Sunday, 28 June 2015

Bajaj Electricals Ltd: It is Light

For earlier post on Bajaj Electricals ltd Click here

As expected, Bajaj electrical has delivered great results in Mar-15 Quarter. Turnover at 1311 cr from 1271, almost same but NP at 47 cr from loss of 11 cr. I always prefer to use operating profits to make something out of a statement as it evens out the impact of debt and differential tax rates. Here its operating profit is at 70 cr from loss of 78 lac with its engg division has posted 20 cr operating profit from loss of 20 cr…big turnaround. I was putting my money on that….and it has done just that.

Now let’s view its return on capital employed. It has deployed a capital of 120 cr in Lighting and Consumer Durables division and operating profit of both is 165 cr…so an operating ratio of around 140% !!!

We take proportionate interest cost of 15 cr and tax rate of 30% and net profit now is at 115 cr….so return on capital employed is actually around 100%....just awesome. And it is not just an aberration but it is around this regularly. As I have explained earlier, it is because Bajaj has outsourced almost all of the production to third parties. It is just what Apple does…only designing and conceptualization is done by Apple in USA, the whole production is done in China…but maximum value is derived by Apple for conceptualization , designing and Marketing. If I am right, out of $150, china only accounts for $7 but does the maximum production.

Welcome to the new age of manufacturing where branding and designing are the biggest contributories to profits than manufacturing alone. This is “Production”. India too is realizing the difference between “Made In India” and “Make in India”. Indians are traditionally better than Chinese in branding and marketing. In China, a number of manufacturers go on producing the same products and you just can’t differentiate the producer as branding is at minimum. And Branding is a costly cost component.

Back to Bajaj, Indian Government is going to start bidding for its 100 smart cities. Bajaj is surely going to win huge orders. Bajaj Electricals has partnered with Cisco to jointly bid and participate to develop, deploy and promote smart street-lighting solutions. Cisco will manage the software applications and networking aspects such as routers and wireless applications while Bajaj Electricals will focus on advanced LED technology to install and service the street-lights.

Few years back, it implemented “Theory of Constraints” program to put its supply chain, inventory and distribution on track to minimize the blockage of resources and to channelize the flow of resources to eliminate the internal and external constraints to growth. This is yielding results as inventory levels are not high given its outsourced business model.

Last year its inventory was at 447 cr and turnover was 4000 cr. But consumer goods turnover was around 3000 cr. Finished goods inventory was at 390 cr. So just 13%...which is very good for an outsourced company like Bajaj. Recently, there has been much emphasis on supply chain and inventory control in india. As these can make or break a business like in retail excess inventories in one financial year can turn into obsolete stock in next financial year and can create havoc. So model is changing fast, with distributors leaving their old school intelligence of forecasting the demand and supply and then arranging the supply chain. Often company marketing team is seen dumping stocks to distributors for meeting sales targets. All this is horribly inefficient and a waste of costly resources.

Distribution channel should not be a costly factor in the whole process from production to consumption. If it is; then it will only lead to wastages of resources just like we see in our horrible agriculture distribution system in india which wastes 30% of the produce. Distribution is not just about transporting, storing and supplying; it is pure planning about how much to store. Distribution system’s role is to add value into the whole process and it will be adding value only when it is precise in knowing the quantity of stock required and at which interval. And for this, it should have the needle like accuracy levels.
If it acts like this, then it can save huge resources of the organization in the form of reduction in inventory, stucking of stock with distributors and retailers, obsolete stock, reduction in transportation cost etc.

Now a day’s companies are resorting to collection of daily sales data from distributors in order to make the whole supply chain real time and with this they can pick which product is not functioning up to the mark. With conventional system, often a non performing product is labeled as a failure on the part of distributor with no effort is being made to know the deficiencies of the product.

Bajaj Electricals was recommended around 220/- it touched 300/- after the results and now it is trading around 275/- It is still a great buy.

Regards

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing)




6 comments:

  1. Hi Gurpreet , Thanks for the detailed write-up . Its always pleasant to read your point of view.

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  2. Hi Gurpreet ,
    In general the M.Cap needs to be considered and probably compare with the peers to get some idea.However this itself falls into a leader category and the M.Cap is already big ?? (Because of Past wealth creator and so split which dilutes equity), how can one come to an estimate on how it can grow (or) Is the current ones Big/Small in comparison with the market that we have (or) Is the current M.Cap looks big because of Engineers division .
    Please advise
    Thank you.

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  3. It seems to be a good buy to me now. EPC division seeing a turnaround and LED lighting being the future. Still a good buy right?

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    Replies
    1. without doubt sir...just go ahead and buy

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  4. Can you please provide me the current Bajaj Electricals Customer Care Number by which I can directly connect to the care executive of the Punjab office.

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    Replies
    1. Hi Nidhi...May be you are at wrong place as i don't have any such information. It will be better if you visit the website of Bajaj electricals.

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