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Buy Orient Electric, target Rs 200: Phillip Capital (India)

Phillip Capital (India) has a buy call on Orient Electric (OEL) with a target price of Rs 200.

The current market price of Orient Electric is Rs 140.

Time period given by the foreign brokerage is one year when Orient Electric price can reach the defined target.

View of Phillip Capital on Orient Electric:
Premiumisation is gathering pace: This partnership will help OEL to expand its appliances portfolio. The 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 100 crore brand in the next 3-5 years. Initially, the 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. The 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 per cent. The 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 the 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.

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 DeLonghi to start from 3QFY19, in FY20 we except revenue of Rs 500mn. We expect with initial higher market expense, DeLonghi EBITDA contribution of Rs 0.30 crore in FY20. With improvement in reach (availability) & product offering, DeLonghi will start contributing meaningfully from FY21. Faster scale up of DeLonghi 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 about 200bps improvement in margins. With improvement in working capital requirement (through channel financing), we expect an FCF of Rs 150 crore over the next two years, which will help the company to pay off its debt of Rs 150 crore. We maintain our target multiple 30x and Re-iterate our BUY recommendation with a target of Rs 200.

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