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Edelweiss Professional Investor Research
Insightful. Independent. Decisive.
Orient Electric Ltd
Utkarsh Nopany Praveen Sahay
Research Analyst Research Analyst
utkarsh.nopany@edelweissfin.com praveen.sahay@edelweissfin.com
Date: 17th January 2019
Long Term Recommendation
Orient Electric Ltd
Spreading out its wings
Orient Electric Ltd (OEL), a part of CK Birla group, is the second-largest fan manufacturers in India. Utkarsh Nopany
Over the last one decade, OEL has transformed from a single product (fans) company into a Research Analyst
complete lifestyle home solutions provider in the electrical segment (fans, light, appliances and utkarsh.nopany@edelweissfin.com
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 Praveen Sahay
macro environment; b) superior execution of new management under the leadership of Mr. Research Analyst
praveen.sahay@edelweissfin.com
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; CMP INR: 144
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 Rating: BUY
coverage with ‘BUY’ and TP of INR 180 (25% upside). Target Price INR: 180
Potent catalysts in place to spur consumer durables sector Upside: 25%
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 Bloomberg: ORIENTEL:IN
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 52-week
OEL, his key focus areas were: a) building a right team which fits with organization culture; b) launch 177.00 / 103.25
range (INR):
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 Share in issue (cr): 21.2
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 M cap (INR cr): 3,053
of revenue from premium fans and operating leverage benefits in non-fan segments.
Avg. Daily Vol.
42/214
Premium offerings to spur fan market share; eyeing pole position in new segments BSE/NSE :(‘000):
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 Promoter
38.52
in the fan segment over the medium-term. Moreover, in a short span of time, it has become one of Holding (%)
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
Date: 17th January, 2019
1
Edelweiss Professional Investor ResearchTable 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
2
Edelweiss Professional Investor ResearchOrient Electric Ltd
Structure
Orient Electric Ltd
Structure
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 OEL’s ROCE is also projected to improve We recommend a ‘BUY’ with target
sales growth in all the segments, from 30.1% in FY18 to 37.6% in FY20 on price of INR 180/share, valuing the
improvement in operating margin and healthy cash accrual, limited capex and stock at 32x on FY20 EPS estimates
lower interest cost high dividend payout
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%
3
Edelweiss Professional Investor ResearchOrient Electric Ltd
Structure
Orient Electric
Risk-reward Ltd Favourable
Extremely Structure
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 INR 268 Based on revenue CAGR of 18%, EBITDA margin of 12% and applying a P/E multiple of 36x
P/E multiple for the
past 4 years}
Base Case
{OEL is valued at a
discount to its peers
on expectation of INR 180 Based on revenue CAGR of 15%, EBITDA margin of 10% and applying a P/E multiple of 32x
lower-than-industry
average operating
margin of 12-13%}
Bear Case
{OEL would continue
to trade at a steep
discount to its peers in INR 115 Based on revenue CAGR of 12%, EBITDA margin of 8% and applying a P/E multiple of 28x
case of no
improvement in
operating margin}
4
Edelweiss Professional Investor ResearchOrient Electric Ltd
Business Value Drivers
Orient Electric Ltd
Business Value Drivers
Nature of OEL operates in four consumer durables products—fans, lighting, small appliances and switchgears.
Industry While the industry structure of fans is concentrated, the other segments are highly fragmented.
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
Opportunity Size 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.
OEL has been prudent in capital allocation as it has diversified from a single product to complete lifestyle
Capital home solutions in the electrical segment in a span of one decade. Moreover, it has successfully enhanced
Allocation 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.
OEL is expected to benefit from: a) favourable macro factors; b) successful launch of new products across
Business Value Drivers
segments; c) deepening distribution reach; d) benefit of higher marketing & sales promotion campaign
Predictability
through the Orient Connect programme; and e) benefit of operating leverage due to rising scale of
operations of the non-fan segment.
OEL is one of the oldest players in the fan segment and has maintained/improved its market share due
Sustainability 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.
OEL is expected to clock higher-than-industry average growth in operating profit over FY18-FY20 on
Disproportionate expectation of market share gains across segments. Furthermore, the company’s margin is expected to
Future gradually improve to industry average level with increase in scale of operation of new segments—lights,
appliances and switchgears.
Business
Strategy &
The company is planning to grow its market share in each of the segments over the medium term.
Planned
Initiatives
OEL’s EPS is estimated to clock 36.9% CAGR during FY18-20 primarily due to: a) increase in scale of
Near-Term
operations; b) benefit of operating leverage; and c) reduction in interest cost due to gradual repayment
Visibility
of term loan.
Long-Term Over the long term, OEL is expected to benefit due to improving business risk profile with rising revenue
Visibility share of non-fan segment (up from 34% in FY18 to 41% in FY20).
Risks of political uncertainty in key exporting countries of OEL (Middle East, Africa), steep competition in
Near Term Risk
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
5
Edelweiss Professional Investor ResearchOrient Electric Ltd
Focus Charts
Orient Electric Ltd
Focus Charts
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
Revenue Growth 40% Good monsoon, GST rate
35% cut & 7th pay commission
40%
30%
Drought
30% 25%
20%
20% 15%
10%
10% 5% Drought & 6th
Drought pay
0%
0%
FY18
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY19
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
Durables Staples Consumer Durable revenue growth (%)
Government targets 100% HHs electrification by Mar 2019 Government targets to build 5 crore houses by Mar 2022
Govt spending on Rural Electrification (INR cr) Govt spending on Housing for All (INR cr)
8000 40000
30000
6000
20000
4000
10000
2000 0
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY16 FY17 FY18 FY19
Village Electrification Household Electrification PMAY-Urban PMAY-Rural
CD ROCE profile better than staples since FY11 CD valuation discount to staple narrows down since FY13
ROCE Profile P/E multiple
65% 60 4.50
50
55% 40
30 2.50
45%
20
10
35%
0 0.50
25% FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
Durables Staples Durables Staples Staples P/E premium over Durables
Source: Ministry of Finance, Edelweiss Professional Investor Research
6
Edelweiss Professional Investor ResearchOrient Electric Ltd
Focus Charts
Orient Electric Ltd
Focus Charts
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
40% EBITDA growth - FY18 EBITDA growth (FY18-FY20)
30%
30% 24%
18%
20% 12%
6%
10%
0%
V-Guard
Orient
Crompton
Bajaj
TTK
Symphony
Havells
0%
V-Guard
Orient
TTK Prestige
Hawkins
Bajaj
Crompton
Havells
Symphony
-10%
EBITDA growth Industry average growth
OEL register better-than-industry improvement in ROE in FY18.. ..and to witness further improvement over the next two years
Change in ROE - FY18 over FY17 Change in ROE - FY18-FY20
15.7% 7.46%
10.2% 7.9% 4.50% 4.10%
0.8%
-2.7% -6.6%
-27.5% -7.10% -7.27% -7.60% -8.67%
V-Guard
Orient
Bajaj
TTK
Crompton
Havells
Symphony
V-Guard
Orient
Bajaj
TTK
Symphony
Crompton
Havells
OEL is trading below industry avg P/E multiple on FY20.. ..and also trading below industry avg FY20 EV/EBITDA multiple
50.0 30.0
40.0 25.0
30.0 20.0
(x)
(x)
15.0
20.0
10.0
10.0 5.0
0.0 0.0
V-Guard
Orient
Bajaj
Crompton
TTK
Symphony
Havells
Orient
Bajaj
Crompton
TTK
Symphony
Havells
P/E - FY20 Industry Average Multiple EV/EBITDA - FY20 Industry Average Multiple
Source: Bloomberg, Edelweiss Professional Investor Research
7
Edelweiss Professional Investor ResearchOrient Electric Ltd
Focus Charts
Orient Electric Ltd Part III - Story in a Nutshell: OEL Investment Hypothesis
Focus Charts
OEL revenue growing at better-than-industry pace.. ..due to market share gains across the product segments
8% 1%
Net Sales growth (y-o-y) High growth on
weak base
40%
20% 24%
0%
-20% 66%
1QFY18 2QFY18 3QFY18 4QFY18 Q1FY19 Q2FY19
Orient Crompton Bajaj (consumer)
Havells (ex Lloyd) V-Guard Fan Lighting Appliances Switchgears
OEL has a better gross margin profile than its peers.. ..but EBITDA margin is significantly lower than its peers
Gross Margin - FY18 EBITDA margin - FY18
37.0%* 14.4%
13.5%*
32.8%
8.7%
29.6% 29.1% 8.1%
Havells Crompton V-Guard Orient Havells Crompton V-Guard Orient
*refer to FY17
OEL EBITDA margin to reach industry average level on expectation of improvement in profitability in lighting/appliances segment
2400 Rationalised appliances 16%
Exited
Ventured into Ventured into segment by exiting small non-LED
2100 Ventured appliances LED lighting appliances and ventured 14%
segment
into lighting segment segment into switchgear segment 9%
Revenue (INR crore)
1800 12%
EBITDA margin (%)
segment 9%
1500 8% 28% 10%
25%
1200 6% 8% 24% 8%
6% 20%
13% 18% 23%
900 6% 16% 6%
3% 13%
600 12% 61% 4%
9% 66% 64%
7% 12% 76% 70% 71%
80% 72%
300 90% 85% 2%
100% 93% 87%
0 0%
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19P FY20P
Fans Lighting Appliances Switchgear EBITDA margin
OEL B/S position to remain highly comfortable in the future OEL return ratios to improve over the next two years
180 1.80 40.0
150 1.50 1.50 35.0
120 1.12 1.20 30.0
90 0.92 0.90
0.75 25.0
60 0.60
20.0
30 0.30
0 0.00 15.0
FY17 FY18 FY19P FY20P FY17 FY18 FY19P FY20P
Net Debt (INR crore) Net Debt/EBITDA (x) ROE (%) ROCE (%)
Source: Edelweiss Professional Investor Research
8
Edelweiss Professional Investor ResearchOrient Electric Ltd
Investment Hypothesis
Orient Electric Ltd I. Consumer Durables are placed better than Staples in all the parameters
Investment Hypothesis
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
Net Sales Net Sales
Consumer Durable Consumer Staple
(INR crore) (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
Revenue Growth (y-o-y)
35%
30%
25%
20%
15%
10%
5%
0%
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
Durables Staples
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.
9
Edelweiss Professional Investor ResearchOrient Electric Ltd
Investment Hypothesis
Orient Electric Ltd
Investment Hypothesis
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
40% Good monsoon, GST rate
cut & 7th pay commission
30%
Drought
20%
10%
Drought & 6th pay
Drought commission
0%
FY09
FY16
FY04
FY05
FY06
FY07
FY08
FY10
FY11
FY12
FY13
FY14
FY15
FY17
FY18
FY19
Consumer Durable revenue growth (%)
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)
8000 35000
7000 30000
25000
6000
20000
5000
15000
4000
10000
3000 5000
2000 0
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY16 FY17 FY18 FY19
Village Electrification Household Electrification PMAY-Urban PMAY-Rural
Source: Ministry of Finance, Edelweiss Professional Investor Research
10
Edelweiss Professional Investor ResearchOrient Electric Ltd
Investment Hypothesis
Orient Electric Ltd
Investment Hypothesis
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
ROCE Profile P/E multiple (x)
60% 100 5.00
80 4.00
50%
60 3.00
40% 40 2.00
20 1.00
30% 0 0.00
20% FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
Durables Staples Staples P/E premium over Durables
Durables Staples
Source: Edelweiss Professional Investor Research
11
Edelweiss Professional Investor ResearchOrient Electric Ltd
Investment Hypothesis
Orient Electric Ltd II. OEL is sweetly placed in CD pack
Investment Hypothesis
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
EBITDA growth - FY18 EBITDA growth (FY18-FY20)
35%
40% 30%
25%
30% 20%
20% 15%
10%
10% 5%
0%
0%
V-Guard
Orient
Crompton
Bajaj
TTK
Symphony
Havells
V-Guard
Hawkins
Orient
Bajaj
TTK Prestige
Crompton
Havells
Symphony
-10%
EBITDA growth Industry average growth
OEL register sharp improvement in ROE in FY18.. ..and to witness further improvement during FY18-FY20
Change in ROE - FY18 over FY17 Change in ROE - FY18-FY20
15.7% 7.46%
10.2% 7.9% 4.50% 4.10%
0.8%
-2.7% -6.6%
-7.10% -7.27% -7.60%
-27.5% -8.67%
V-Guard
Orient
Bajaj
Crompton
TTK
Symphony
Havells
V-Guard
Orient
Bajaj
TTK
Symphony
Crompton
Havells
..also trading below industry EV/EBITDA multiple (x) on
OEL is trading below industry P/E multiple (x) on FY20..
FY20
50.0 30.0
40.0 25.0
30.0 20.0
15.0
20.0
10.0
10.0 5.0
0.0 0.0
Bajaj
Orient
Crompton
TTK
Havells
Symphony
V-Guard
Bajaj
Crompton
Orient
TTK
Symphony
Havells
P/E - FY20 Industry Average Multiple EV/EBITDA - FY20 Industry Average Multiple
Source: Bloomberg, Edelweiss Professional Investor Research
12
Edelweiss Professional Investor ResearchOrient Electric Ltd
Investment Hypothesis
Orient Electric Ltd
Investment Hypothesis
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
Exited non-LED
Rationalised appliances segment
1800 Ventured into segment by exiting small 16%
LED lighting appliances and ventured
1600 Ventured into segment into switchgear segment 14%
Ventured into appliances 8%
1400 lighting segment
segment 12%
8% 24%
1200 6%
(Revenue INR cr)
8% 20% 10%
17% 23%
1000 18%
7% 16% 8%
800 13%
3%
12% 6%
600 9%
69% 66%
12% 76% 68% 4%
400 80% 72%
7% 90% 85%
200 87% 2%
100% 93%
0 0%
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
Fans Lighting Appliances Switchgear EBITDA margin
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.
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Edelweiss Professional Investor ResearchOrient Electric Ltd
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Orient Electric Ltd
Investment Hypothesis
JCH EBITDA margin improved after elevation of Mr. Rakesh OEL also experiences improvement in EBITDA margin
Khanna to VP, Sales in Sep 2003 post appointment of Mr. Khanna as CEO in Mar 2015
7.0% 7.3% 8.7%
7.6%
2.5%
6.7%
5.3%
-3.8%
-4.7%
FY02 FY04 FY05 FY06 FY07 FY15 FY16 FY17 FY18
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
Retail network and service centres has gone up from around
80,000 retailers and ~150 centres in FY15 to ~100,000
“We would be investing in developing the existing dealer
retailers and 350 centres in FY18. Going ahead, OEL plans to
service centres, developing on the product range and
Strengthening of increase its retail network by 15-20% in the near-future.
infrastructure, and therefore we are not looking at the
distribution
1 profits being very high," Mr. Khanna said in August 2004.
network & service It has expanded its reach in the international market from
centre exporting to 30 countries in 2015 to 35 countries in 2018 and
JCH proposes to expand its export basket by foraying into
plans to further expand its presence in US, EU in the near-
Africa by Feb 2005.
future to reduce its dependency on domestic real estate
activity.
OEL launched Aero series fans with winglet technology
JCH launched air condition with twin turbo technology which which reduces the noise and increases the air delivery. This
Launch of
reduces the noise and distributes the air uniformly. It also apart, the company has launched innovative products in LED
innovative
offers a new removable front cover which is available in four lighting (i.e. multi-coloured LED Battens), modular air
products and
different colour, Mr. Khanna said in Aug 2004. coolers and better technology water heaters. For detailed
refrain from
2 information on product innovation, please refer next page.
resorting to
“The company was looking at innovations and `next
aggressive pricing
generation' products to keep its market share” and not “We would like to see ourselves as clear innovator in the
in low-end
resort to aggressive pricing in the low-end product category and complete leader in the premium segments,
products
segment,” Mr. Khanna said in Sep 2004. which would help increase our share from 24% to 25% in the
next two years,” Mr. Khanna said in Feb 2018.
Entered into switchgear segment in Oct 2015 in
collaboration with a technology partner, Slovenia-based ETI
"The company is seriously discussing a launch of Group and LED battens in Aug 2017.
refrigerators as Hitachi is very strong in the international
Venture into a new
3 refrigeration market. However, it is yet to be decided when In Nov 2018, it entered into a strategic partnership with
segment
to enter the refrigeration market in India," Mr. Khanna said Italy-based De’Longhi Group to exclusively market the
in August 2004. 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:
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Edelweiss Professional Investor ResearchOrient Electric Ltd
Investment Hypothesis
Orient Electric Ltd
Joining
Investment Hypothesis
Years of
S. No. Name Designation Education Previous Employment
Date Experience
Key Managerial Personnel (KMPS)
Jun- B.Tech. (Electricals), M.Tech. Havells India P. Ltd.- VP -
1 Mr. Ashok Kumar Singh SBU Head (Switchgear) 28+
2015 (Electricals) Industrial Product
Mr. Pushp Saurabh Oct- B.Sc. (Electronics), MBA LG Electronics India Pvt. Ltd -
2 SBU Head (Appliances) 20+
Baishakhia 2015 (Marketing) Business Head
Nokia India (a subsidiary of
Apr- Head - Business Development &
3 Mr. Rakesh Chawla B.Com, PGDBM 25+ Microsoft OY) - Head - Sales
2016 Exports
Operations (North)
May- Hero Cycles Ltd. - Director –
4 Mr. Arvind Kumar Singh VP & Head - Manufacturing – Fans B.E. (Mechanical) 29+
2016 Operations
Samsung India Electronics Pvt.
5 Mr. Ravi Chopra Jul-2016 VP - Human Resources B.Sc., Masters (HRM) 19+
Ltd – Director- HR
LeEco Technology – COO &
6 Mr. Atul Jain Jul-2017 SBU Head (Fans) B.Tech (Mechanical), MBA 28+
Head of India Operations
Apr- Usha International - CFO;
7 Mr. Saibal Sengupta CFO CA 29+
2018 Dabur – VP (Finance)
Other Senior Management Personnel
Marketing Head - Branding & Greenlam - Marketing Head;
1 Mr. Arijit Dutta Dec-15 B. Com, MBA 18+
Corporate Communication Sony - Marketing Head
GM - LED/Solar Lighting;
Project & Institutional Business,
2 Mr. Alok Kushwaha Apr-16 B.E. (Electronics) 22+ Goldwyn Ltd - LED lighting
Sales
Marketing Head
MTS Group - Head Retail
3 Mr. Vikas Arora Jun-16 Marketing Head - Switchgear B.Tech (Mechanical), MBA 18+
Operations
Hero Cycle - Head -
Head - Procurement, Planning
4 Mr. Vishal Yadav Jul-16 B. Tech (Mechanical) 20+ Procurement, Planning and
and Control
Control
5 Mr. Benzon John Apr-17 Supply Chain Head M. Com, MBA 25+ Haier - GM - Logistics
Eureka Forbes Ltd - National
National Head - Warehousing,
6 Mr. Amit Srivastav Nov-17 B.Tech (Mechanical), MBA 15+ Head - Warehousing, Logistics
Logistics and Distribution
and Distribution
Lenovo India - Regional Sales
7 Mr. Siddharth Haridas Dec-17 Zonal Head B. Com, MBA 16+
Manager
KAIL Ltd - Regional Business
Zonal Business Head (TN &
8 Mr. Rajkumar Prakasam Jan-18 B. Sc., MBA 21+ Head; Panasonic - Business
Kerela)
Head
Philips Lighting India – VP &
9 Mr. Srihari Madhava Rao Mar-18 Chief Innovation Officer B.Tech, ECE 24+ 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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Edelweiss Professional Investor ResearchOrient Electric Ltd
Investment Hypothesis
Orient Electric Ltd
S. No. Date Description of Product Innovations
Investment Hypothesis
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 OEL becomes India’s first brand to get BEE (Bureau of Energy Efficiency) rating for its LED lamps, which later has become
Jul-2016
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
200000 >152000
~100000 >100000 ~100000
100000
>30000
0
V-Guard Orient Crompton Havells Bajaj
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.
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Edelweiss Professional Investor ResearchOrient Electric Ltd
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Orient Electric Ltd
Investment Hypothesis
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 OEL marketing expense forms 4.7% of net sales in
remain at elevated level by FY20 FY18, which is in-line with its peers
100 4.6%
4.7%
90 4.4% 4.4%
80 4.2%
(INR cr)
70 4.0%
60 3.8% 3.1%*
50 3.6% 2.6%
40 3.4%
FY16 FY17 FY18 FY19P FY20P
Adv & sales promotion expense Adv exp as a % of sales Havells Crompton V-Guard Orient
Source: Edelweiss Professional Investor Research; * refer to FY17
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Orient Electric Ltd
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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
Net Sales growth (y-o-y) 1%
60% 8%
High growth on
weak base
40%
24%
20%
0%
1QFY18 2QFY18 3QFY18 4QFY18 Q1FY19 Q2FY19 66%
-20%
Orient Crompton Bajaj (consumer)
Havells (ex Lloyd) V-Guard
Fan Lighting Appliances Switchgears
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.
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Orient Electric Ltd
Investment Hypothesis
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 OEL fan market share to improve in the future due to
due to successful launch of premium fans harp growth in premium fan sales revenue
203 10%
119 109
4%
-168
-266
Usha Orient Havells Crompton Bajaj FY18 FY20
*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
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Edelweiss Professional Investor ResearchOrient Electric Ltd
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Orient Electric Ltd
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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
58 57
49 47
17 15
-6
Havells Crompton Orient Philips Eveready Surya Bajaj
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.
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Edelweiss Professional Investor ResearchOrient Electric Ltd
Investment Hypothesis
Orient Electric Ltd
Investment Hypothesis
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
IIP - Consumer Durable Growth Rate (%) (y-o-y) 2200 20.0
20 16.0
1900
15
10 12.0
1600
5
8.0
0
1300
-5 4.0
-10
1000 0.0
-15 FY16 FY17 FY18 FY19P FY20P
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
Jan-14
May-14
Jan-15
May-15
Jan-16
May-16
Jan-17
May-17
Jan-18
May-18
Net Sales (INR crore) % change (y-o-y)
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
Gross Margin - FY18 Manufacturing sales proportion - FY18
37.0%*
74%
72%*
32.8%
57%
29.6%
29.1% 53%
Havells Crompton V-Guard Orient Havells Crompton V-Guard Orient
Source: Edelweiss Investment Research; *refers to FY17 Source: Edelweiss Professional Investor Research; *refers to FY17
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Orient Electric Ltd
Investment Hypothesis
OEL EBITDA margin profile well below its peers in FY18.. ..due to high employee expense for non-fan segment..
14.4% 8.9%
8.5%
13.5%* 8.2%
8.7%
8.1% 5.5%
Havells Crompton V-Guard Orient Havells Crompton V-Guard Orient
Source: Edelweiss Investment Research; *refer to FY17 Source: Edelweiss Professional Investor Research
..high packing & distribution cost.. ..and higher ad & sales promotion expense
4.7%
4.9% 4.4%
3.6%
2.4% 2.2% 3.1%
2.6%
Havells Crompton V-Guard Orient Havells Crompton V-Guard Orient
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
2400 15%
2100
Revenue (INR crore)
EBITDA margin (%)
9%
1800 9%
1500 8% 28% 10%
25%
1200 6% 8% 24%
13% 6% 20%
18% 23%
900 6% 16% 5%
3%
12% 13%
600 9% 66% 63% 59%
12% 80% 72% 76% 70% 71%
300 7% 90% 85%
100% 93% 87%
0 0%
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19P FY20P
Fans Lighting Appliances Switchgear EBITDA margin
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.
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Edelweiss Professional Investor ResearchOrient Electric Ltd
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Orient Electric Ltd
Investment Hypothesis
Fan as a % of
Electrical Consumer Durables (FY18) Revenue (INR cr) EBITDA margin
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.
LED as a % lighting
Lighting (FY18) Revenue (INR cr) EBITDA margin
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.
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