Thread by @Mjkfinvestment

A brief thread on Orient Electric 🧵

Market cap: 6850 crores
Revenues: 2061 crores
P/E: 73.78
P/B: 16.77
ROCE: 31.22%

It is the 3rd largest player in the Fans segment and has been in operation for over 60 years;

The avg. age of employees stood at 37 years in FY18;

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Recently, it diversified into related product categories like Lighting, Switch gears, Air coolers, Water Heaters, etc;

Orient's 13.5% revenue CAGR over FY18-20 has outpaced Havells India (+7.6% CAGR) and Crompton Greaves Consumer Electricals (+5.9%);

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Orient enjoys a similar gross margin as its peers but has one of the lowest EBITDA margins;

This is on higher employee cost and advertising spends, suggestions, that Orient is perhaps in the investment phase;

Orient generates a RoE of over 22%, which is superior to many peers;

The Electronic Consumer Durables (ECD) segment-
-comprising Fans and other appliances, has grown by ~11% CAGR over FY11-20 and forms ~70% of the revenue, while the Lighting and Switchgear segment has grown ~29% CAGR and constitutes the remainder of revenue;

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Industry size and growth trends:

Over FY12-20, Ceiling Fan volume CAGR was ~7%;

Fans have higher penetration (~80%), thus the opportunity from higher penetration-led growth is limited.

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Strong case for EBITDA margin to converge with the 13-15% range enjoyed by Havells and Crompton;

It has already reached a double-digit margin in FY21;

Earnings are depressed on higher depreciation v/s peers (absolute depreciation is higher than the leader, i.e. Crompton).

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Aspirations+Innovation = Formidable Challenge

Post demerger from Orient Paper and Industries in FY17 OEL is fast establishing itself as an innovative brand in Lighting, Appliances, & Switchgears;

Demerger resulted in renewed management focus on the business, led by innovations;

Consumer Durables Industry in India.

Crompton is the largest brand, commanding a market share of ~25% in value terms, followed by Havells and OEL.

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Ad spends one of the highest among peers:

As a % of sales, ad spends remained at 4% in FY20 and at similar levels over FY18-20,

This is still higher when compared to 3.4%/ 2.2%/ 1.2%/ 2.3% for Havells/ Crompton/ Polycab/ V-gaurd.

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Debt to reduce given Orient's strong focus on cash flows and working capital:

The working capital cycle has gradually improved to 50 days in FY20 (v/s 65 days in FY18) owing to a reduction in debtor days.

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Strengths:

Strong brand name in the Fans market,

Experienced top management,

Local manufacturing capabilities to aid margin expansion,

Higher focus on branding with a focus on ad spends.

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Threats:

Strong competition, likely supply chain normalization could aid unorganized/smaller players.

Opportunities:

Diversification into wider Electrical products and Appliances category.

Weakness:
Higher dependency on Fans.

End of thread 🧵

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