Investors with a long term perspective can buy the stock of Bajaj Electricals. Order flow for the company's Engineering and Projects (E&P) business may improve now as power sector reforms announced in the Budget may put the investments in the sector back on track.

The E&P business unit contributes 30 per cent of overall sales of the company. In addition to orders for transmission line towers from power distributors, this segment undertakes orders from the government for high masts, poles and lighting. .

The company bids for orders from schemes such as Rajiv Gandhi Grameen Vidyuthikaran Yojana. The E&P order book saw a slowdown over the last few quarters on fewer government orders.

Bajaj Electricals' consumer business is also set to see a stronger growth going ahead, with the company marketing its products aggressively in the semi-urban and rural markets and gaining market share.

At the current price of Rs 181, the stock discounts its likely FY-12 earnings by 14 times and looks like a value buy for long-term investors. Havells, the company's peer, trades at a price-earning multiple of 25 times.

E&P business to improve

In FY-11, Bajaj's E&P business unit recorded sales growth of 13 per cent. However, since the beginning of the current fiscal, sales growth has been sluggish at 2 per cent so far this fiscal.

The company had to incur additional cost on some of its ongoing projects without much revenues flowing in. Operating profit margins of the segment for the nine months of FY12 dropped to 1.1 per cent from 7.4 per cent in the same period last year.

The E&P business may see improved prospects in the coming fiscal. The Budget has announced doubling of outlay on infrastructure projects in the twelfth Five-year plan which begins from 2012-13. Also, with power generation companies shown green-flag to borrow through the ECB route to fund projects, there may be good flow of new orders in the power infrastructure side.

The E&P order book stood at around Rs 774 crore in the beginning of March, (1.7 times the segment's nine month sales of FY-12). Operating profit margins of the segment may also improve once the pace of execution picks up. It has also made a decision not to compete in the market for orders below a certain profit margin.

Consumer business to grow

The company's consumer durable and lighting segments have been growing robustly. In the nine months ending December-2011, they recorded a sales growth of 20 per cent and 21 per cent respectively. Small appliances, a segment where the company is entrenched, has continued to grow strongly despite the slowdown in other consumer durable sales.

The company has expanded reach in the semi-urban markets. Going ahead, moderating inflation and interest rates may provide a further fillip to demand.

In the lighting segment, growth was driven largely by the demand for compact fluorescent lamps (CFL), thanks to the increasing awareness on energy savings and the company's aggressive selling of these lamps in the rural markets.

Now that the government has given relief to CFL makers by completely exempting customs duty on the coating chemical used in CFLs, the company will save on some costs. This if passed on may act as fillip to demand.

Strong pricing power

Bajaj Electricals has demonstrated pricing power on several occasions in the past. An increase in raw material costs (copper prices, in particular) in 2010 and 2011 has seen the company increase product prices without demand being hit.

However, there may not be any increase in product prices now following the hike in excise duty in the Budget as most of the products of the company are from excise-free zones.

Operating profit margin in the consumer durables segment was at 10 per cent for the nine months ending December-11, not sharply down from last year despite the rally in copper prices and the depreciation in rupee.

The rupee's strengthening vis-a-vis the dollar in the last two months may help the company see some savings on its copper import bill.

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