Buy This Mid-Cap Consumer Asset – Electronic Stock for a 47% Gain: Motilal Oswal
Main investment justification for Orient Electric Ltd (OEL) according to Motilal Oswal
- Revenue was up 10% year-on-year to INR 6.8 billion and was around 5% below our expectations. The two-year compound annual growth rate (CAGR) remained solid at 17%. Earnings before interest, tax, depreciation and amortization (EBITDA) decreased by 21% year-on-year to INR 665 million and was 13% below our expectations. The EBITDA margin was 9.8% against an expectation of 10.7%. Adjusted profit after tax (PAT) fell 27% year-on-year to INR 381 million and was 16% below our expectations.
- a) Electrical consumer goods: Revenue increased by 5% year-on-year to INR 4.8 billion. Profit before interest and tax (PBIT) margin came in at 11.1% from 14.9% last year, suggesting inflation in commodity prices as well as normalization in advertising spend, travel expenses , etc . The EBIT margin was 14.7% compared to 14.6% last year.
- Price increases have been in the order of 13 to 15% on an annual basis. Adjusted for the same, volumes would have decreased by 4-5% on an annual basis. However, adjusted for pent-up demand last year, demand remains strong and is expected to accelerate in the upcoming summer season. There was an element of destocking, which paves the way for near-term channel filling. The level of trust remains high among distribution partners, although there is some reluctance to pass on price increases.
Buy with a target price of Rs. 500
According to the brokerage, “We are maintaining our earnings estimate as 4QFY22 is a strong seasonal quarter and should benefit from pre-buying. OEL is a story of strong operating leverage, with margin expansion accompanied by improvement While the two-year revenue CAGR was at 17% vs. 27% for HAVL, earnings CAGR is better at 41% vs. 24% for HAVL We forecast revenue/EBITDA/PAT CAGR of 14%/ 22%/27% on FY22-24E.We value OEL at 45x FY24E EPS, with a TP of INR500.At CMP, the stock is trading at a FY23E/FY24E P/E of 38x/32x.
Motilal Oswal also asserted in a report that “Our longer-term thesis indicates a narrowing margin differential between OEL and major FMEG peers. On a FY24E P/E basis, OEL is trading at a discount of 34%/5 %s HAVL/CROMPTON, while its FY22-24E EPS CAGR of 27% is ~2x of 14% each for HAVL/CROMPTON On an EV/EBITDA basis, the discount is 44%/28%.We maintain our rating Orient Electric is our first choice when it comes to consumer electrics.”
The stock was selected in Motilal Oswal’s brokerage report. Investing in stocks presents a risk of financial loss. Investors should therefore exercise caution. Greynium Information Technologies, the author, and the brokerage are not responsible for any losses caused as a result of decisions based on the article.