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Edelweiss Professional Investor Research Insightful. Independent. Decisive. Orient Electric Ltd Date: 17th January 2019 Utkarsh Nopany Research Analyst [email protected] Praveen Sahay Research Analyst [email protected]

Orient Electric Ltd - Markets Mojo · Orient Electric Ltd Spreading out its wings 1 Orient Electric Ltd (OEL), a part of CK Birla group, is the second Utkarsh Nopany Research Analyst

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Page 1: Orient Electric Ltd - Markets Mojo · Orient Electric Ltd Spreading out its wings 1 Orient Electric Ltd (OEL), a part of CK Birla group, is the second Utkarsh Nopany Research Analyst

Edelweiss Professional Investor Research Insightful. Independent. Decisive.

Orient Electric Ltd

Date: 17th January 2019

Utkarsh Nopany

Research Analyst

[email protected]

Praveen Sahay

Research Analyst

[email protected]

Page 2: Orient Electric Ltd - Markets Mojo · Orient Electric Ltd Spreading out its wings 1 Orient Electric Ltd (OEL), a part of CK Birla group, is the second Utkarsh Nopany Research Analyst

Edelweiss Professional Investor Research

Long Term Recommendation Orient Electric Ltd

Spreading out its wings

1

Utkarsh Nopany Research Analyst [email protected] Praveen Sahay Research Analyst [email protected]

CMP INR: 144

Rating: BUY

Target Price INR: 180

Upside: 25%

Bloomberg: ORIENTEL:IN

52-week

range (INR): 177.00 / 103.25

Share in issue (cr): 21.2

M cap (INR cr): 3,053

Avg. Daily Vol.

BSE/NSE :(‘000): 42/214

Promoter

Holding (%) 38.52

Date: 17th January, 2019

Orient Electric Ltd (OEL), a part of CK Birla group, is the second-largest fan manufacturers in India. Over the last one decade, OEL has transformed from a single product (fans) company into a complete lifestyle home solutions provider in the electrical segment (fans, light, appliances and 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 macro environment; b) superior execution of new management under the leadership of Mr. 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; 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 coverage with ‘BUY’ and TP of INR 180 (25% upside).

Potent catalysts in place to spur consumer durables sector 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 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 OEL, his key focus areas were: a) building a right team which fits with organization culture; b) launch 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 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 of revenue from premium fans and operating leverage benefits in non-fan segments.

Premium offerings to spur fan market share; eyeing pole position in new segments 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 in the fan segment over the medium-term. Moreover, in a short span of time, it has become one of 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

Page 3: Orient Electric Ltd - Markets Mojo · Orient Electric Ltd Spreading out its wings 1 Orient Electric Ltd (OEL), a part of CK Birla group, is the second Utkarsh Nopany Research Analyst

Edelweiss Professional Investor Research

2

Table 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

Page 4: Orient Electric Ltd - Markets Mojo · Orient Electric Ltd Spreading out its wings 1 Orient Electric Ltd (OEL), a part of CK Birla group, is the second Utkarsh Nopany Research Analyst

Edelweiss Professional Investor Research

Structure

Structure

Orient Electric Ltd

Orient Electric Ltd

3

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 sales growth in all the segments,

improvement in operating margin and lower interest cost

OEL’s ROCE is also projected to improve from 30.1% in FY18 to 37.6% in FY20 on healthy cash accrual, limited capex and

high dividend payout

We recommend a ‘BUY’ with target price of INR 180/share, valuing the stock at 32x on FY20 EPS estimates

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%

Page 5: Orient Electric Ltd - Markets Mojo · Orient Electric Ltd Spreading out its wings 1 Orient Electric Ltd (OEL), a part of CK Birla group, is the second Utkarsh Nopany Research Analyst

Edelweiss Professional Investor Research

Structure

Structure

Orient Electric Ltd

Orient Electric Ltd

4

Risk-reward Extremely Favourable

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

P/E multiple for the

past 4 years}

INR 268 Based on revenue CAGR of 18%, EBITDA margin of 12% and applying a P/E multiple of 36x

Base Case

{OEL is valued at a

discount to its peers

on expectation of

lower-than-industry

average operating

margin of 12-13%}

INR 180 Based on revenue CAGR of 15%, EBITDA margin of 10% and applying a P/E multiple of 32x

Bear Case

{OEL would continue

to trade at a steep

discount to its peers in

case of no

improvement in

operating margin}

INR 115 Based on revenue CAGR of 12%, EBITDA margin of 8% and applying a P/E multiple of 28x

Page 6: Orient Electric Ltd - Markets Mojo · Orient Electric Ltd Spreading out its wings 1 Orient Electric Ltd (OEL), a part of CK Birla group, is the second Utkarsh Nopany Research Analyst

Edelweiss Professional Investor Research

Business Value Drivers

Business Value Drivers

Orient Electric Ltd

Orient Electric Ltd

5

Bu

sin

ess

Val

ue

Dri

vers

Nature of Industry

OEL operates in four consumer durables products—fans, lighting, small appliances and switchgears. While the industry structure of fans is concentrated, the other segments are highly fragmented.

Opportunity Size

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 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.

Capital Allocation

OEL has been prudent in capital allocation as it has diversified from a single product to complete lifestyle home solutions in the electrical segment in a span of one decade. Moreover, it has successfully enhanced 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.

Predictability

OEL is expected to benefit from: a) favourable macro factors; b) successful launch of new products across segments; c) deepening distribution reach; d) benefit of higher marketing & sales promotion campaign through the Orient Connect programme; and e) benefit of operating leverage due to rising scale of operations of the non-fan segment.

Sustainability OEL is one of the oldest players in the fan segment and has maintained/improved its market share due 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.

Disproportionate Future

OEL is expected to clock higher-than-industry average growth in operating profit over FY18-FY20 on expectation of market share gains across segments. Furthermore, the company’s margin is expected to gradually improve to industry average level with increase in scale of operation of new segments—lights, appliances and switchgears.

Business Strategy & Planned Initiatives

The company is planning to grow its market share in each of the segments over the medium term.

Near-Term Visibility

OEL’s EPS is estimated to clock 36.9% CAGR during FY18-20 primarily due to: a) increase in scale of operations; b) benefit of operating leverage; and c) reduction in interest cost due to gradual repayment of term loan.

Long-Term Visibility

Over the long term, OEL is expected to benefit due to improving business risk profile with rising revenue share of non-fan segment (up from 34% in FY18 to 41% in FY20).

Near Term Risk Risks of political uncertainty in key exporting countries of OEL (Middle East, Africa), steep competition in 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

Page 7: Orient Electric Ltd - Markets Mojo · Orient Electric Ltd Spreading out its wings 1 Orient Electric Ltd (OEL), a part of CK Birla group, is the second Utkarsh Nopany Research Analyst

Edelweiss Professional Investor Research

Focus Charts

Focus Charts

Orient Electric Ltd

Orient Electric Ltd

6

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

Government targets 100% HHs electrification by Mar 2019 Government targets to build 5 crore houses by Mar 2022

CD ROCE profile better than staples since FY11 CD valuation discount to staple narrows down since FY13

Source: Ministry of Finance, Edelweiss Professional Investor Research

0%

10%

20%

30%

40%

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Revenue Growth

Durables Staples

0%

5%

10%

15%

20%

25%

30%

35%

40%

FY0

4

FY0

5

FY0

6

FY0

7

FY0

8

FY0

9

FY1

0

FY1

1

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6

FY1

7

FY1

8

FY1

9

Consumer Durable revenue growth (%)

Drought Drought & 6th

pay

Drought

Good monsoon, GST rate

cut & 7th pay commission

2000

4000

6000

8000

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

Govt spending on Rural Electrification (INR cr)

Village Electrification Household Electrification

0

10000

20000

30000

40000

FY16 FY17 FY18 FY19

Govt spending on Housing for All (INR cr)

PMAY-Urban PMAY-Rural

25%

35%

45%

55%

65%

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

ROCE Profile

Durables Staples

0.50

2.50

4.50

0

10

20

30

40

50

60

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

P/E multiple

Durables Staples Staples P/E premium over Durables

Page 8: Orient Electric Ltd - Markets Mojo · Orient Electric Ltd Spreading out its wings 1 Orient Electric Ltd (OEL), a part of CK Birla group, is the second Utkarsh Nopany Research Analyst

Edelweiss Professional Investor Research

Focus Charts

Focus Charts

Orient Electric Ltd

Orient Electric Ltd

7

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

OEL register better-than-industry improvement in ROE in FY18.. ..and to witness further improvement over the next two years

OEL is trading below industry avg P/E multiple on FY20.. ..and also trading below industry avg FY20 EV/EBITDA multiple

Source: Bloomberg, Edelweiss Professional Investor Research

-10%

0%

10%

20%

30%

40%

Ori

ent

Hav

ells

Baj

aj

TTK

Pre

stig

e

V-G

uar

d

Sym

ph

on

y

Cro

mp

ton

Haw

kin

s

EBITDA growth - FY18

0%

6%

12%

18%

24%

30%

Baj

aj

V-G

uar

d

Hav

ells

Ori

ent

Sym

ph

on

y

TTK

Cro

mp

ton

EBITDA growth (FY18-FY20)

EBITDA growth Industry average growth

15.7%10.2% 7.9%

0.8%

-2.7% -6.6%

-27.5%

Baj

aj

TTK

Ori

ent

Hav

ells

V-G

uar

d

Sym

ph

on

y

Cro

mp

ton

Change in ROE - FY18 over FY17

7.46%4.50% 4.10%

-7.10% -7.27% -7.60% -8.67%

Ori

ent

V-G

uar

d

Hav

ells

Baj

aj

Sym

ph

on

y

Cro

mp

ton

TTK

Change in ROE - FY18-FY20

0.0

10.0

20.0

30.0

40.0

50.0

Baj

aj

Ori

ent

Cro

mp

ton

Sym

ph

on

y

V-G

uar

d

TTK

Hav

ells

(x)

P/E - FY20 Industry Average Multiple

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Baj

aj

Ori

ent

Cro

mp

ton

TTK

Sym

ph

on

y

Hav

ells

(x)

EV/EBITDA - FY20 Industry Average Multiple

Page 9: Orient Electric Ltd - Markets Mojo · Orient Electric Ltd Spreading out its wings 1 Orient Electric Ltd (OEL), a part of CK Birla group, is the second Utkarsh Nopany Research Analyst

Edelweiss Professional Investor Research

Focus Charts

Focus Charts

Orient Electric Ltd

Orient Electric Ltd

8

Part III - Story in a Nutshell: OEL Investment Hypothesis

OEL revenue growing at better-than-industry pace.. ..due to market share gains across the product segments

OEL has a better gross margin profile than its peers.. ..but EBITDA margin is significantly lower than its peers

*refer to FY17

OEL EBITDA margin to reach industry average level on expectation of improvement in profitability in lighting/appliances segment

OEL B/S position to remain highly comfortable in the future OEL return ratios to improve over the next two years

Source: Edelweiss Professional Investor Research

-20%

0%

20%

40%

1QFY18 2QFY18 3QFY18 4QFY18 Q1FY19 Q2FY19

Net Sales growth (y-o-y)

Orient Crompton Bajaj (consumer)Havells (ex Lloyd) V-Guard

High growth on weak base

66%

24%

8% 1%

Fan Lighting Appliances Switchgears

37.0%*

29.6% 29.1%

32.8%

Havells Crompton V-Guard Orient

Gross Margin - FY18

13.5%*14.4%

8.1%8.7%

Havells Crompton V-Guard Orient

EBITDA margin - FY18

100% 93% 87% 90% 85% 80% 72% 76% 70% 71% 66% 64% 61%7% 12%

9%12%

13%16%

18% 23% 20%24%

25%28%

3%6%

13%6% 6% 8%

8%

9%

9%

0%

2%

4%

6%

8%

10%

12%

14%

16%

0

300

600

900

1200

1500

1800

2100

2400

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19P FY20P

EBIT

DA

mar

gin

(%

)

Rev

enu

e (I

NR

cro

re)

Fans Lighting Appliances Switchgear EBITDA margin

1.50

1.120.92

0.75

0.00

0.30

0.60

0.90

1.20

1.50

1.80

0

30

60

90

120

150

180

FY17 FY18 FY19P FY20P

Net Debt (INR crore) Net Debt/EBITDA (x)

15.0

20.0

25.0

30.0

35.0

40.0

FY17 FY18 FY19P FY20P

ROE (%) ROCE (%)

Ventured into lighting segment

Ventured into appliances segment

Ventured into LED lighting segment

Rationalised appliances segment by exiting small appliances and ventured into switchgear segment

Exited non-LED segment

Page 10: Orient Electric Ltd - Markets Mojo · Orient Electric Ltd Spreading out its wings 1 Orient Electric Ltd (OEL), a part of CK Birla group, is the second Utkarsh Nopany Research Analyst

Edelweiss Professional Investor Research

Investment Hypothesis

Investment Hypothesis

Orient Electric Ltd

Orient Electric Ltd

9

I. Consumer Durables are placed better than Staples in all the parameters 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

Consumer Durable Net Sales

(INR crore) Consumer Staple

Net Sales (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

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.

0%

5%

10%

15%

20%

25%

30%

35%

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Revenue Growth (y-o-y)

Durables Staples

Page 11: Orient Electric Ltd - Markets Mojo · Orient Electric Ltd Spreading out its wings 1 Orient Electric Ltd (OEL), a part of CK Birla group, is the second Utkarsh Nopany Research Analyst

Edelweiss Professional Investor Research

Investment Hypothesis

Investment Hypothesis

Orient Electric Ltd

Orient Electric Ltd

10

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

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)

Source: Ministry of Finance, Edelweiss Professional Investor Research

0%

10%

20%

30%

40%

FY0

4

FY0

5

FY0

6

FY0

7

FY0

8

FY0

9

FY1

0

FY1

1

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6

FY1

7

FY1

8

FY1

9

Consumer Durable revenue growth (%)

Drought Drought & 6th pay

commission

Drought

Good monsoon, GST rate

cut & 7th pay commission

2000

3000

4000

5000

6000

7000

8000

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

Village Electrification Household Electrification

0

5000

10000

15000

20000

25000

30000

35000

FY16 FY17 FY18 FY19

PMAY-Urban PMAY-Rural

Page 12: Orient Electric Ltd - Markets Mojo · Orient Electric Ltd Spreading out its wings 1 Orient Electric Ltd (OEL), a part of CK Birla group, is the second Utkarsh Nopany Research Analyst

Edelweiss Professional Investor Research

Investment Hypothesis

Investment Hypothesis

Orient Electric Ltd

Orient Electric Ltd

11

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

Source: Edelweiss Professional Investor Research

20%

30%

40%

50%

60%

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

ROCE Profile

Durables Staples

0.001.002.003.004.005.00

020406080

100

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

P/E multiple (x)

Durables Staples Staples P/E premium over Durables

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II. OEL is sweetly placed in CD pack 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

OEL register sharp improvement in ROE in FY18.. ..and to witness further improvement during FY18-FY20

OEL is trading below industry P/E multiple (x) on FY20.. ..also trading below industry EV/EBITDA multiple (x) on

FY20

Source: Bloomberg, Edelweiss Professional Investor Research

-10%

0%

10%

20%

30%

40%

Ori

ent

Hav

ells

Baj

aj

TTK

Pre

stig

e

V-G

uar

d

Sym

ph

on

y

Cro

mp

ton

Haw

kin

s

EBITDA growth - FY18

0%5%

10%15%20%25%30%35%

Baj

aj

V-G

uar

d

Hav

ells

Ori

ent

Sym

ph

on

y

TTK

Cro

mp

ton

EBITDA growth (FY18-FY20)

EBITDA growth Industry average growth

15.7%10.2% 7.9%

0.8%

-2.7% -6.6%

-27.5%

Baj

aj

TTK

Ori

ent

Hav

ells

V-G

uar

d

Sym

ph

on

y

Cro

mp

ton

Change in ROE - FY18 over FY17

7.46%4.50% 4.10%

-7.10% -7.27% -7.60% -8.67%

Ori

ent

V-G

uar

d

Hav

ells

Baj

aj

Sym

ph

on

y

Cro

mp

ton

TTK

Change in ROE - FY18-FY20

0.0

10.0

20.0

30.0

40.0

50.0

Baj

aj

Ori

ent

Cro

mp

ton

Sym

ph

on

y

V-G

uar

d

TTK

Hav

ells

P/E - FY20 Industry Average Multiple

0.05.0

10.015.020.025.030.0

Baj

aj

Ori

ent

Cro

mp

ton

TTK

Sym

ph

on

y

Hav

ells

EV/EBITDA - FY20 Industry Average Multiple

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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

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.

100% 93%87%

90% 85% 80% 72% 76% 68% 69% 66%

7%12%

9%12%

13%16%

18%23%

20%

24%

3%

7%

17%8%

6%8%

8%

0%

2%

4%

6%

8%

10%

12%

14%

16%

0

200

400

600

800

1000

1200

1400

1600

1800

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

(Re

ven

ue

INR

cr)

Fans Lighting Appliances Switchgear EBITDA margin

Ventured into lighting segment

Ventured into appliances segment

Ventured into LED lighting segment

Rationalised appliances segment by exiting small appliances and ventured into switchgear segment

Exited non-LED segment

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JCH EBITDA margin improved after elevation of Mr. Rakesh Khanna to VP, Sales in Sep 2003

OEL also experiences improvement in EBITDA margin post appointment of Mr. Khanna as CEO in Mar 2015

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

1

Strengthening of distribution network & service centre

“We would be investing in developing the existing dealer service centres, developing on the product range and infrastructure, and therefore we are not looking at the profits being very high," Mr. Khanna said in August 2004. JCH proposes to expand its export basket by foraying into Africa by Feb 2005.

Retail network and service centres has gone up from around 80,000 retailers and ~150 centres in FY15 to ~100,000 retailers and 350 centres in FY18. Going ahead, OEL plans to increase its retail network by 15-20% in the near-future. It has expanded its reach in the international market from exporting to 30 countries in 2015 to 35 countries in 2018 and plans to further expand its presence in US, EU in the near-future to reduce its dependency on domestic real estate activity.

2

Launch of innovative products and refrain from resorting to aggressive pricing in low-end products

JCH launched air condition with twin turbo technology which reduces the noise and distributes the air uniformly. It also offers a new removable front cover which is available in four different colour, Mr. Khanna said in Aug 2004. “The company was looking at innovations and `next generation' products to keep its market share” and not resort to aggressive pricing in the low-end product segment,” Mr. Khanna said in Sep 2004.

OEL launched Aero series fans with winglet technology which reduces the noise and increases the air delivery. This apart, the company has launched innovative products in LED lighting (i.e. multi-coloured LED Battens), modular air coolers and better technology water heaters. For detailed information on product innovation, please refer next page. “We would like to see ourselves as clear innovator in the category and complete leader in the premium segments, which would help increase our share from 24% to 25% in the next two years,” Mr. Khanna said in Feb 2018.

3 Venture into a new segment

"The company is seriously discussing a launch of refrigerators as Hitachi is very strong in the international refrigeration market. However, it is yet to be decided when to enter the refrigeration market in India," Mr. Khanna said in August 2004.

Entered into switchgear segment in Oct 2015 in collaboration with a technology partner, Slovenia-based ETI Group and LED battens in Aug 2017. 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).

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:

-4.7%-3.8%

2.5%

7.0% 7.3%

FY02 FY04 FY05 FY06 FY07

5.3%

6.7%

7.6%

8.7%

FY15 FY16 FY17 FY18

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S. No. Name Joining

Date Designation Education

Years of Experience

Previous Employment

Key Managerial Personnel (KMPS)

1 Mr. Ashok Kumar Singh Jun-2015

SBU Head (Switchgear) B.Tech. (Electricals), M.Tech. (Electricals)

28+ Havells India P. Ltd.- VP -Industrial Product

2 Mr. Pushp Saurabh Baishakhia

Oct-2015

SBU Head (Appliances) B.Sc. (Electronics), MBA (Marketing)

20+ LG Electronics India Pvt. Ltd - Business Head

3 Mr. Rakesh Chawla Apr-2016

Head - Business Development & Exports

B.Com, PGDBM 25+ Nokia India (a subsidiary of Microsoft OY) - Head - Sales Operations (North)

4 Mr. Arvind Kumar Singh May-2016

VP & Head - Manufacturing – Fans B.E. (Mechanical) 29+ Hero Cycles Ltd. - Director – Operations

5 Mr. Ravi Chopra Jul-2016 VP - Human Resources B.Sc., Masters (HRM) 19+ Samsung India Electronics Pvt. Ltd – Director- HR

6 Mr. Atul Jain Jul-2017 SBU Head (Fans) B.Tech (Mechanical), MBA 28+ LeEco Technology – COO & Head of India Operations

7 Mr. Saibal Sengupta Apr-2018

CFO CA 29+ Usha International - CFO; Dabur – VP (Finance)

Other Senior Management Personnel

1 Mr. Arijit Dutta Dec-15 Marketing Head - Branding & Corporate Communication

B. Com, MBA 18+ Greenlam - Marketing Head; Sony - Marketing Head

2 Mr. Alok Kushwaha Apr-16 Project & Institutional Business, Sales

B.E. (Electronics) 22+ GM - LED/Solar Lighting; Goldwyn Ltd - LED lighting Marketing Head

3 Mr. Vikas Arora Jun-16 Marketing Head - Switchgear B.Tech (Mechanical), MBA 18+ MTS Group - Head Retail Operations

4 Mr. Vishal Yadav Jul-16 Head - Procurement, Planning and Control

B. Tech (Mechanical) 20+ Hero Cycle - Head - Procurement, Planning and Control

5 Mr. Benzon John Apr-17 Supply Chain Head M. Com, MBA 25+ Haier - GM - Logistics

6 Mr. Amit Srivastav Nov-17 National Head - Warehousing, Logistics and Distribution

B.Tech (Mechanical), MBA 15+ Eureka Forbes Ltd - National Head - Warehousing, Logistics and Distribution

7 Mr. Siddharth Haridas Dec-17 Zonal Head B. Com, MBA 16+ Lenovo India - Regional Sales Manager

8 Mr. Rajkumar Prakasam Jan-18 Zonal Business Head (TN & Kerela)

B. Sc., MBA 21+ KAIL Ltd - Regional Business Head; Panasonic - Business Head

9 Mr. Srihari Madhava Rao Mar-18 Chief Innovation Officer B.Tech, ECE 24+ Philips Lighting India – VP & 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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S. No. Date Description of Product Innovations

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 Jul-2016

OEL becomes India’s first brand to get BEE (Bureau of Energy Efficiency) rating for its LED lamps, which later has become 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

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.

>30000

~100000 >100000 ~100000

>152000

0

100000

200000

V-Guard Orient Crompton Havells Bajaj

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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 remain at elevated level by FY20

OEL marketing expense forms 4.7% of net sales in FY18, which is in-line with its peers

Source: Edelweiss Professional Investor Research; * refer to FY17

3.4%

3.6%

3.8%

4.0%

4.2%

4.4%

4.6%

40

50

60

70

80

90

100

FY16 FY17 FY18 FY19P FY20P

(IN

R c

r)

Adv & sales promotion expense Adv exp as a % of sales

3.1%*

2.6%

4.4%

4.7%

Havells Crompton V-Guard Orient

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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

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.

-20%

0%

20%

40%

60%

1QFY18 2QFY18 3QFY18 4QFY18 Q1FY19 Q2FY19

Net Sales growth (y-o-y)

Orient Crompton Bajaj (consumer)

Havells (ex Lloyd) V-Guard

High growth on weak base

66%

24%

8% 1%

Fan Lighting Appliances Switchgears

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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 due to successful launch of premium fans

OEL fan market share to improve in the future due to harp growth in premium fan sales revenue

*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

203

119 109

-168

-266 Usha Orient Havells Crompton Bajaj

4%

10%

FY18 FY20

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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

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.

58 57

49 47

17 15

-6 Havells Crompton Orient Philips Eveready Surya Bajaj

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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

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

Source: Edelweiss Investment Research; *refers to FY17 Source: Edelweiss Professional Investor Research; *refers to FY17

-15

-10

-5

0

5

10

15

20

Jan

-14

May

-14

Sep

-14

Jan

-15

May

-15

Sep

-15

Jan

-16

May

-16

Sep

-16

Jan

-17

May

-17

Sep

-17

Jan

-18

May

-18

Sep

-18

IIP - Consumer Durable Growth Rate (%) (y-o-y)

0.0

4.0

8.0

12.0

16.0

20.0

1000

1300

1600

1900

2200

FY16 FY17 FY18 FY19P FY20P

Net Sales (INR crore) % change (y-o-y)

37.0%*

29.6%29.1%

32.8%

Havells Crompton V-Guard Orient

Gross Margin - FY18

72%*

53%

57%

74%

Havells Crompton V-Guard Orient

Manufacturing sales proportion - FY18

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Investment Hypothesis

Investment Hypothesis

Orient Electric Ltd

Orient Electric Ltd

22

OEL EBITDA margin profile well below its peers in FY18.. ..due to high employee expense for non-fan segment..

Source: Edelweiss Investment Research; *refer to FY17 Source: Edelweiss Professional Investor Research

..high packing & distribution cost.. ..and higher ad & sales promotion expense

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

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.

13.5%*

14.4%

8.1%8.7%

Havells Crompton V-Guard Orient

8.2%

5.5%

8.5%8.9%

Havells Crompton V-Guard Orient

4.9%

2.4% 2.2%

3.6%

Havells Crompton V-Guard Orient

3.1%

2.6%

4.4%4.7%

Havells Crompton V-Guard Orient

100% 93% 87% 90% 85% 80% 72% 76% 70% 71% 66% 63% 59%

7%12%

9% 12% 13% 16% 18% 23% 20%24%

25%28%

3%6%

13% 6% 6% 8%8%

9%9%

0%

5%

10%

15%

0

300

600

900

1200

1500

1800

2100

2400

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19P FY20P

EBIT

DA

mar

gin

(%

)

Re

ven

ue

(IN

R c

rore

)

Fans Lighting Appliances Switchgear EBITDA margin

Page 24: Orient Electric Ltd - Markets Mojo · Orient Electric Ltd Spreading out its wings 1 Orient Electric Ltd (OEL), a part of CK Birla group, is the second Utkarsh Nopany Research Analyst

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Investment Hypothesis

Investment Hypothesis

Orient Electric Ltd

Orient Electric Ltd

23

Electrical Consumer Durables (FY18) Revenue (INR cr) EBITDA margin Fan as a % of 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.

Lighting (FY18) Revenue (INR cr) EBITDA margin LED as a % lighting

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.

Page 25: Orient Electric Ltd - Markets Mojo · Orient Electric Ltd Spreading out its wings 1 Orient Electric Ltd (OEL), a part of CK Birla group, is the second Utkarsh Nopany Research Analyst

Edelweiss Professional Investor Research

Investment Hypothesis

Investment Hypothesis

Orient Electric Ltd

Orient Electric Ltd

24

VI. Improving return ratios along with strong balance sheet OEL’s operating cycle higher than industry average on strong Q4 and push-based distribution

OEL’s operating cycle improved from 92 days in FY17 to 73 days in FY18. However, it remained

higher than the industry’s average cycle of 61 days due to continued reliance on push-based

distribution model and a seasonally strong Q4 (accounted for 39% of total revenue in FY18). This is

predominantly due to strong fan demand (accounting for 66% of OEL’s revenue) in Q4 before

commencement of the summer season. With expectation of increasing proportion of non-fan

revenue in the future (which is not seasonal in nature) and start of channel financing from FY19,

OEL’s operating cycle is expected to gradually dip to industry’s average level over the medium term.

OEL operating cycle higher than industry average on seasonally strong Q4 – FY18

Source: Edelweiss Professional Investor Research

Balance sheet to remain strong with sharp improvement in return ratios

OEL’s net debt/EBITDA is estimated to improve to 0.75x in FY20 from 1.12x in FY18 due to healthy

cash flow from operations and gradual repayment of term loan. Given limited capex requirement

in the CD industry, we believe the company’s balance sheet will remain comfortable over the long

term. With improved earnings profile, OEL’s RoE and RoCE are also estimated to improve to 34.3%

and 37.6% in FY20 from 26.9% and 30.1% in FY18, respectively.

OEL B/S position to remain highly comfortable in the future OEL return ratios to improve over the next two years

Source: Edelweiss Professional Investor Research

20%

24%

28%

32%

36%

40%

0

30

60

90

120

150

Crompton Symphony Hawkins Havells V-Guard Orient TTK Bajaj

Operating Cycle (Days) Industry Average (Days) Q4 as % of total revenue

1.50

1.12

0.92

0.75

0.00

0.30

0.60

0.90

1.20

1.50

1.80

0

30

60

90

120

150

180

FY17 FY18 FY19P FY20P

Net Debt (INR crore) Net Debt/EBITDA (x)

15.0

20.0

25.0

30.0

35.0

40.0

FY17 FY18 FY19P FY20P

ROE (%) ROCE (%)

Page 26: Orient Electric Ltd - Markets Mojo · Orient Electric Ltd Spreading out its wings 1 Orient Electric Ltd (OEL), a part of CK Birla group, is the second Utkarsh Nopany Research Analyst

Edelweiss Professional Investor Research

Outlook and Valuation

Outlook and Valuations

Orient Electric Ltd

Orient Electric Ltd

25

We initiate coverage on OEL with ‘BUY’ recommendation and TP of INR 180, entailing 25% upside

based on current market price. Our TP is based on 32x FY20E PAT. We have valued the company at

20% discount to 4-year industry average multiple of around 40x as it generates lower-than-industry

average operating margin. However, the valuation discount will narrow in case of better-than-

estimated improvement in operating margin in the future.

Relative Valuation

Name Market Cap (INR crore)

Sales (INR crore) EBITDA margin (%) P/E (x) EV/EBITDA (x) ROE (%)

FY18 FY19E FY20E FY18 FY19E FY20E FY19E FY20E FY19E FY20E FY18 FY19E FY20E

Havells 43,720 8,139 9,887 11,736 12.9 13.1 13.6 49.9 40.0 32.2 25.8 20.0 21.8 24.1

Crompton 14,074 4,080 4,554 5,147 13.0 13.4 14.0 36.3 29.5 23.7 19.8 49.0 43.0 41.4

V-Guard 9,815 2,312 2,670 3,237 9.4 10.0 11.1 48.9 36.2 36.0 26.7 23.5 24.3 28.0

TTK Prestige 8,738 1,871 2,137 2,464 13.2 13.6 14.1 45.3 37.6 28.6 23.9 28.1 18.0 19.5

Symphony 7,611 798 1,055 1,294 27.5 24.2 24.0 39.8 32.7 31.5 25.6 35.8 29.5 28.5

Bajaj Electric 5,200 4,708 6,560 6,679 6.2 6.8 7.5 20.8 18.5 13.9 12.1 28.9 23.4 21.8

OEL 3,116 1,600 1,841 2,111 8.7 9.2 10.0 34.0 25.4 19.0 15.3 26.9 31.1 34.3

Average 13.0 12.9 13.5 39.4 31.5 26.5 21.4 30.3 27.3 28.2

Key Risks Exit of key management personnel: Exit of senior management (i.e. Mr. Rakesh Khanna and

senior management employees) is a key risk for OEL as it has played an important role in

turning around the company over the past 3 years.

Technology advancement: The lighting industry has seen disruptions in the past (such as shift

from incandescent bulbs to CFL and then to LED) due to development in technology. Thus,

OEL needs to continuously upgrade its technology to maintain market share.

Intense competition: OEL may face intense competition from existing players in the form of

aggressive pricing, increased spending on marketing & distribution, launch of improved

products with attractive features, etc. Furthermore, entry of large international companies in

the home appliances segment can lead to intense competition in the industry in the future.

Slowdown in economy: Rise in disposable incomes is a key driver of consumer discretionary.

Hence, any slowdown in economy could pose downside risk to OEL’s earnings.

Page 27: Orient Electric Ltd - Markets Mojo · Orient Electric Ltd Spreading out its wings 1 Orient Electric Ltd (OEL), a part of CK Birla group, is the second Utkarsh Nopany Research Analyst

Edelweiss Professional Investor Research

Business Overview

Business Overview

Orient Electric Ltd

Orient Electric Ltd

26

Company Description

OEL (erstwhile Calcutta Electrical Manufacturing Company), incorporated in 1939, became a part of the CK Birla Group in 1954

and was subsequently rechristened Orient Electric post demerger of consumer electric business of Orient Paper & Industries w.e.f.

March 1, 2017. OEL operates in two segments – electrical consumer durables (which includes electrical fans and home appliances)

and lighting & switchgears. The company has 5 manufacturing facilities across India (2 in Noida and 1 each in Kolkata, Faridabad

and Guwahati). Its products are sold under the ‘Orient Electric’ Brand. India’s ex-cricket captain Mr. M. S. Dhoni is the brand

ambassador of the company’s advertisement campaign since 2006.

Business Model OEL has an annual fan manufacturing capacity of 98.5 lakh units, lights & luminaires capacity of 255 lakh units and switchgear capacity of 25.5 lakh units situated in Haryana & West Bengal. The company is also engaged in trading of home appliances products (i.e. air coolers, water heaters, mixer grinders, etc).

Strategic Positioning OEL is the second largest fan player in India. In a short span of time, the company has become one of the top 3 manufacturer of LED bulbs in India. It is the fifth largest player in air cooler segment in India. This apart, the company has a small with rising presence in home appliances and switchgear segment.

Competitive Edge

OEL has a strong distribution network in North and South India. The company has maintained its solid position in the fan segment since long due to its strong focus on R&D. The company has an edge over its competitors in the fan & light segment due to high proportion of manufactured sales. The company also has a good brand recall as the former Indian captain Mr. M. S. Dhoni is the brand ambassador of the company since 2006.

Financial Structure OPIL has a strong balance sheet position, with net debt/EBITDA at 1.17x in FY18. The company also has comfortable liquidity position due to projected CFO of INR 95 crore vis-à-vis debt repayment obligation of INR 20 crore in FY20.

Key Competitors OEL’s key competitors are Crompton, Havells, Bajaj Electricals, Usha, Luminous, V-Guard, Philips Lighting, Surya Roshni, Syska LED, Symphony, TTK Prestige, etc.

Industry Revenue Drivers Rise in disposable income, rapid urbanization, real estate activity and government focus on electrification program are the key revenue drivers in this industry.

Shareholder Value Proposition

We are initiating coverage on OEL with a ‘Buy’ rating and TP of INR 180 per share, offering 25% upside potential to investors. Our TP is based on 32x FY20E EPS, which is at a 20% discount to 4-year industry average multiple as it generates lower than industry average operating margin. We believe the valuation discount to industry average can narrow down in case of better-than-projected improvement in operating margin in the near-future.

Page 28: Orient Electric Ltd - Markets Mojo · Orient Electric Ltd Spreading out its wings 1 Orient Electric Ltd (OEL), a part of CK Birla group, is the second Utkarsh Nopany Research Analyst

Edelweiss Professional Investor Research

Key Management

Key Management

Orient Electric Ltd

Orient Electric Ltd

27

Name Designation Profile

Mr. C. K. Birla Chairman, Promoter Mr. Chandra Kant Birla, B.A., is an industrialist with rich experience. He is associated with various group companies (Orient Cement Ltd, HIL Ltd, Orient Paper & Industries Ltd, National Engineering Industries Ltd, etc).

Mr. Rakesh Khanna MD & CEO

Mr. Rakesh Khanna, B.E. (Mechanical) and MBA, has over three decades of working experience in consumer durables. He joined OEL in Dec 2014. He was initially associated with Wipro, then joined Johnson Controls-Hitachi Air-Conditioning India Ltd 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.

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Timeline

Financial Analysis

Orient Electric Ltd

Orient Electric Ltd

28

Major Milestones

1939 Year of incorporation

1954Acquired by CK Birla

1990Developed & Patented PSPO technology

2008 Entered into lighting business

2011 Forays into home appliances business

2014 New brand identity unveiled

2015 Ventures into Switchgear business

2017 Orient Electric demerged as a separate entity

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Edelweiss Professional Investor Research

Financials

Financials

Orient Electric Ltd

Orient Electric Ltd

29

Income statement (Standalone)

Year to March FY16 FY17 FY18 FY19P FY20P

Income from operations 1,296 1,364 1,600 1,841 2,111

Direct costs NA 0 1,062 1,216 1,394

Employee costs NA 131 143 169 181

Other expenses NA 1,129 256 287 325

Total operating expenses 1,209 1,261 1,461 1,672 1,901

EBITDA 87 103 139 169 210

Depreciation and amortisation 20 20 20 20 20

EBIT 68 83 119 149 190

Interest expenses 29 27 24 19 14

Other income 5 5 3 6 6

Profit before tax 44 61 98 136 182

Provision for tax 15 21 34 46 62

Core profit 29 41 64 90 120

Extraordinary items 0 0 0 0 0

Profit after tax 29 41 64 90 120

Minority Interest 0 0 0 0 0

Share from associates 0 0 0 0 0

Adjusted net profit 29 41 64 90 120

Equity shares outstanding (mn) 20 21 21 21 21

EPS (INR) basic 1.4 1.9 3.0 4.2 5.7

Diluted shares (Cr) 20.2 21.2 21.2 21.2 21.2

EPS (INR) fully diluted 1.4 1.9 3.0 4.2 5.7

Dividend per share NM NM 1.0 1.5 2.0

Dividend payout (%) NM NM 33.1 35.4 35.4

Common size metrics- as % of net revenues

Year to March FY16 FY17 FY18 FY19P FY20P

Operating expenses 93.3 92.4 91.3 90.8 90.0

Depreciation 1.5 1.5 1.2 1.1 0.9

Interest expenditure 2.2 1.9 1.5 1.0 0.7

EBITDA margins 6.7 7.6 8.7 9.2 10.0

Net profit margins 2.2 3.0 4.0 4.9 5.7

Growth metrics (%)

Year to March FY16 FY17 FY18 FY19P FY20P

Revenues 8.9 5.2 17.3 15.1 14.7

EBITDA NM 18.2 35.1 21.4 24.4

PBT NA 39.0 59.5 39.1 33.6

Net profit NA 40.4 57.9 40.3 33.6

EPS NA 34.0 57.9 40.3 33.6

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Financials

Financials

Orient Electric Ltd

Orient Electric Ltd

30

Balance sheet (Standalone)

As on 31st March FY18 FY19P FY20P

Equity share capital 21 21 21

Preference Share Capital 0 0 0

Reserves & surplus 242 294 363

Shareholders funds 263 315 384

Long Term Borrowing 34 14 0

Short Term Borrowing 130 140 150

Minority interest 0 0 0

Other Liabilties 22 20 14

Sources of funds 449 489 548

Gross block 226 266 311

Depreciation 126 146 166

Net block 100 120 145

Capital work in progress 9 0 0

Total fixed assets 109 120 145

Intangible Assets 6 6 6

Investments 9 9 9

Inventories 209 241 276

Sundry debtors 394 453 520

Cash and equivalents 31 19 7

Loans and advances 0 0 0

Other current assets 33 38 44

Total current assets 667 751 847

Sundry creditors and others 336 387 443

Provisions 31 35 40

Total CL & provisions 367 422 484

Other Assets 25 25 25

Uses of funds 449 489 548

Book value per share (INR) 12 15 18

Cash flow statement

Year to March FY18 FY19P FY20P

Net profit 64 90 120

Add: Depreciation 20 20 20

Add: Deferred tax 10 0 0

Add: Others 0 0 0

Gross cash flow 94 110 140

Less: Changes in W. C. 24 41 45

Operating cash flow 70 69 95

Less: Capex 23 31 45

Free cash flow 46 38 50

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Financials

Financials

Orient Electric Ltd

Orient Electric Ltd

31

Ratios

Year to March FY17 FY18 FY19P FY20P

ROAE (%) 19.0 26.9 31.1 34.3

ROACE (%) 22.5 30.4 33.5 37.6

Current ratio 1.9 1.8 1.8 1.8

Debtors (days) 97 90 90 90

Inventory (days) 47 48 48 48

Payable (days) 52 65 65 65

Cash conversion cycle (days) 92 73 73 73

Debt/EBITDA 1.7 1.3 1.0 0.8

Debt/Equity 0.8 0.7 0.6 0.4

Adjusted debt/Equity 0.7 0.6 0.5 0.4

Valuation parameters

Year to March FY17 FY18 FY19P FY20P

Diluted EPS (INR) 1.9 3.0 4.2 5.7

Y-o-Y growth (%) 34.0 57.9 40.3 33.6

CEPS (INR) 3.7 4.9 5.2 6.6

Diluted P/E (x) 75.3 47.7 34.0 25.4

Price/BV(x) 14.3 11.6 9.7 8.0

EV/Sales (x) 2.4 2.0 1.7 1.5

EV/EBITDA (x) 31.1 23.1 19.0 15.3

Diluted shares O/S 21.2 21.2 21.2 21.2

Basic EPS 1.9 3.0 4.2 5.7

Basic PE (x) 75.3 47.7 34.0 25.4

Dividend yield (%) NA 0.7 1.0 1.4

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Edelweiss Professional Investor Research

32

Orient Electric Ltd

Orient Electric Ltd

Edelweiss Broking Limited, 1st Floor, Tower 3, Wing B, Kohinoor City Mall, Kohinoor City, Kirol Road, Kurla(W)

Board: (91-22) 4272 2200

Vinay Khattar

Head Research

[email protected]

Rating Expected to

Buy appreciate more than 15% over a 12-month period

Hold appreciate between 5-15% over a 12-month period

Reduce Return below 5% over a 12-month period

60

70

80

90

100

110

120

130

May

-18

Jun

-18

Jul-

18

Au

g-1

8

Sep

-18

Oct

-18

No

v-1

8

Dec

-18

(In

de

xed

)

Orient Electric Sensex

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Edelweiss Professional Investor Research

33

Disclaimer

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Page 35: Orient Electric Ltd - Markets Mojo · Orient Electric Ltd Spreading out its wings 1 Orient Electric Ltd (OEL), a part of CK Birla group, is the second Utkarsh Nopany Research Analyst

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