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INSTITUTIONAL EQUITY RESEARCH
Page | 1 | PHILLIPCAPITAL INDIA RESEARCH
Orient Electric Ltd (ORIENTEL IN)
One Step up in Premiumisation with “De’Longhi”
INDIA | MIDCAP | Company Update
3 December 2018
Premiumisation strategy continues; Orient Electric Ltd has entered into a strategic partnership with De'Longhi Group, Italy. This partnership will lead to:
Entry of three international premium small appliances brands in India – De’Longhi, Kenwood and Braun.
Orient Electric Ltd (OEL) to have exclusive rights to market and sell these products in India.
The partnership will help OEL to expand its appliances portfolio (offering) and tap into emerging trends in the consumer appliances space in India.
The De’Longhi Group, brand portfolios: “De’Longhi, Kenwood & Braun” – have- very strong product baskets in small household appliance in coffee preparation, food preparation and cooking, cleaning and ironing and home comfort. De’Longhi will be positioning these brands in premium segment and will be targeting mass premium customers. All these 3 brands will be positioning as 1) De’Longhi to deliver the true ‘Bean to Cup’ coffee experience across different types of consumers (De’Longhi’s being No.1 in the world in espresso coffee machines). 2) Kenwood is positioned at the ‘Joy of homemade food’ through its range of Kitchen machines, Food processors and blenders, and 3) Braun will bring in world-class technology and innovation in Hand blenders and irons. Currently OEL will be importing these products (from Italy, Germany, China and Romania – De’Longhi factories) but in longer term, De’Longhi may look to put up a facility in India (Make in India).
Orient Electric Ltd: Premiumisation is gathering pace: This partnership will help OEL to expand its appliances portfolio. Company will be distributing these premium products through its own brand stores, large format retailers, specialist store channel and e-commerce. Management believes that each of the three brands has the potential to become a Rs 1.0bn brand in the next 3-5 years. Initially, Company will be selling these products across top 25 cities, first focussing on the key markets like – Mumbai, Delhi, NCR Bangalore, Kolkata, Hyderabad. OEL has started test marketing, with a soft launch in NCR & received a very strong response. Company will gradually ramp up to 100 cities in the next 2-3 years. OEL will also look at B2B sales and expects the institutional channels to contribute 10-15%.
Management expects strong margin from these products. We expect this tie-up has helped
OEL to move up in its main strategy of premiumisation, as company has done in its core products Fans (Aero series), Lighting & switchgears and also alliance with our original
investment thesis of OEL moving up in Value chain (Click here for detail report).
Outlook and valuation: De'Longhi is a leading global premium brand in Kitchen appliances. Additional to this, strategic partnership also helps OEL to increase its product offering in this segment. We expect revenue contribution from De’Longhi to start from 3QFY19, in FY20 we except revenue of Rs 500mn. We expect with initial higher market expense, De’Longhi EBITDA contribution of Rs 30mn in FY20. With improvement in reach (availability) & product offering, De’Longhi will start contributing meaningfully from FY21. Faster scale up of De’Longhi products in Indian, will positively surprise our estimates.
Over the next two years, we expect this business will show healthy improvement in margins and return ratios, majorly driven by: (1) fans – moving up in premium products, (2) lighting – lower share from CFL (lower margin business) with increasing share of LEDs, street lighting, and moving up in the premium segment, and (3) increasing penetration and better product mix in appliances and switchgears. Consequently, we expect ~200bps improvement in margins. With improvement in working capital requirement (through channel financing), we expect an FCF of Rs 1.5bn over the next two years, which will help the company to pay off its debt of Rs 1.5bn. We maintain our target multiple 30x and Re-iterate our BUY recommendation with a target of Rs 200.
BUY (Maintain) CMP RS 140 / TARGET RS 200 (+42%)
COMPANY DATA
O/S SHARES (MN) : 212
MARKET CAP (RSBN) : 30
MARKET CAP (USDBN) : 0.4
52 - WK HI/LO (RS) : 177 / 25
SHARE HOLDING PATTERN, %
Sep 18 Jun 18
PROMOTERS : 38.5 38.5
FII / NRI : 4.5 4.3
FI / MF : 18.3 18.3
NON PRO : 16.4 16.7
PUBLIC & OTHERS : 22.3 22.3
PRICE PERFORMANCE, %
1MTH 3MTH 1YR
ABS 14.5 -15.6 Na
REL TO BSE 7.4 -7.4 Na
PRICE VS. SENSEX
Source: Phillip Capital India Research
KEY FINANCIALS: Orient Electric Ltd.
Rs mn FY18 FY19E FY20E
Net Sales 15,998 19,215 23,281
EBIDTA 1,365 1,792 2,390
Net Profit 640 985 1,407
EPS, Rs 3.0 4.6 6.6
PER, x 43.4 28.2 19.8
EV/EBIDTA, x 21.5 16.3 12.0
P/BV, x 10.6 8.3 6.3
ROE, % 26.9 32.9 36.3
Debt/Equity (%) 0.7 0.4 0.3 Source: PhillipCapital estimates.
__Revised Est. __ __% Revision__
Rs mn FY19E FY20E FY19E FY20E
Revenue 19,215 23,281 0.0% 2.2%
EBITDA 1,792 2,390 0.0% 1.3%
PAT 985 1,407 0.0% 1.4% Deepak Agarwal (+ 9122 6246 4112) [email protected]
Akshay Mokashe (+ 9122 6246 4130) [email protected]
60
70
80
90
100
110
120
130
May/18 Jul/18 Sep/18
Orient Elec BSE Sensex
Page | 2 | PHILLIPCAPITAL INDIA RESEARCH
ORIENT ELECTRIC LTD COMPANY UPDATE
OEL: Not much of product overlap (between OEL & De’longhi, Ex. Iron & JMG)
A brief about De’Longhi Group Founded in 1902 as a small industrial parts manufacturing workshop, now a major producer of portable heaters and air conditioners, the company has expanded to include nearly every category of small domestic appliances in coffee, food preparation and cooking industry, as well as household cleaning and ironing. Currently company has strong presence in 33 countries with direct commercial subsidiaries and sells its products worldwide.
Regional Sales breakdown - 2016 2017
Source: Company, PhillipCapital India Research
A Brief about all the 3 brands 1. De’Longhi - Better every day: De’Longhi’s is No.1 in the world in espresso coffee machines and has wide range of heating and cooling home, cooking meals, steaming suit. Brand aims to offer consumers innovative home appliances with a distinctive combination of style and performance, always turning "the everyday" into something special. De’Longhi also is an authorized distributor for third-party Nespresso (Nestle product) in more than 20 countries. 2. Kenwood - Create more: Founded in 1947 by Kenneth Wood, this British company has fast become a respected global leader in food preparation appliances, now trading in over 40 countries around the world. Kenwood products inspire confidence to create delicious food for all occasions at all skill levels. The company joined the De’Longhi Group in 2001. Company will be launching smoothies maker, centrifugal juicer, blender, chopper, sandwich maker, hand mixers, etc. for Indian market.
Orient Eelctric Ltd.
Fans (Rs 10.9bn)
Lighting (Rs 3.5bn)
Switchgear(Rs 0.29bn)
Home Appliances (Rs 1.3bn)
Air Cooler, Iron, Juicer Mixer Grinder, Water
Heater
De'Longhi Group
De'Longhi:- Coffee Makers- Air Conditioning- Air Heating
Kenwood:- Food Processor- Grinder- Slow Juicer-
Braun:- Hand blender- Mixer- Food Processor- Personal Grooming
Other N/E Europe
12%
Other S/E Europe
17%
MEIA 8%
China 4% Japan
4% N. America
8%
Australia & NZ 6%
Other APA 3%
Italy 13%
UK 7%
Germany 13%
Ex-URSS 5%
Other N/E Europe
13%
Other S/E Europe
17%
MEIA 7%
China 4% Japan
4% N. America
10%
Australia & NZ 6%
Other APA 3%
Italy 11%
UK 6%
Germany 12%
Ex-URSS 7%
Kenwood’s Unique product: “Slow juicer” which has 2 major features: (a) Less oxidation and separation (b) High extraction rate. Kenwood products key advantages: - Compact size - Improved technology - Price (7 different products costs upto Rs. 43,000 & Kenwood Food processor 7 in 1 will cost Rs. 25,999).
De’longhi Group – Revenue break up – Brand wise
Ariete 3%
Kenwood 23%
De'Longhi 63%
Braun 11%
Page | 3 | PHILLIPCAPITAL INDIA RESEARCH
ORIENT ELECTRIC LTD COMPANY UPDATE
3. BRAUN - Designed to make a difference: More than 90 years old brand with the world’s best optimised ergonomics design and with technologically advanced products. BRAUN is present in personal care, household and watches. Braun is No.1 in hand blenders and constantly growing in food preparation and ironing. Braun has specially launched spice grinder for the Indian market.
Segmental Revenue Break-up (Product + Brands)
Sr. No. Products Brand presence Revenue (FY -16) Revenue (FY -17) Yoy
1 coffee makers De'Longhi 738.68 887.76 20.2%
2 Cooking & Food Prep De'Longhi, Kenwood & Braun 701.746 651.024 -7.2%
3 Floor Care De’Longhi 36.934 19.728 -46.6%
4 Ironing Braun 73.868 78.912 6.8%
5 Air Conditioning De’Longhi 110.802 118.368 6.8%
6 Heating De’Longhi 92.335 98.64 6.8%
7 Other De'Longhi, Kenwood & Braun 92.335 118.368 28.2%
Total 1846.7 1972.8 6.8% Source: Company, De’Longhi, PhillipCapital India Research
De’Longhi Group brands enjoy a clear global leadership in the industry and its core product segments.
De’Longhi market leader: 1 in kitchen appliances worldwide
Sr. No. Products Brand presence Market Position Market Size (bn)* Market share (%)
2 Espresso coffee makers De'Longhi #1 2.1 33%
1 Kettles & Toasters De'Longhi Kenwood Braun
1.36 8%
3 Hand blenders Braun Kenwood #1 0.54 24%
4 Food processors Kenwood Braun #1 0.48 17%
5 Kitchen machines Kenwood #1 0.7 37%
6 Other De'Longhi Kenwood Braun #1 3.6 5% Source: Company, De’Longhi, PhillipCapital India Research
Key products 1. Coffee makers (45% of Sales): De’Longhi holds the no. 1 position in the world for its coffee machines. In India Company will be launching Coffee machine in the range from 10k to 100K+. Company will be majorly targeting to mass premium segment of customer and also selling in B2B network.
Differentiation with its competitor comparison (globally and domestic)
GLOBAL BRANDS Brands available in India
Up
to
Rs
15
0K
Saeco Aulika Focus,
Automatic, Astoria, Carimali
Up
to
Rs
70
K De’Longhi, Lavazza,
Atlantis ABS Moulded,
Coffee, Nespresso
Up
to
Rs
15
K
Havells, Morphy Richards,
Philips, Technora
*From 28th November 2018, all De’Longhi product sales in India (offline or online) will be through Orient Electric Ltd. Source: Company, De’Longhi, PhillipCapital India Research
BRAUN – key differentiate features:
Active Blade Technology: for hard food item
such as coconut, avocado etc.
Splash Control technology: To prevent spilling
of fluidic materials from the container while
blending.
Smart Speed Technology: Speed control for
blending.
Price range of Key Products launched in India– Coffee makers
Name Price (Rs)
Whip Machine 10,999
Filter Coffee machine 19,990
Espresso (Red, Silver & Black
colour)
25,990
EC-850 39,999
Page | 4 | PHILLIPCAPITAL INDIA RESEARCH
ORIENT ELECTRIC LTD COMPANY UPDATE
2. Kitchen Machines (33% of Revenue):
Kenwood and Braun have strong product baskets and are market leaders in Food processors, hand mixers, hand blenders. OEL will be selling these products through its selected premium channel, targeting modern retail and also through E-Com. Company has done soft marketing in NCR, received strong response.
Differentiation with its competitor comparison (Globally) (Put Domestic Companies)
GLOBAL BRANDS Brands available in
India
Ab
ove
Rs
20
K
NA
Up
to
Rs
20
K
Inalsa, Philips,
Morphy Richard
Up
to
Rs
10
k
Bajaj Phillips, Havells,
Philips, Bosch
Source: Company, De’Longhi, PhillipCapital India Research
De’Longhi has a very strong presence worldwide, with No 1 position in products like – Coffer maker. In India De’Longhi will be targeting to Mass premium customer and also target B2B channel. Overall we expect this strategic tie-up has helped OEL to move up in premiumisation ladder and in its core strategy, as company is moving in premium products in its core product portfolio like Fans (Aero series), Lighting & switchgears.
Financials – De’Longhi
Income Statement
Y/E Mar, Euro FY14 FY15 FY16 FY17
Revenue 1727 1891 1855 2011
% change y-o-y 6.8% 9.5% -1.9% 8.4%
Net Inds. Margin 816 905 915 971
% to sales 47.2% 47.8% 49.3% 48.3%
EBITDA (before not rec.) 260 288 295 309
% to sales 15.1% 15.2% 15.9% 15.4%
EBITDA 260 285 292 304
% to sales 15.0% 15.1% 15.7% 15.1%
EBIT 213 233 239 244
% to sales 12.3% 12.3% 12.9% 12.1%
Profit Before Taxes 171 199 227 227
Taxes -43.80 -49.3 -59.2 -49.1
Profit / (Loss) for the period 127 150 168 178
Profit/(Loss)pertaining to Minority interest 0.7 0.3 0.8 0
Profit/(Loss) after minority interest 127 150 167 178
% to sales 7.3% 7.9% 9.0% 8.9%
Source: Company, PhillipCapital India Research
OEL with De’longhi - expects to capture a significant market share in the premium appliance segment in the next few years.
E marketing done by OEL for De’Longhi in India.
OEL moving up in Premiumisation.
Page | 5 | PHILLIPCAPITAL INDIA RESEARCH
ORIENT ELECTRIC LTD QUARTERLY UPDATE
Financials - Orient Electric Ltd
Income Statement Y/E Mar, Rs mn
FY18 FY19e FY20e
Net sales
15,998 19,215 23,281
Growth, %
17.3 20.1 21.2
Other income
55 85 83
Total income
16,053 19,300 23,364
Raw material expenses
10,434 12,509 15,129
Employee expenses
1,428 1,770 2,001
Other Operating expenses
2,062 2,254 2,637
EBITDA (Core)
1,365 1,792 2,390
Growth, %
50.5 31.2 33.4
Margin, %
8.5 9.3 10.2
Depreciation
198 217 236
EBIT
1,223 1,660 2,237
Growth, %
60.9 35.7 34.7
Margin, %
7.6 8.6 9.6
Interest paid
245 201 137
Pre-tax profit
978 1,459 2,100
Tax provided 338 474 693
Profit after tax 640 985 1,407
Growth, % 46.4 53.9 42.8
Net Profit (adjusted) 640 985 1,407
Unadj. shares (m) 212 212 212
Wtd avg shares (m) 212 212 212
Balance Sheet Y/E Mar, Rs mn
FY18 FY19e FY20e
Cash & bank
305 92 167
Debtors
3,939 4,464 5,086
Inventory
2,091 2,489 2,985
Loans & advances
146 146 146
Other current assets
330 330 330
Total current assets
6,811 7,522 8,714
Gross fixed assets
2,115 2,612 3,112
Less: Depreciation
1,058 1,275 1,511
Add: Capital WIP
47 50 50
Net fixed assets
1,104 1,387 1,650
Total assets
7,914 8,909 10,364
Current liabilities
3,345 3,983 4,776
Provisions
322 322 322
Total current liabilities
3,667 4,305 5,098
Total Debt
1,859 1,485 1,123
Deferred Tax Liability
-245 -245 -245
Total liabilities 5,282 5,546 5,977
Paid-up capital 212 212 212
Reserves & surplus 2,420 3,151 4,176
Shareholders’ equity 2,632 3,363 4,388
Total equity & liabilities 7,914 8,909 10,365
Source: Company, PhillipCapital India Research Estimates
Cash Flow Y/E Mar, Rs mn
FY18 FY19e FY20e
Pre-tax profit
978 1,459 2,100
Depreciation
198 217 236
Chg in working capital
-489 -286 -324
Total tax paid
-259 -474 -693
Other operating activities
481 116 54
Cash flow from operating activities
909 1,032 1,373
Capital expenditure
-254 -500 -500
Other investing activities
0 0 0
Cash flow from investing activities
34 85 83
Free cash flow
-220 -415 -417
Debt raised/(repaid)
-246 -374 -362
Dividend (incl. tax)
-373 -455 -519
Cash flow from financing activities -619 -829 -881
Net chg in cash 71 -213 75
Valuation Ratios
FY18 FY19e FY20e
Per Share data
EPS (INR)
3.0 4.6 6.6
Growth, %
46.4 53.9 42.8
Book NAV/share (INR)
12.4 15.8 20.7
FDEPS (INR)
3.0 4.6 6.6
CEPS (INR)
3.9 5.7 7.7
CFPS (INR)
4.3 4.9 6.5
DPS (INR)
0.5 1.0 1.5
Return ratios
Return on assets (%)
26.9 32.9 36.3
Return on equity (%)
26.9 32.9 36.3
Return on capital employed (%)
30.1 37.5 45.3
Turnover ratios
Sales/Total assets (x)
3.8 4.2 4.4
Sales/Net FA (x) 15.1 14.4 14.5
Working capital/Sales (x) 0.2 0.2 0.1
Fixed capital/Sales (x) 0.1 0.1 0.1
Receivable days 88.6 83.6 78.6
Inventory days 51.4 51.4 51.4
Payable days 82.3 82.3 82.3
Working capital days 57.8 52.8 47.8
Liquidity ratios
Current ratio (x) 1.9 1.7 1.7
Quick ratio (x) 1.3 1.2 1.1
Interest cover (x) 1.3 1.2 1.1
Dividend cover (x) na na na
Total debt/Equity (x) 0.7 0.4 0.3
Net debt/Equity (x) 0.6 0.4 0.2
Valuation
PER (x) 43.4 28.2 19.8
PEG (x) - y-o-y growth 0.9 0.5 0.5
Price/Book (x) 10.6 8.3 6.3
Yield (%) 0.4 0.8 1.1
EV/Net sales (x) 1.8 1.5 1.2
EV/EBITDA (x) 21.5 16.3 12.0
EV/EBIT (x) 24.0 17.6 12.9
Page | 6 | PHILLIPCAPITAL INDIA RESEARCH
ORIENT ELECTRIC LTD QUARTERLY UPDATE
Stock Price, Price Target and Rating History
Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year.
Rating Criteria Definition
BUY >= +15% Target price is equal to or more than 15% of current market price
NEUTRAL -15% > to < +15% Target price is less than +15% but more than -15%
SELL <= -15% Target price is less than or equal to -15%.
NR (TP 190)
B (TP 200)
B (TP 200)
0
20
40
60
80
100
120
140
160
180
M-18 J-18 A-18 S-18 N-18
Page | 7 | PHILLIPCAPITAL INDIA RESEARCH
ORIENT ELECTRIC LTD QUARTERLY UPDATE
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Page | 8 | PHILLIPCAPITAL INDIA RESEARCH
ORIENT ELECTRIC LTD QUARTERLY UPDATE
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