Orient Electric Ltd - Long Term Recommendation

17th January 2019 By Edelweiss

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).

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Key Highlights
  • New management thrust on premiumisation and operative leverage benefit in non-fans operations to boost operating margin in the near-future
  • The company is trading at an attractive valuation of 25.4x on FY20 EPS vs industry average 1-year forward P/E multiple of 40x (based on the past four year data
  • Consumer Durable (CD) companies are placed better than consumer staples (CS) in all investment parameters – growth, return and valuation
  • OEL is favorably placed in our CD universe due to superior execution of new management initiatives
Pros
  • The Company favorably placed in our consumer durables universe due to new management initiatives
  • It has gained market share across segments
Cons
  • The Company favorably placed in our consumer durables universe due to new management initiatives
  • It has gained market share across segments

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