Buy This Mid Cap Consumer Goods - Electronic Stock For 47% Gain: Motilal Oswal

Key investment rationale for Orient Electric Ltd (OEL) according to Motilal Oswal

• Revenue increased by 10% YoY to INR6.8b and was ~5% below our expectation. Two-year compound annual growth rate (CAGR) stood strong at 17%. Earnings before interest, taxes, depreciation and amortization (EBITDA) declined by 21% YoY to INR665m and was 13% below our expectation. EBITDA margin came in at 9.8% v/s our expectation of 10.7%. Adjusted profit after tax (PAT) fell 27% YoY to INR381m and was 16% below our expectation.
• a) Electrical Consumer Durables: Revenue rose 5% YoY to INR4.8b. Profit before interest and tax (PBIT) margin stood at 11.1% v/s 14.9% last year, suggesting commodity price inflation as well as normalization in ad spends, travel costs, etc. b) Lighting and Switchgear: Revenue rose 25% YoY INR2b. PBIT margin stood at 14.7% v/s 14.6% last year.
• Price hikes have been in the 13-15% range on a YoY basis. Adjusted for the same, volumes would have declined 4-5% on a YoY basis. However, adjusted for pent-up demand last year, demand continues to remain strong and is expected to gather pace in the upcoming summer season. There was an element of destocking, which paves the way for channel filling in near term. Confidence level remains strong among channel partners, even though there is some reluctance to pass on price hikes.

Buy With A Target Price of Rs. 500

According to the brokerage "We maintain our earnings estimate as 4QFY22 is a seasonally strong quarter and should benefit from pre-buying. OEL is a strong operating leverage story, with margin expansion accompanied by an improving Balance Sheet. While two-year revenue CAGR stood at 17% v/s 27% for HAVL, earnings CAGR is better at 41% v/s 24% for HAVL. We forecast a revenue/EBITDA/PAT CAGR of 14%/22%/27% over FY22-24E. We value OEL at 45x FY24E EPS, with a TP of INR500. At the CMP, the stock trades at an FY23E/FY24E P/E of 38x/32x."

Motilal Oswal has also claimed in a report that " Our longer term thesis indicates a reduction in the margin differential between OEL and leading FMEG peers. On an FY24E P/E basis, OEL is trading at a discount of 34%/5% v/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 stands at 44%/28%. We maintain our Buy rating. Orient Electric is our top pick in the consumer electrical space."

Disclaimer

The stock has been picked from the brokerage report of Motilal Oswal. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.