Strengthening customer loyalty as showcased in consistent increase in market share Bajaj Corp. Limited’s (BCL’s) key product catering to the premium class - Bajaj Almond Drop Hair Oil (ADHO) is the flagship product accounting for majority of company’s revenues. It belongs to Light Hair Oil (LHO) segment which accounts for almost 15% of the overall hair oil industry. Over the last five years, this segment has grown at a CAGR of 25.5% while Almond based hair oils remained the key driver which has been growing at a CAGR of 37.5% in terms of value. Bajaj ADHO has created a unique position in the hair oil market through various initiatives such as product differentiation, focused marketing and distinctive packaging. The brand has showcased a consistent increase in the market share growing from 31.4% in FY 2006 to 53.0% in FY 2011 which depicts strong customer loyalty and brand recognition. Going forward, the company aims to achieve 65.0% market share in LHO segment. Strategic moves to tap rural markets without compromising on the costs The company is enhancing focus on rural population to tap the wide opportunities available in rural areas. With the growing media coverage and enhanced information sources coupled with rising affordability, the rural population is witnessing increased awareness of branded products. This enables them to switch from unbranded products to packaged and branded products. BCL intends to increase contribution from the rural consumers by providing an appropriate value proposition in terms of pricing, positioning and packaging. The company’s key product – ADHO is the only brand among its key competitors which is available in sachets. Accordingly, the proportion of rural sales of ADHO has increased from 29% in FY 2007 to 39% in FY 2011. Strong fundamentals offers soft cushion to opt for inorganic growth BCL enjoys a robust market share, strengthening brand image and a growing customer loyalty. The company is also financially well-positioned with an unleveraged balance sheet, strong operating cash flows and high profitability. During February 2012 the company paid a dividend of 400% of its face value. The sound fundamentals will help the company to opt for implementing its strategies to bid for inorganic growth and to enter new product lines. OUTLOOK & VALUATION We initiated coverage on Bajaj Corp. Ltd. (BCL) with a BUY recommendation at ` 115 in our short note dated 12 March, 2012. Following our meet with the Management, we have now come out with a detailed report. As mentioned earlier, our positive outlook for the company is based on a strong brand loyalty enjoyed by the company which reflects in the consistent and substantial improvement in Light Hair Oil market share; strong pricing power over the competitors which reflects in high profit margins; and robust fundamentals as depicted by strong cash flow generation, unleveraged balance sheet, strong top-line and bottom-line growth. Additionally, the company is also increasing its reach in rural markets through its distribution network aggressively. The company may soon announce an acquisition deal as a part of their strategy to grow. Additionally, the high promoters’ stake may add further value to the investment. According to the new norms over promoter holding, the promoters will have to reduce their shareholding to 75% by mid-FY 2013. At CMP of ` 129, the stock currently trades at 11.3x FY14 EPS of ` 11.4, at substantial discount to its competitors. We maintain our BUY rating on BCL at current levels with a target price of ` 148 (13x FY14E EPS). Please refer to important disclosures at the end of the report For private Circulation Only. Sushil Financial Services Private Limited Member : BSEL, SEBI Regn.No. INB/F010982338 | NSEIL, SEBI Regn.No.INB/F230607435. Office : 12, Homji Street, Fort, Mumbai 400 001. Phone: +91 22 40936000 Fax: +91 22 22665758 Email : [email protected]April 04, 2012 BUY CMP ` 129 Target ` 148 Techno Speak FMCG (Personal Care) EARLIER RECO* Buy Price ` 115 Date March 12, 2012 ** * Short Note SHARE HOLDING (%) Promoters 84.75 FII 7.25 FI / MF 1.86 Body Corporates 2.63 Public & Others 3.51 STOCK DATA Reuters Code Bloomberg Code BACO.BO BJCOR IN BSE Code NSE Symbol 533229 BAJAJCORP Market Capitalization* ` 17,700 mn US$ 347 mn Shares Outstanding* 147.5 mn 52 Weeks (H/L) ` 132/85 Avg. Daily Volume (6m) 20,535 Shares Price Performance (%) 1M 3M 6M 7 21 17 200 Days EMA: 111 *On fully diluted equity shares EQUITY ANALYST Saurabh Jain | +91 22 4093 4004 [email protected]EQUITY ANALYST Alok Deora | +91 22 4093 4014 [email protected]Bajaj Corp. Ltd. Initiating Coverage (Detailed) KEY FINANCIALS Y/E Mar 31 Revenue (` mn) EBITDA Margin (%) Net Profit (` mn) Net Margin (%) AEPS (`) P/E (x) P/B (x) P/S (x) FY11 3,594.4 30.3 841.0 23.4 7.0 18.5 5.1 5.3 FY12E 4,656.1 25.6 1,199.9 25.8 8.1 15.9 4.8 4.1 FY13E 5,630.1 25.8 1,414.3 25.1 9.6 13.5 3.6 3.4 FY14E 6,668.9 26.7 1,678.4 25.2 11.4 11.3 2.8 2.9
Transcript
Strengthening customer loyalty as showcased in consistent increase in market share Bajaj Corp. Limited’s (BCL’s) key product catering to the premium class - Bajaj Almond Drop Hair Oil (ADHO) is the flagship product accounting for majority of company’s revenues. It belongs to Light Hair Oil (LHO) segment which accounts for almost 15% of the overall hair oil industry. Over the last five years, this segment has grown at a CAGR of 25.5% while Almond based hair oils remained the key driver which has been growing at a CAGR of 37.5% in terms of value. Bajaj ADHO has created a unique position in the hair oil market through various initiatives such as product differentiation, focused marketing and distinctive packaging. The brand has showcased a consistent increase in the market share growing from 31.4% in FY 2006 to 53.0% in FY 2011 which depicts strong customer loyalty and brand recognition. Going forward, the company aims to achieve 65.0% market share in LHO segment.
Strategic moves to tap rural markets without compromising on the costs The company is enhancing focus on rural population to tap the wide opportunities available in rural areas. With the growing media coverage and enhanced information sources coupled with rising affordability, the rural population is witnessing increased awareness of branded products. This enables them to switch from unbranded products to packaged and branded products. BCL intends to increase contribution from the rural consumers by providing an appropriate value proposition in terms of pricing, positioning and packaging. The company’s key product – ADHO is the only brand among its key competitors which is available in sachets. Accordingly, the proportion of rural sales of ADHO has increased from 29% in FY 2007 to 39% in FY 2011.
Strong fundamentals offers soft cushion to opt for inorganic growth BCL enjoys a robust market share, strengthening brand image and a growing customer loyalty. The company is also financially well-positioned with an unleveraged balance sheet, strong operating cash flows and high profitability. During February 2012 the company paid a dividend of 400% of its face value. The sound fundamentals will help the company to opt for implementing its strategies to bid for inorganic growth and to enter new product lines.
OUTLOOK & VALUATION We initiated coverage on Bajaj Corp. Ltd. (BCL) with a BUY recommendation at ` 115 in our short note dated 12 March, 2012. Following our meet with the Management, we have now come out with a detailed report. As mentioned earlier, our positive outlook for the company is based on a strong brand loyalty enjoyed by the company which reflects in the consistent and substantial improvement in Light Hair Oil market share; strong pricing power over the competitors which reflects in high profit margins; and robust fundamentals as depicted by strong cash flow generation, unleveraged balance sheet, strong top-line and bottom-line growth. Additionally, the company is also increasing its reach in rural markets through its distribution network aggressively. The company may soon announce an acquisition deal as a part of their strategy to grow. Additionally, the high promoters’ stake may add further value to the investment. According to the new norms over promoter holding, the promoters will have to reduce their shareholding to 75% by mid-FY 2013. At CMP of ` 129, the stock currently trades at 11.3x FY14 EPS of ` 11.4, at substantial discount to its competitors. We maintain our BUY rating on BCL at current levels with a target price of ` 148 (13x FY14E EPS).
Please refer to important disclosures at the end of the report For private Circulation Only.
Company Overview BCL is one of the leading FMCG companies that represent one of the oldest business houses of the country. The company offers personal care products under the hair care segment of the consumer goods. Formerly known as Bajaj Sevashram, the company eventually became Bajaj Corp Ltd. and endorses brands which have been in the industry for many decades.
Bajaj Group is a conglomerate founded by legendry Mr. Jamnalal Bajaj in 1926, which split between the brothers Mr. Rahul Bajaj and Mr. Shishir Bajaj in 2007. BCL is a part of Shishir Bajaj Group which comprises of other companies such as Bajaj Hindustan Ltd, Bajaj Eco-tec Products Ltd and Bajaj Infrastructure Development Company. BCL was founded by Mr. Kamal Nayan Bajaj in 1953 and is currently been headed by Mr. Kushagra Bajaj.
The company’s product portfolio consists of Bajaj - Almond Drops Hair Oil (ADHO), Bajaj – Brahmi Amla Hair Oil (BAHO), Bajaj – Amla Shikakai Hair Oil (ASHO), Bajaj Jasmine Hair Oil. The company has recently launched Kailash Parbat Thanda Tel (Cooling Oil). Besides the Hair Oil segment, the company also offers Bajaj Kala Dant Manjan (Black Tooth Powder for rural markets) and Bajaj Kali Mehndi (Black Henna). Of these, ADHO is the flagship product which contributed approximately 96% of the FY 2011 sales. The company also exports several brands including ADHO, BAHO and Bajaj Kali Mehndi to various countries including UAE, Mauritius, Malaysia, Kuwait, Maldives, Oman, Kenya, Saudi Arabia, Uganda, Singapore, Myanmar, Pacific Islands (New Zealand, Australia, Fiji Islands) West Indies, Sri Lanka, Bangladesh, Afghanistan, Combodia, Nepal and USA.
The company got listed on Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) in August 2010 raising ` 2,970 mn at the upper end of the offered price band of ` 630 - ` 660. On May 05, 2011, the company split the stock price from the face value of ` 5 to ` 1.
Business Overview The company has an operating history of almost 60 years when Bajaj Sevashram Limited (BSL) was founded to market and sell hair oils and other beauty products. Resulting from the family settlement, the business was demerged to Bajaj Consumer Care Limited (BCCL) in 2001. BSL assigned the trademarks for all of the brands to BCCL. Subsequently, BCCL licensed these brands exclusively to BCL for a term of 99 years from March, 2008 through a Trademark License Agreement. The consideration to BCCL for the use of these trademarks is in the form of an annual royalty payment at the rate of 1% of net sales.
The company has three manufacturing facilities each in Parwanoo (Himachal Pradesh), Paonta Sahib (Himachal Pradesh) and Dehradun (Uttarakhand). All these manufacturing facilities are located in tax-free zones. For Parwanoo Unit, BCL is exempted from paying excise duties for a period of 10 years from fiscal year ended March 31, 2009 and income tax for a period of five years from fiscal year ended March 31, 2009. For Dehradun and Poanta Sahib Facilities, the company is exempted from paying excise duties for a period of 10 years from fiscal year ended March 31, 2010 and income tax for a period of five years from fiscal year ended March 31, 2010. After the income tax free period, BCL will be taxed at a concessional rate for the following five years. In addition, the company has a couple of third-party operated manufacturing units each at Parwanoo (Himachal Pradesh) and Udaipur (Rajasthan). The Udaipur based manufacturing facility is dedicated to production of Black Tooth Powder, an oral care product for rural population.
The company manufactures and markets a variety of hair oils such as ADHO, BAHO, ASHO, Jasmine Oil and Kailash Parbat Cooling Oil and few other hair care and oral care products such as Bajaj Kali Mehndi and Bajaj Kala Dant Manjan respectively. The
Formerly known as Bajaj Sevashram, the company eventually became Bajaj Corp Ltd. and endorses brands which have been in the industry for many decades.
The consideration to BCCL for the use of these trademarks is in the form of an annual royalty payment at the rate of 1% of net sales.
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principal product is ADHO which belongs to Light Hair Oil (LHO) category. The company’s hair oil products are widely used throughout India under three principal brand names 'Almond Drops', the market leading brand for light hair oil, 'Brahmi Amla', traditional heavy hair oil produced since 1953 and 'Amla Shikakai', heavy hair oil catering to cost conscious consumers.
Product Basket
Almond Drops Hair Oil (ADHO) - The modern Indian consumer is moving away from the traditional heavy and sticky hair oils towards light hair oils. Bajaj ADHO which was launched in 1989 is the leading brand in the light hair oil segment. ADHO is positioned as non-sticky, nourishing and stylish hair oil targeting to the premium consumer class. This is probably the highest priced hair oil in the Light Hair Oil (LHO) category. The oil is packaged in glass bottles which help retaining the aroma that may be lost in usual plastic bottles because of high temperatures experienced throughout the country. The glass bottles not only add to the shelf life of the product but also offer credibility to the premium nature of the Almond Drops brand. However, the company has recently experimented with the traditional plastic bottle which was also widely accepted by the customers.
During FY 2007 to FY 2011, the ADHO market has grown at a CAGR of 29.0% in volume terms and at a CAGR of 37.5% in value terms. At the same time, the company has managed to grab a substantial portion of the growing market thereby increasing its market share from 31.4% in FY 2006 to 53.0% in FY 2011. Moreover, the company has managed to command this strong leadership not by compromising on the pricing power demonstrating the robust customer loyalty and strong brand recognition. Though, the brand retains strong hold amongst the customers, the Bajaj ADHO competes with several other products such as Dabur Almond Hair Oil and other Light Hair Oils such as Deys Medical’s Keo Karpin, Marico’s Hair & Care, Marico’s Shanti Badam Hair Oil and HUL’s Clinic All Clear.
Dominance in Northern region: Geographically, ADHO has more dominance in the Northern states of the country which together contributed 47.4% of the total sales in FY 2010, followed by the Eastern states (17.8%), Western States (13.6%), Central States (12.9%) and Southern States (2.6%). The South Indian consumers have strong preference for Coconut based oils.
ADHO’s Market Share in Light Hair Oil Segment Price of 100 ml SKU of Almond Drops Hair Oil
Source: Company Presentation, Sushil Finance
During FY 2007 to FY 2011, the Almond Drop Hair Oil market has grown at a CAGR of 29.0% in volume terms and 37.5% in value terms.
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Brahmi Amla Hair Oil (BAHO) – The company has been producing this traditional heavy herbal hair oil since 1953. BAHO serves a niche market and is one of the well-known Amla brands. Despite being in business for several decades, this product contributes insignificantly to the overall top-line. During FY 2011, BAHO contributed merely 2.8% to the revenues. This brand primarily competes with Dabur Amla and Dabur Sarson Anmol (Mustard Oil).
Kailash Parbat Thanda Tail (Cooling Oil) – The company launched this new product during FY 2012 which caters to the Cooling Oil segment of the Hair Oils market and competes with Himani Navratna Oil (Emami). This is a budding segment in the Hair Oils market and has been growing at CAGR of 14.5% in volume terms and at 16.5% in value terms. Being a seasonal product Bajaj Kailash Parbat Cooling Oil experiences huge demand during the summer season while the demand remains subdued during winters. Accordingly, the company sold 28,777 cases during the launching quarter (Q1 FY12) and merely 7,562 and 998 case units during Q2 FY12 and Q3 FY12, respectively. During 9M FY12, the cooling oil contributed 2.1% to the overall sales of the company.
Besides the above three products, the company also has Amla Shikakai Hair Oil (ASHO), Jasmine (Chameli) Hair Oil, Bajaj Kali Mehndi (Black Henna), Bajaj Kala Dant Manjan (Black Tooth Powder) and Lal Dant Manjan (Red Tooth Powder).
Consumer Profile The above products of the company enjoy a balanced consumer profile and Almond Drops in particular, which enjoy a strong customer loyalty shares a balanced and mixed consumer profile. 54% of its consumers are males and 59% of the consumers belong to the age group of 15-39 years. The urban and rural mix is also improving as 39% of the consumers are now rural.
Raw Materials The primary raw materials required by the company are Light Liquid Paraffin (LLP), Refined Vegetable Oil, Glass Bottles, Perfumes & Other Additives, Corrugated boxes, Bottle Caps and others. LLP and Vegetable Oils are derivatives of Crude and thus prices moves in tandem with the Crude Oil prices. Currently, around 40% of these raw material costs are LLP while Refined Vegetable Oil consists 8% of the total raw material costs. Another substantial part of the total raw material costs is glass, which roughly makes one-fourth of the raw material expenditure. During 9M FY 2012, the raw material expenditure has increased to 46.2%, as a percentage of revenues as compared to 42.1% in 9M FY 2011. The increase in raw material costs was primarily on account of rising LLP which increased from ` 62.75 per Kg to ` 84.93 per Kg during the same period. In addition, the upwards movement in Refined Vegetable Oil has also increased from ` 53.33 per Kg to ` 66.41 which also contributed to the rise in raw material costs. Despite increased raw material prices, the company enjoys one of the highest operating margins in the FMCG segment.
The company launched Kailash Parbat Cooling Oil during FY 2012 which caters to the Cooling Oil segment of the Hair Oils market and competes with Himani Navratna Oil (Emami).
The increase in raw material costs was primarily on account of rising LLP which increased from ` 62.75 per Kg to ` 84.93 per Kg during 9M FY 2011, on Y-o-Y basis.
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Industry Overview
The Indian FMCG sector is the fourth largest sector in the economy with a total market size in excess of ` 1,670 bn, according to the company presentation. The sector is characterized by strong presence of multinational corporations and a well-established distribution network. Moreover, there is intense competition between the organized and unorganized segments. Abundant availability of raw materials, cheaper labor costs and presence across the entire value chain provides India a competitive advantage. Expanding population, growing middle class and rapid urbanization coupled with rising awareness resulting from increased media penetration presents an opportunity to makers of branded products to convert unbranded consumers to branded products. Rising per capita income and disposable income, improving consumer confidence levels and favorable demographics are adding fuel to this growth.
The Hair Care segment consists 7.7% of FMCG sector valuing at ` 128.15 bn. The Hair Care industry grew at 39.3% during FY 2010, matching the pace of the growth in the FMCG industry which showcased a growth of 43.9% in FY 2010 on an annual basis. The Hair Care segment consists of various components including Shampoos, Perfumed Oils, Coconut based Oils, Hair Conditioners and Hair Dyes. The Hair Oils comprises approximately 52.0% of the Hair Care segment in value terms, contributing approximately ` 66,640 mn to the overall Hair Care market. The Hair Oil market in India is highly dominated by Coconut based oils which command almost 48% of the market share. Other growing categories in the Hair Oils are Amla based Oils, Light Hair Oils and Cooling Oils which command 15%, 15% and 12% of the share in overall Hair Oil segment.
Hair Oil Market
Source: Company Presentation, Sushil Finance
FMCG (` 1,67,064 Cr.) crores)
Hair Care (` 12,815 Cr.)
Shampoo (` 3,973 Cr.)
Perfumed Oil (` 3,460 Cr.)
Coconut Oil (` 3,204 Cr.)
Conditioners (` 256 Cr.)
Hair Dyes (` 1,922 Cr.)
Coconut Oils (48%)
Amla based Oils (15 %)
Light Hair Oils (15 %)
Cooling Oils (12%)
Others (10%)
Hair Oil Market (Approx. 52% of the Hair Care Market)
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Growth of Hair Oil segment in India
Source: Company Presentation, Sushil Finance
Over the last 5 years, the Overall Hair Oil market has grown at a CAGR of 16.7% in volume terms and at a CAGR of 20.0% in value terms.
The Light Hair Oil (LHO) segment has been the key driver of the Hair Care industry in the country. With rising awareness, the modern consumer prefers light, non-sticky and modern oils over the traditional oils. Light Hair Oils being relatively costlier is dominated by urban areas of Northern states of the country. Higher disposable incomes and the propensity of consumers to try new products coupled with preference for Coconut based Oils of South Indian people has resulted into a geographical concentration of Light Hair Oils in Northern India, which roughly contributes half of the volumes. Since FY 2007, the LHO segment has been growing at a CAGR of 17.6% in volume terms and 25.5% in value terms. During FY 2011, the LHO segment registered a sales volume of 22,464 kiloliters worth ` 8330 mn. The growth going forward is likely to come from conversion of consumers of unbranded products to branded products primarily from rural areas.
During FY 2011, Northern states dominated the LHO market contributing 49% of the overall sales on account of factor mentioned above. Both Eastern and Western regions contributed almost equally with 22% and 23% while Southern states reflecting their strong preference for Coconut based oils contributed just 4% to the overall sales of the LHO segment.
Growth of Light Hair Oil segment in India
Source: Company Presentation, Sushil Finance
Amongst the LHO segment, Almond based Hair Oils are growing faster than other light hair oils. Over the past four years, Almond based Hair Oil has grown at a CAGR of 29.0% in volume terms and 37.5% in value terms. Almond based Hair Oils have been improving
Over the past four years, Almond Drops Hair Oil has grown at a CAGR of 29.0% in volume terms and 37.5% in value terms.
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on the consumer preferences due to its unique Hair Nourishing Elements, Vitamin E content, Light fragrance and Non-sticky feel.
Growth of Almond Drops Hair Oil in India
Source: Company Presentation, Sushil Finance
Cooling Hair Oils have emerged as a significant segment in the hair oil market of this hot sub-continent. Cooling oils are hair oils intended to provide immediate relief to the scalp during the summer season. Since FY 2008, the cooling hair oil category in the country has been growing at a CAGR of 14.5% in volume terms and 16.5% in value terms reaching nearly ` 766 crores in the financial year ended March 31, 2011.
Growth of Cooling Hair Oils in India
Source: Company Presentation, Sushil Finance
Going forward, the growth in branded hair care products is likely to be driven by conversion of unbranded and unorganized segment to branded category which presents immense opportunities in the rural markets. Hair Oil is the highest penetrated consumption category in both rural and urban India as compared to other categories such as Toothpaste, Shampoo, Hair Oil, Skin Cream, Mosquito Repellants, Instant Noodles, Hair Dyes and Floor Cleaners. According to Industry reports, Hair Oil reaches to 67% of the rural population and 80% to the urban population. This showcases that there is a channel established and the players need to fight for the conversion. We believe, LHO; Almond based hair oils in particular are likely to see robust growth rates for next few years because of its unique characteristics such as almond extracts, vitamin E nourishing qualities, non-sticky and lightness.
Going forward, the growth is likely to be driven by conversion of unorganized segment to branded category
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Competitive Scenario Investment Rationale
GROWTH STRATEGIES GOING FOWARD
BAJAJ CORP
COVERSION OF NON-BRANDED & OTHER
HAIR OIL USERS TO LHO CONSUMERS
EATING AWAY COMPETITORS’
MARKET SHARE & NEW PRODUCT
LAUNCHES
INDUSTRIAL GROWTH
INORGANIC GROWTH THROUGH ACQUISITIONS
Market Leadership (LHO)
Brand & Product Heritage
Extensive Distribution Network
Robust Financial Position
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Investment Rationale
Consistent increase in market share of flagship brand showcases high customer loyalty During the past few years, the company’s flagship product ADHO has emerged to become a market leader in the unconventional light hair oil category of the Indian Hair Oil Market. We are positive on the brand/product as the company has successfully been growing its hold in the light hair oil market despite being priced at the upper end as compared to its competitors. Thus, the product exhibits strong brand recognition and entertains robust customer loyalty. This pricing power reflects not only the product’s superior quality but also ensures safeguarded profitability going forward. We believe if BCL attempts any new endeavors by leveraging on this brand, the company will be benefited from the goodwill established by the Bajaj ADHO over the years.
Quarterly Sales Volume of Bajaj Almond Drops Hair Oil
Source: Company Presentation, Sushil Finance
Over the last few years, the ADHO has displayed consistent growth in volumes. Furthermore, the brand enjoys a well-diversified and balanced consumer profile. According to the company’s investor presentation – 54% of the consumers are males and remaining 46% are females. Interestingly, 59% of the consumers belong to the young population between the age brackets of 15-39 years. Furthermore, the increasing rural penetration has resulted into increased contribution from rural areas. The rural consumers now make 39% of the total consumers. These favorable demographics provide long term visibility for the product.
Price of 100 ml SKU of popular brands in the Hair Oil Market
Source: Company Presentation, Sushil Finance
This pricing power reflects not only the product’s superior quality but also ensures safeguarded profitability going forward
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Strategic steps to extend reach to rural markets while not sacrificing on the prices A majority of Indian population resides in rural areas and presents ample opportunities to FMCG companies to grow substantially. This requires strategic moves and positioning the product in a way to lure the rural consumers. In order to avail this opportunity, most of the companies are focusing on extending their distribution network to deep rural markets. These companies are tweaking their products in terms of packaging, pricing, and positioning to suit to the rural requirements. With the growing media coverage and enhancing information sources coupled with rising affordability, the rural population has witnessed increasing awareness of branded products. This enables them to switch from unbranded products to packaged and branded products. Thus, in wake of changing consumer preferences and changing consumption patterns, the company also intends to benefit by increasing contribution from the rural consumers by providing an appropriate value proposition in terms of pricing, positioning and packaging.
The company’s key product – ADHO is probably the only brand among its key competitors which is available in sachets. With the increasing distribution network in rural areas the sales contribution from small SKUs is also increasing. The increasing rural acceptance of ADHO is explained by the growth in the sales of low unit size packs, 3ml and 20 ml both of which are driving the volume growth particularly in rural areas. During FY 2011 the sales from small SKUs formed 13.2% of the total volume sales of the brand as compared to 9.6% in FY 2010. Accordingly, the proportion of rural sales of ADHO has increased to 39% in FY 2011 from 29% in FY 2007.
As on 31 December 2010, the products of the company were accessible at 0.87 mn retail outlets of rural areas which increased almost 39% to 1.21 mn on 31 December 2011. The huge increase in the rural distribution network on an annual basis showcases aggressive attempts to penetrate rural areas.
Consumer Profile – 2007 Consumer Profile - 2011
Source: Company Presentation, Sushil Finance
With the growing media coverage and enhancing information sources coupled with rising affordability, the rural population has witnessed increasing awareness of branded products.
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Strong fundamentals offer soft cushions for inorganic growth The company is financially well-positioned with an unleveraged balance sheet, strong operating cash flows and high profitability. These sound fundamentals will upkeep the company’s intentions to grow inorganically. Despite a substantial contraction in the operating margins in last few years, BCL enjoys one of best operating margins as compared to other FMCG players in the country.
Besides the operating efficiency, the robust cash on the books make this fast growing company look attractive. As of March 31, 2011 the company had Cash and Cash equivalents of ` 4114.0 mn (including ` 2780 mn net raised through IPO in August 2010 shown as Investments). Of this cash, the company acquired a non-operating company called Uptown Properties and Leasing Pvt. Ltd. which holds a plot of land in Worli, Mumbai for the consideration of ` 750 mn. The company believes that since the company is growing, it will eventually need a bigger corporate office to synchronize its various departments. Accordingly, in a couple of years’ time, the company intends to develop its corporate office at this premise which extends into 11,222 sq.ft. and have a built up area of 33,600 sq.ft. Moreover, since the company has strong cash position, the company is looking for a further acquisition in the near future. Since, the company is currently unleveraged it may also consider taking a debt for this acquisition. The company does not require any significant capacity additions in the near future; we do not expect any substantial capital expenditure.
The company generates over 95% of its revenues from a product which enjoys highest market share in its category, high customer loyalty and is gaining popularity both in terms of geographies and consumer profiles. Thus, we believe that the company does not require spending much on the product development for its established product. The saved money can in turn be spent on adding new products to its basket. The company launched ‘Bajaj Kailash Parbat – Cooling Oil’ in FY12 and is planning to launch a new product in FY13.
Furthermore, the high promoter holding also reflects their belief in the company. The promoters currently hold 84.75% of the stake in the company which according to the new norms will have to be reduced to 75% by mid-2013. Additionally, the company has been investor friendly in terms of dividend distribution. The company paid a dividend of 400% of its face value during February 2012.
The company recently acquired a non-operating firm called Uptown Properties and Leasing Pvt. Ltd. for the consideration of ` 750 mn.
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Competitive Scenario Being one of the fastest growing consumer goods markets, the Indian FMCG space can be characterized as one of the most competitive space driven by strong demand and consumption patterns. Rising awareness and affordability has been the key drivers behind these improving consumer trends. The favorable demographics, rapidly growing urbanization, rising middle class and changing consumer preferences alongwith retail expansion and enlarging branded sector are luring the industry players to pitch the every possible area. Even though the overall FMCG sector is well-diversified and highly fragmented, the hair care market, half of which is the hair oil industry is primarily dominated by Marico, Dabur and Bajaj which together consist roughly fourth-fifth of the hair oil market.
The key players in the Indian Hair Care industry are Dabur, Bajaj, HUL, Marico, Emami and Keo Karpin. Marico being the coconut based hair oil producer leads the overall hair oil markets. Marico holds almost half of the market share followed by Dabur and Bajaj respectively. The coconut based oil market is dominated by Marico, the Amla based oil market is led by Dabur India, Emami is the market leader in the Cooling Oil segment while Bajaj Corp heads the Light Hair Oil segment. As mentioned earlier, hair oils are one of the most important personal care products in India just like tooth brushes, tooth pastes and soaps. Accordingly, the penetration of hair oils is one of the highest as compared to other FMCG products. Thus, the hair oil companies like Bajaj Corp, Dabur India, Emami, Marico and HUL keep trying to eat away each other’s market share. Nevertheless, as personal care products enjoy high customer loyalty it becomes very difficult to make a person switch from its previous product.
Peer Comparison
Company (FY 2011)
Revenues (` mn)
Revenue Growth
EBITDA Margin
EPS P/E* P/S*
Bajaj Corp 3594.4 21.9% 30.3% 5.70 16.8x 4.0x
Dabur India 40774.3 20.3% 19.6% 3.08 39.8x 5.2x
Marico 31283.1 17.6% 15.6% 4.64 27.4x 3.6x
Emami 12590.1 23.2% 23.7% 14.53 25.7x 4.5x
HUL 196643.7 10.9% 16.2% 9.61 32.8x 4.1x Source: Capitaline, Sushil Finance * Based on TTM Performance
Key Risks Dependency on single product – The company derives 96% of revenues from its flagship product, ADHO and is quite dependent on this product. Nevertheless, the company enjoys strong brand loyalty and market leadership. Going forward, the company expects this contribution to come down to 85% over the period of next three years as the other products such as Kailash Parbat Cooling Oil grows out of their nascent product stage.
Raw material costs linked to volatile crude prices – The company’s primary cost is raw material cost which constitutes around 40-45% of overall revenues. A majority of raw material costs are spent on Light Liquid Paraffin (LLP) and Vegetable Refined Oil which are linked to crude oil prices. During last two years, the LLP prices have increased from ` 44.5 per Kg to ` 82.9 per Kg. Similarly, prices of refined oil have increased from ` 52.2 per Kg to ` 70.3 per Kg. Accordingly, the company has taken a major hit on the operating margins which have contracted from 33.1% in FY 2010 to 25.5% in Q3 FY12. Going forward, any increase in raw material price above our estimates would result into lower than expected operating margins.
As personal care products enjoy high customer loyalty it becomes very difficult to make a person switch from its previous product.
April 04, 2012 13
Bajaj Corp. Ltd
SWOT Analysis
Strengths Weaknesses
Strong Brand Recognition and Leadership of Key Brand (ADHO) in the LHO category
Extensive Distribution Network
Strong Fundamentals – Robust Cash Flows / Negative Working Capital / High Profit Margins / Unleveraged Balance Sheet
Products do not need much expenditure/changes
No Capital Expenditure required for Capacity Expansion in near future
Strong Pricing Power
High Customer Loyalty
Dependency on single product (ADHO)
Declining volumes in other brands
Majority of Sales are Northern dominated
Opportunities Threats
Vast opportunities from rural population which still uses unbranded products
Growing preferences for Light Hair Oils due to its own qualities
New product launches
Inorganic growth
New generation hair care products such as hair creams
Advertising and Marketing depends on the competitors
Raw Material prices linked to the Crude Oil prices
April 04, 2012 14
Bajaj Corp. Ltd
Financials
We expect Bajaj Almond Drops Hair Oil to register strong volume growth in FY13 (13.3%) and FY14 (12.5%) which coupled with improved realizations of 5.5% in FY13 and 5.0% in FY14 is likely to post 19.6% growth in FY13 revenues and 18.1% in FY14 revenues, from this product. Accordingly, we expect growth of 14.2% and 12.8% in FY13 and FY14 in overall sales volume. We expect FY13 net sales to be ` 5,618.2 mn and FY14 revenues to be ` 6,659.3 mn registering a growth of 20.9% and 18.5%, respectively.
Revenues growth in Bajaj Corp.
Source: Company Data, Sushil Finance
We expect raw material prices to cool down after a significant run in the recent times; we expect company’s EBITDA margins to edge higher to 25.8% in FY13 and 26.7% in FY14. The company recently suffered a substantial dent in its operating margins primarily due to increase in raw material prices.
EBITDA and EBITDA Margins
Source: Company Data, Sushil Finance
We expect BCL to achieve net margins of 25.1% and 25.2% in FY13 and FY14 and an EPS of ` 9.59 in FY13 and ` 11.38 in FY14.
April 04, 2012 15
Bajaj Corp. Ltd
FINANCIAL RATIO STATEMENT
Y/E March FY11 FY12E FY13E FY14E
Growth (%)
Net Sales 21.8 29.6 20.9 18.5
EBITDA 11.4 9.4 21.9 22.5
PAT 0.2 42.7 17.9 18.7
Profitability (%)
EBITDA Margin 30.3 25.6 25.8 26.7
PAT Margin 23.4 25.8 25.1 25.2
ROCE 28.5 29.5 26.9 25.3
ROE 27.4 30.4 26.7 24.4
Per Share Data (Rs.)
EPS (Diluted) 6.99 8.14 9.59 11.38
CEPS 7.11 8.30 9.80 11.66
BVPS 25.5 26.8 35.9 46.6
Valuations (X)
PER 18.5 15.9 13.5 11.3
P/BV 5.1 4.8 3.6 2.8
EV / EBITDA 16.7 15.3 12.5 10.2
EV / Net sales 5.1 3.9 3.2 2.7
Mcap / Net sales 5.3 4.1 3.4 2.9
Turnover Days
Debtors days 06 07 08 09
Creditors days 104 105 107 109
Gearing Ratio
Total Debt to Equity - - - -
Source: Company, Sushil Finance Research Estimates
PROFIT & LOSS STATEMENT `.mn
Y/E March FY11 FY12E FY13E FY14E FY13E
Net Sales 3,586.7 4,647.8 5,618.2 6,659.3
Other Op. Income 7.7 8.3 9.0 9.6
Total Revenues 3,594.4 4,656.1 5,630.1 6,668.9
Raw Material Exp. 1,550.1 2,158.5 2,565.1 3,001.0 7,927.7
Shareholder’s Fund 3,763.4 3,949.4 5,295.0 6,870.3
Loan Funds - - - -
Net Def. Tax Lia. 0.5 0.5 0.5 0.5
Total Liabilities 0.5 0.5 0.5 0.5
Gross Block 247.3 286.6 385.2 554.4
Less: Depreciation 30.4 24.9 30.6 41.5
Net Block 216.9 261.6 354.6 512.9
Capital WIP 2.9 - - -
Investments 3,300.6 3,300.6 3,300.6 3,300.6
Inventories 144.3 203.7 261.7 328.4
Sundry Debtors 60.3 89.1 123.1 164.2
Cash & Bank Bal 813.4 1,047.4 2,339.1 3,792.6
Loans and Adv 42.8 42.8 42.8 42.8
Current Liabilities 442.9 620.9 752.0 896.2
Provisions 375.2 375.2 375.2 375.2
Miscellaneous Exp. 0.7 0.7 0.7 0.7
Total Assets 3,763.8 3,949.9 5,295.5 6,870.8
CASH FLOW STATEMENT `.mn
Y/E March FY11 FY12E FY13E FY14E
PAT 841.0 1,199.9 1,414.3 1,678.4
Depreciation 30.4 24.9 30.6 41.5
Chg in Working cap 432.9 89.8 39.1 36.4
Operating CF 1,304.3 1,314.6 1,484.0 1,756.4
Capex (51.2) (69.7) (123.6) (199.8)
Chg in Cap WIP (2.9) 2.9 - -
Chg in Investments (3,279.6) - - -
Investing CF (3,333.7) (66.8) (123.6) (199.8)
Chg in DTL (0.1) - - -
IPO Proceeds 2,622.6 - - -
Chg in Equity 22.5 - - -
Dividend Payment - (870.3) (59.0) (88.5)
Dividend Dist. Tax - (143.6) (9.7) (14.5)
Financing CF 2,645.0 (1,013.8) (68.7) (103.1)
Chg in cash 615.6 234.0 1,291.7 1,453.5
Cash at start 197.8 813.4 1,047.4 2,339.1
Cash at end 813.4 1,047.4 2,339.1 3,792.6
April 04, 2012 16
Bajaj Corp. Ltd
Please Note that our technical calls are totally independent of our fundamental calls.
Additional information with respect to any securities referred to herein will be available upon request.
Sushil Financial Services Private Limited and its connected companies, and their respective directors, Officers and employees (to be collectively known as SFSPL), may, from time to time, have a long or short position in the securities mentioned and may sell or buy such securities. SFSPL may act upon or make use of information contained herein prior to the publication thereof.
This sheet is for private circulation only and the said document does not constitute an offer to buy or sell any securities mentioned herein. While utmost care has been taken in preparing the above, We claim no responsibility for its accuracy. We shall not be liable for any direct or indirect losses arising from the use thereof and the investors are requested to use the information contained herein at their own risk.
