OEL operates in two segments – electrical consumer durables (which includes electrical fans and home appliances)
and lighting & switchgears. The company has 5 manufacturing facilities across India (2 in Noida and 1 each in Kolkata, Faridabad
and Guwahati). Its products are sold under the ‘Orient Electric’ Brand. India’s ex-cricket captain Mr. M. S. Dhoni is the brand
ambassador of the company’s advertisement campaign since 2006.
Business Model OEL has an annual fan manufacturing capacity of 98.5 lakh units, lights & luminaires capacity of 255 lakh units and switchgear capacity of 25.5 lakh units situated in Haryana & West Bengal. The company is also engaged in trading of home appliances products (i.e. air coolers, water heaters, mixer grinders, etc).
Strategic Positioning OEL is the second largest fan player in India. In a short span of time, the company has become one of the top 3 manufacturer of LED bulbs in India. It is the fifth largest player in air cooler segment in India. This apart, the company has a small with rising presence in home appliances and switchgear segment.
Competitive Edge
OEL has a strong distribution network in North and South India. The company has maintained its solid position in the fan segment since long due to its strong focus on R&D. The company has an edge over its competitors in the fan & light segment due to high proportion of manufactured sales. The company also has a good brand recall as the former Indian captain Mr. M. S. Dhoni is the brand ambassador of the company since 2006.
Financial Structure OPIL has a strong balance sheet position, with net debt/EBITDA at 1.17x in FY18. The company also has comfortable liquidity position due to projected CFO of INR 95 crore vis-à-vis debt repayment obligation of INR 20 crore in FY20.
Key Competitors OEL’s key competitors are Crompton, Havells, Bajaj Electricals, Usha, Luminous, V-Guard, Philips Lighting, Surya Roshni, Syska LED, Symphony, TTK Prestige, etc.
Industry Revenue Drivers Rise in disposable income, rapid urbanization, real estate activity and government focus on electrification program are the key revenue drivers in this industry.
Shareholder Value Proposition
We are initiating coverage on OEL with a ‘Buy’ rating and TP of INR 180 per share, offering 25% upside potential to investors. Our TP is based on 32x FY20E EPS, which is at a 20% discount to 4-year industry average multiple as it generates lower than industry average operating margin. We believe the valuation discount to industry average can narrow down in case of better-than-projected improvement in operating margin in the near-future.
Edelweiss Professional Investor Research
Key Management
Key Management
Orient Electric Ltd
Orient Electric Ltd
27
Name Designation Profile
Mr. C. K. Birla Chairman, Promoter Mr. Chandra Kant Birla, B.A., is an industrialist with rich experience. He is associated with various group companies (Orient Cement Ltd, HIL Ltd, Orient Paper & Industries Ltd, National Engineering Industries Ltd, etc).
Mr. Rakesh Khanna MD & CEO
Mr. Rakesh Khanna, B.E. (Mechanical) and MBA, has over three decades of working experience in consumer durables. He joined OEL in Dec 2014. He was initially associated with Wipro, then joined Johnson Controls-Hitachi Air-Conditioning India Ltd in 1994 and was elevated to Vice President, Sales in Sep 2003 and from there he moved as Head of Sony division of Jumbo Electronics in Dubai in May 2007.
Edelweiss Professional Investor Research
Timeline
Financial Analysis
Orient Electric Ltd
Orient Electric Ltd
28
Major Milestones
1939 Year of incorporation
1954Acquired by CK Birla
1990Developed & Patented PSPO technology
2008 Entered into lighting business
2011 Forays into home appliances business
2014 New brand identity unveiled
2015 Ventures into Switchgear business
2017 Orient Electric demerged as a separate entity
Edelweiss Professional Investor Research
Financials
Financials
Orient Electric Ltd
Orient Electric Ltd
29
Income statement (Standalone)
Year to March FY16 FY17 FY18 FY19P FY20P
Income from operations 1,296 1,364 1,600 1,841 2,111
Direct costs NA 0 1,062 1,216 1,394
Employee costs NA 131 143 169 181
Other expenses NA 1,129 256 287 325
Total operating expenses 1,209 1,261 1,461 1,672 1,901
EBITDA 87 103 139 169 210
Depreciation and amortisation 20 20 20 20 20
EBIT 68 83 119 149 190
Interest expenses 29 27 24 19 14
Other income 5 5 3 6 6
Profit before tax 44 61 98 136 182
Provision for tax 15 21 34 46 62
Core profit 29 41 64 90 120
Extraordinary items 0 0 0 0 0
Profit after tax 29 41 64 90 120
Minority Interest 0 0 0 0 0
Share from associates 0 0 0 0 0
Adjusted net profit 29 41 64 90 120
Equity shares outstanding (mn) 20 21 21 21 21
EPS (INR) basic 1.4 1.9 3.0 4.2 5.7
Diluted shares (Cr) 20.2 21.2 21.2 21.2 21.2
EPS (INR) fully diluted 1.4 1.9 3.0 4.2 5.7
Dividend per share NM NM 1.0 1.5 2.0
Dividend payout (%) NM NM 33.1 35.4 35.4
Common size metrics- as % of net revenues
Year to March FY16 FY17 FY18 FY19P FY20P
Operating expenses 93.3 92.4 91.3 90.8 90.0
Depreciation 1.5 1.5 1.2 1.1 0.9
Interest expenditure 2.2 1.9 1.5 1.0 0.7
EBITDA margins 6.7 7.6 8.7 9.2 10.0
Net profit margins 2.2 3.0 4.0 4.9 5.7
Growth metrics (%)
Year to March FY16 FY17 FY18 FY19P FY20P
Revenues 8.9 5.2 17.3 15.1 14.7
EBITDA NM 18.2 35.1 21.4 24.4
PBT NA 39.0 59.5 39.1 33.6
Net profit NA 40.4 57.9 40.3 33.6
EPS NA 34.0 57.9 40.3 33.6
Edelweiss Professional Investor Research
Financials
Financials
Orient Electric Ltd
Orient Electric Ltd
30
Balance sheet (Standalone)
As on 31st March FY18 FY19P FY20P
Equity share capital 21 21 21
Preference Share Capital 0 0 0
Reserves & surplus 242 294 363
Shareholders funds 263 315 384
Long Term Borrowing 34 14 0
Short Term Borrowing 130 140 150
Minority interest 0 0 0
Other Liabilties 22 20 14
Sources of funds 449 489 548
Gross block 226 266 311
Depreciation 126 146 166
Net block 100 120 145
Capital work in progress 9 0 0
Total fixed assets 109 120 145
Intangible Assets 6 6 6
Investments 9 9 9
Inventories 209 241 276
Sundry debtors 394 453 520
Cash and equivalents 31 19 7
Loans and advances 0 0 0
Other current assets 33 38 44
Total current assets 667 751 847
Sundry creditors and others 336 387 443
Provisions 31 35 40
Total CL & provisions 367 422 484
Other Assets 25 25 25
Uses of funds 449 489 548
Book value per share (INR) 12 15 18
Cash flow statement
Year to March FY18 FY19P FY20P
Net profit 64 90 120
Add: Depreciation 20 20 20
Add: Deferred tax 10 0 0
Add: Others 0 0 0
Gross cash flow 94 110 140
Less: Changes in W. C. 24 41 45
Operating cash flow 70 69 95
Less: Capex 23 31 45
Free cash flow 46 38 50
Edelweiss Professional Investor Research
Financials
Financials
Orient Electric Ltd
Orient Electric Ltd
31
Ratios
Year to March FY17 FY18 FY19P FY20P
ROAE (%) 19.0 26.9 31.1 34.3
ROACE (%) 22.5 30.4 33.5 37.6
Current ratio 1.9 1.8 1.8 1.8
Debtors (days) 97 90 90 90
Inventory (days) 47 48 48 48
Payable (days) 52 65 65 65
Cash conversion cycle (days) 92 73 73 73
Debt/EBITDA 1.7 1.3 1.0 0.8
Debt/Equity 0.8 0.7 0.6 0.4
Adjusted debt/Equity 0.7 0.6 0.5 0.4
Valuation parameters
Year to March FY17 FY18 FY19P FY20P
Diluted EPS (INR) 1.9 3.0 4.2 5.7
Y-o-Y growth (%) 34.0 57.9 40.3 33.6
CEPS (INR) 3.7 4.9 5.2 6.6
Diluted P/E (x) 75.3 47.7 34.0 25.4
Price/BV(x) 14.3 11.6 9.7 8.0
EV/Sales (x) 2.4 2.0 1.7 1.5
EV/EBITDA (x) 31.1 23.1 19.0 15.3
Diluted shares O/S 21.2 21.2 21.2 21.2
Basic EPS 1.9 3.0 4.2 5.7
Basic PE (x) 75.3 47.7 34.0 25.4
Dividend yield (%) NA 0.7 1.0 1.4
Edelweiss Professional Investor Research
32
Orient Electric Ltd
Orient Electric Ltd
Edelweiss Broking Limited, 1st Floor, Tower 3, Wing B, Kohinoor City Mall, Kohinoor City, Kirol Road, Kurla(W)
Board: (91-22) 4272 2200
Vinay Khattar
Head Research
Rating Expected to
Buy appreciate more than 15% over a 12-month period
Hold appreciate between 5-15% over a 12-month period
Reduce Return below 5% over a 12-month period
60
70
80
90
100
110
120
130
May
-18
Jun
-18
Jul-
18
Au
g-1
8
Sep
-18
Oct
-18
No
v-1
8
Dec
-18
(In
de
xed
)
Orient Electric Sensex
Edelweiss Professional Investor Research
33
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