Sluggish demand for kitchen and home appliances is not good news for Bajaj Electricals Ltd. Appliances form a large part of its portfolio, which is dominated by the consumer products segment, which includes fans, lights, electric cookers and mixers. This business made up about 80% of consolidated operating revenue in the June quarter (Q1FY23).
In the last two financial years, restrictions imposed during the COVID pandemic spurred demand for certain categories, including kitchen appliances. However, with the easing of restrictions came a change in consumer spending. “As household access to kitchen appliances has improved over the past two years, the demand for replacement is likely to return after 2-3 years,” analysts at ICICI Securities said in a report on September 19.
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In addition, higher inflation levels have weighed on the spending power of consumers, the effect of which is more pronounced in the lower to middle income groups. “Our discussions with company, industry and channel checks suggest slower demand from Tier 3 and 4 and rural areas in July-August ’22. However, we focus on premium products and Tier 1 and 2 cities showed healthy growth. The report has continued,” the ICICI Securities report said.
Against this backdrop, Bajaj Electricals’ high exposure to rural markets poses risks to its volumes. If rural cash flow improves, demand may improve. Moreover, increasing electrification in rural areas augurs well for Bajaj Electricals’ products.
Sales may pick up in the coming festive season as well. Hence, H2FY23 is expected to be better in terms of demand. The same holds true for margins, which were hit hard by higher cost costs. The consumer products segment’s Ebit margin was 6% in the first quarter, which was flat sequentially. There may be some respite from the fall in commodity prices, but gains can be expected from the third quarter.
In addition, improving revenue in the High Margin Lighting segment will improve the overall margin profile of the Company. Meanwhile, Bajaj Electricals continues to launch products across all segments and is also focusing on premiumization. However, it remains to be seen whether this translates into significant market share given the competitive intensity.
Capturing market share will be a major trigger for Bajaj Electrical stock, which is down around 28% from the 52-week high seen in September 2021. In addition, investors would do well to closely track improvements in margin performance. According to Bloomberg, the stock is trading at 36 times estimated earnings for FY24.
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