Conversion and increasing penetration will drive...

A C Choksi Institutional Research 1

A C Choksi Share Brokers Private Limited

INITIATION REPORT | BAJAJ CORP LTD. Sept 09, 2011

BAJAJ CORP LTD.

Conversion and increasing penetration will drive growth…

Swati GuptaSenior Analyst Tel: 91-22-6159 5146 Email: [email protected]

Sector: FMCG Recommendation: BUY Target Price: Rs. 148.13 Recommendation Price: Rs. 123.65




Investment Summary:

• Almond Drops- Market leader in LHO Category: Bajaj Corp is the market leader in the LHO category in India through its flagship brand “Bajaj Almond Drops Hair Oil (ADHO)”. Almond hair oil category witnessed 29% CAGR by volume and 37.5% CAGR by value over FY07-FY11. ADHO commands dominant market share in LHO category. Its market share by value improved from 40.3% during FY08 to 54.2% during Q1FY12. The company is targeting 60-65% market share over the next 3-4 years.

• Strong volume growth of Almond hair oil: During Q1FY12, ADHO had achieved a dominant market share (volume) of 50.4% in LHO category as compared to 38.4% in FY08. With rising disposable income, consumers tend to up-trade and ADHO emerged as a key beneficiary of changing consumer preferences.

• Pricing Power and Premium Margins: Bajaj Corp has created a niche for itself which enables it to command premium prices as compared to its peers. The company has successfully increased its prices at 7 year CAGR of 6.4%, without hampering volume growth. The company commands one of the highest EBITDA margins in the industry. We believe that ADHO will continue to maintain premium pricing going forward due to strong brand equity and niche category positioning.

• Conversion and strong distribution network to drive growth: ADHO is gaining market share at the expense of its peers. Going forward, it is expected to derive conversion from unbranded oils, coconut oil and amla oil. Further, Bajaj Corp is rapidly expanding its distribution reach as reaches urban and rural consumers through 2.02 mn retail outlets serviced by 5690 direct distributors and 10,085 wholesalers. Going forward, the company is likely to continue its thrust to strengthen its distribution reach to expand its market share in LHO category.

• Valuation: We Initiate coverage on Bajaj Corp for 12-18 month horizon, with a target price of Rs. 148.13 per share based on DCF valuation method. Our DCF-based target price implies an earnings multiple of 14.55x FY13 earnings. This multiple is at significant discount as compared to its peers, which factors in the risk of it being a single product company.

Recommendation: BUYTarget Price (Rs.) 148.1Recommendation Price (Rs.) 123.7Potential Return (%) 19.8%BSE Sensex 16866.97

Key FinancialsShares Outstanding (mn) 147.5Face Value (Rs.) 1Market Capital (Rs. bn) 18.57Free Float (Rs. bn) 3.68Dividend Yield (%) 1.5%

Stock DataBSE Code 533299NSE Code BAJAJCORPBloomberg BJCOR INReuters Code BACO.BO52-Week Range (Rs.) 151.50/73.30

Share Holding Pattern 30th June 2011

Promoter,85%

FII, 5%

DII, 4%Others, 6

%




Company Background:

Bajaj Corp Ltd. (BCL), a leading producer of hair oils in India is a part of Shishir Bajaj Group of Companies. It was incorporated as ‘Bhaumik Agro Products Private Limited’ on April 25, 2006. The name of the company was changed to Bajaj Corp Pvt. Ltd. Thereafter, the company was converted into public limited company in 2007 and the name changed to Bajaj Corp Ltd. The company commenced its business in April 2008. However, the products have been in existence since 1953 and were sold by different Bajaj group companies.

Bajaj Corp Ltd is one of the leading FMCG Company in India with brands in Hair care category. The brands have a track record of eight decades and the company is a part of one of the oldest business houses of the country. Bajaj Corp is promoted by Shishir Bajaj Group of companies. Mr. Kushagra Nayan Bajaj is the chairman of the company. The company has a strong brand loyalty across the spectrum of Hair Oil category.

Business Overview:

The legacy of BCL’s products extends back to 1953 when Mr. Kamal Nayan Bajaj established Bajaj Sevahram (BSL) to market and sell hair oils and other beauty products. In 2001, in view of the impending Bajaj family settlement, the business was demerged to to form Bajaj Consumer Care Ltd (BCCL) in 2001 when BSL transferred its operating business and assigned all trademarks to BCCL. Subsequently, BCCL licensed these brands to BCL, pursuant to the Trademark License Agreement for a period of 99 years in 2008. As per the agreement, BCL will pay Royalty @ 1% of annual net sales turnover to BCCL.

The company began operating as Bajaj Corp Ltd in April 2008. The company has since become India's third largest producer of hair oils and the largest producer of light hair oils, capturing an estimated 54.2% of the light hair oil market (based on value) in Q1FY12, according to Nielsen Retail Audit Report.

The company’s key product is Bajaj Almond Drops Hair Oil (ADHO), a premium brand that is currently the market leader in the light hair oil segment. In addition, the company also markets other hair oil brands viz., Brahmi Amla Hair Oil (BAHO), Amla Shikakai (ASHO) and Jasmine Hair Oil (JHO). The company also produces oral care products under the brand name Bajaj Black Tooth Powder (BTP). During Q1FY12, Bajaj Corp forayed into cooling oil category with Kailash Parbat Cooling Oil (KPCO).




Sales Break-up in Q1FY12 by Brand

ADHO 91.56%KPCO 5.08%

BAHO 2.29%

ASHO 0.44%

JHO 0.36%

BTP 0.36%

Other 8.53%

Source: Company

Manufacturing Facilities Owned/Leased Products Excise Duty Exemption Income Tax Exemption

Company Operated

Parwanoo, Himachal Pradesh Leased ADHO, ASHO Starting from FY10, for 10 years

100% for 5 years, 30% for following 5 years

Dehradun, Uttar Pradeh Owned ADHO Starting from FY11, for 10 years


Paonta Sahib, Himachal Pradesh Owned ADHO Starting from FY11, for 10 years


Installed Capacity 77.00 mn LtrsTotal Production in FY11 11.02 mn Ltrs

Capacity Utilization 14.3%

Third Party

Parwanoo, Himachal Pradesh ADHO, BAHO & JHO

Starting from FY04, for 10 years

NA

Udaipur, Rajasthan BTP NA NA

Source: Company




Equity Research Team 022 6159 5146 [email protected]

Key Management Details:

Mr Kushagra Bajaj: Non Executive Chairman and one of the promoters of the company. He has 10 years of experience in the consumer & sugar industry and holds directorship other Bajaj group companies including Bajaj Hindusthan Ltd.

Mr. Roshan F. Hinger: Vice Chairman and Whole time director of the company with over 45 years of experience in FMCG business.

Mr Sumit Malhotra: Whole time director of the company. He is Director of Sales and Marketing department of the company. He has 23 years of experience in FMCG sector.

Mr Apoorv Bajaj: Executive President and also a promoter of the company.

Mr. V.C. Nagori: Vice President – Finance. He has 25 years of experience in finance, taxation, audit and legal compliance.

Mr. D. K. Maloo: General Manager - Finance and company secretary. He has 22 years of experience in finance, taxation, audit and legal compliance.




Investment Rationale:

Hair Oil Industry; growing at par with FMCG Industry Average:

Hair care products contribute approximately 8% of the total FMCG market (Rs 1338.76 bn) in India (Source: A C Nielsen). Hair care industry is growing at par with overall industry average of approximately 13-14%. Shampoo and hair oils, including coconut oils, continue to be the key components of this segment. Hair oils category constitute more than 55% of the overall hair care industry in India. Hair oil category witnessed a volume growth of 16.7% CAGR from FY 2007 to FY 2011whereas it witnessed value growth of 20% CAGR over the same period. This growth is primarily attributed to the improvement in distribution network and supply chain efficiency.

Hair Care Industry Size (Value) and Structure

Hair Care (Rs. 10,243 cr)

Hair Oils( Rs. 5,326 cr)

Coconut Oil (Rs.2,151 cr)

Perfumed Oil (Rs. 3,175 cr)

Other Hair care products( Rs. 4,917 cr)

Source: A C Nielsen




Overall Hair Oil Market by Volume Overall Hair Oil Market by Value

0

50

100

150

200

250

300

FY07 FY08 FY09 FY10 FY11 Q1FY12

mn Ltr.

010203040506070


Rs. bn

Source: A C Nielsen

Light Hair Oil Segment is growing faster than overall hair oil market:

Light Hair Oil (LHO) category is growing faster than overall Hair oil market in India. LHO category grew at 17.6% CAGR from FY07 to FY11 in volume terms while it grew at 25.5% CAGR from FY07 to FY11 in value terms.

Light Hair Oil Market by Volume Light Hair Oil Market by Value

0

5

10

15

20

25


mn Ltr.

0

2

4

6

8

10


Rs. bn

Source: A C Nielsen

Thus, share of LHO category increased consistently in overall hair oil category during past few years. This steady increase in LHO share was primarily driven by an increase in realizations which signifies a structural shift in consumer preference for non-sticky hair oils for which consumers are willing to pay premium price. This shift in consumer preference is attributable to rapid urbanization, favorable demographics, increase in disposable income, better distribution network and increasing penetration of branded oils in low SKUs.




From the following tables we can depict that penetration of branded hair oils is increasing steadily in India owing to conversion from unbranded hair oil to branded oils. The penetration of Hair oils grew 4% during 2010 and is currently at a penetration of 88.3%. On the other hand the unbranded Hair Oils which form 41% of the Hair Oil usage has seen a decline of 3% in the year 2010.

Penetration Level

58% 57%51%

40% 41%

29%35% 37%

44% 47%

87%92%

88%84%

88%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000 2003 2005 2006 2010

Unbranded Oil Branded Oil Total Hair Oil

Source: A C Nielsen

LHO share as a % of Overall Hair oil Market (by volume and value)

Source: A C Nielsen




Usage ratio of Branded Oil in Urban and Rural Market

52%59% 61%

68%

26%30%

35%

46%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2000 2003 2005 2006Urban (%) Rural (%)

Source: A C Nielsen

Almond Drops- Market leader in fast growing LHO Category:

Bajaj Corp is the market leader in the LHO category in India through its flagship brand “Bajaj Almond Drops Hair Oil (ADHO)”. As per Nielsen data, Almond hair oil category witnessed 29% CAGR by volume and 37.5% CAGR by value over FY07-FY11. ADHO commands dominant market share in LHO category. Its market share by value improved from 40.3% during FY08 to 54.2% during Q1FY12.

Almond Hair Oil (AHO) Market-Volume Almond Hair Oil (AHO) Market-Value

0

2

4

6

8

10

12


mn Ltrs

0

1

2

3

4

5


Rs. bn

Source: A C Nielsen




AHO share as a % of LHO - Volume AHO share as a % of LHO - Value

0%

10%

20%

30%

40%

50%

60%

0

5

10

15

20

25

FY07 FY08 FY09 FY10 FY11

mn Ltr

AHO LHO AHO volume as a % of LHO volume

0%

10%

20%

30%

40%

50%

60%

0

1

2

3

4

5

6

7

8

9

FY07 FY08 FY09 FY10 FY11

Rs. bn

AHO LHO AHO value as a % of LHO value

Source: A C Nielsen

Strong volume growth of Almond hair oil:

During Q1FY12, ADHO had achieved a dominant market share (volume) of 50.4% in LHO category as compared to 38.4% in FY08. During the period, Almond hair oil category registered ~29% CAGR by volume far higher than LHO category’s ~18% CAGR and overall Hair oil’s ~17% CAGR. Heavy hair oils like coconut oil and Amla oils are growing in high single digits while LHO are growing in high teens. It is visible that ADHO gained market share at the expense of its competitors. With rising disposable income, consumers tend to up-trade and ADHO emerged as a key beneficiary of changing consumer preferences. ADHO is gaining market share from coconut hair oil, amla oils, other LHO and unbranded hair oil. Major conversion came from Marico’s Parachute Coconut Oil (CNO) and Dey’s Keo Karpin. While Marico maintained its dominant market share in CNO category due to continuous conversion from unbranded hair oil users to branded CNO users, Dey’s Medical’s Keo Karpin lost its dominant position in LHO segment. Keo Karpin had market share of 42% in LHO category during FY04 which declined to 19% in FY11.




Premium positioning; High Realizations:

ADHO is positioned as premium value-added hair oil due to its differentiation properties in terms of product (almond based) and packaging (glass bottle). The product is made from almond extracts with added Vitamin E and it is packaged in a glass-bottle instead of a PET-bottle, which helps to preserves the product properties for a longer period of time. Thus, Bajaj Corp has created a niche category of Almond Oil in LHO category which enables it to command premium prices as compared to its peers. The company has successfully increased its prices from Rs 28 for 100ml in Mar’03 to Rs 46 in Apr’11 (CAGR of 6.4%), without hampering volume growth. The brand’s strong pricing power is evident from improvement in market share (by value) from 31.4% in FY06 to 54.2% in Q1FY12. In LHO category, ADHO’s closest competitors are Dey’s Medical’s Keo Karpin with ~19% market share and Marico’s Hair & Care with ~16% market share. While 100 ml SKU of Keo Karpin and Hair & Care are available at Rs. 37 and Rs. 42 respectively, ADHO’s 100 ml SKU is available at Rs. 46. We believe that ADHO will continue to maintain premium pricing going forward due to strong brand equity and niche category positioning.

Premium Pricing as compared to competitors

37

42

46

0 10 20 30 40 50

Keo Karpin

Hair & Care

ADHO

100 ml

Prices( Rs.)

Source: Company




Increasing focus on rural market without diluting margins:

Light hair oils are primarily considered as an urban-centric product due to its premium pricing. However, it is unlikely to ignore 70% of total population living in rural India which is willing to up-trade with the rise in disposable income. In rural India disposable incomes are rising as farmers are shifting towards cash-crops and rural employment generation schemes are already in place. With growing exposure to information and media, rural consumers are well aware of branded products and are willing to up-trade. However, there is a significant difference between consumption pattern of rural and urban consumers. While consumption in urban India can be defined as “Small population-consuming a lot”, rural consumption can be defined as “Large population-consuming little”. Thus, it is important for a company looking forward to improve its traction in rural India to launch low-priced SKUs. Bajaj Corp is increasing its penetration in rural market with ADHO’s LPUs of 3 ml sachet and 20 ml which are priced at Rs. 1 and Rs. 10 respectively. Proportion of rural sales in overall revenues is increasing consistently. During FY05, 3 ml sachet contributed 0.8% of overall sales while during FY11 contribution of sachets increased to 10.4%. However, it is important to note that sachets are considered a low margin SKU due to high price sensitivity. However, Bajaj Corp happened to maintain its margins even in sachets due to cost rationalization in packaging material as sachet packaging is cheaper than glass bottle packaging. Thus, it gives Bajaj Corp an edge over its competitors who would have to dilute their margins to increase traction in rural India. As a result, Bajaj Corp has a dominant market share of ~ 57.5% in LHO category in rural market. During FY11, sachet and 20 ml SKUs registered strong growth of 63% and 49.8% respectively which reinforces the fact of fast growing presence of Bajaj Corp in rural market.

Strong Growth in Low priced SKUs

0% 10% 20% 30% 40% 50% 60% 70%

Sachet

20

50

75

100

200

300

ADHO SKU

s (m

l)

Source: Company




Sachets contribution increased consistently in overall sales

0.8% 1.9% 2.9% 3.5% 5.8% 7.4% 10.4%0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

FY05 FY06 FY07 FY08 FY09 FY10 FY11Sachet 20 50 75 100 200 300 500

Source: Company

Strong Presence in North India:

LHO sales are geographically concentrated specifically in the northern regions of the country due to willingness of consumers to try new products. Whereas, south India is still a major consumer of coconut oil due to its deep rooted traditional values. This can be depicted from the following chart as southern region contributes only 4% of total LHO sales while northern region contributes whopping 51%. On the other hand, contributions of eastern and western regions are almost similar at 22-23% level. Eastern region primarily uses mustard oil, amla oil, cooling oils and LHOs, while western region primarily uses coconut oil, mustard oil, groundnut oil and LHOs. Bajaj Corp has a strong presence in North, East and Western regions with its well entrenched distribution network.




Region wise break up of LHO Market

East , 22%

West, 23%North, 51%

South, 4%

Source: Company

ADHO’s strong position in most of the states (except southern states)

0

10

20

30

40

50

60

70

80

All India

Punjab

Haryana

Delhi

Rajasthan

U. P.

Uttaranchal

Assam

Bihar

Jharkhand

Orissa

W.Ben

gal

Gujarat

M.P.

Chattisgarh

Maharashtra

Karnataka

A.P.

Tamil Nadu

Kerala

ADHO Market Share % (Vol)

Total Urban Rural

Source: Company




Strong Distribution network:

Bajaj Corp has established strong distribution network in past few years. It reaches urban and rural consumers through 2.02 mn retail outlets serviced by 5690 direct distributors and 10,085 wholesalers. Northern Region is the major market for LHO category. Thus, approximately 49% of Bajaj corp’s stockists are based in North India, which ensures high penetration of ADHO in rural and urban area in the region. Bajaj Corp is rapidly expanding its distribution reach as its stockists strength has grown from less than 1500 in FY05 to 5690 in Q1FY12. Going forward, the company is likely to continue its thrust to strengthen its distribution reach to expand its market share in LHO category. Bajaj Corp has 32 regional distribution centers which further distributes to rural and urban stockists.

Approximately 80% sales are derived through dominant distribution channels: Local Grocery stores and general stores are dominant distribution channels for LHO category as approximately 79% sales occur through these channels. Approximately 80% of ADHO’s sales are derived through these channels. From distribution perspective, retailers play an important role to push a brand or influence purchase of consumers. Thus, ADHO which has already become a generic name for Almond oils provides the company an edge over its competitors.

Moderate Competitive intensity:

Marico, Dabur, Bajaj Corp and Emami are the leading players in branded hair oil in India. Hair oil category is unlikely to face fierce competition from MNCs as hair oils are not widely used in different geographies across the globe. Although hair oil category is highly penetrated, approximately 40% of total market is with unorganized players. Hence, with rising income levels and changing consumer preference there is a huge scope for all leading players to register healthy growth going forward. All four domestic players are market leader in their own niche. While Marico is a leading player with approximately 46% market share in branded CNO category, Dabur is leading in Amla oil category with ~70% market share. On the other hand, Emami is a dominant player in cooling oils with a market share of approximately 54.4% whereas Bajaj Corp is market leader in LHO category. Thus, all the players have stable growth coming from their flagship product whereas they are trying to gain market share in other hair oil categories.




ADHO’S Outlook:

• Volume Outlook:

We believe ADHO will register 15% volume growth during FY12 driven by conversion from peers, increasing penetration in rural market and expanding distribution reach. ADHO’s volume growth is primarily driven by conversion from coconut oil users, amla oil users, unbranded oil users and other LHO users. Amongst these, conversion from coconut oil users is approximately 40% whereas conversion from amla oil users is approximately 18%. During FY10, ADHO registered volume growth of 14.8% whereas during FY11 it registered a volume growth of 18.3%. It is important to note that, during FY10, ADHO’s 100 ml SKU was available at 100% premium over Parachute’s 100 ml SKU. Whereas during FY11 copra prices increased significantly and Marico took a price increase of ~ 35%. On the other hand, ADHO took a price increase of ~5% during the year. This resulted into a decline in premium (from 100% to 56%) charged by ADHO over Parachute CNO. This reflected in more-than-average increase in ADHO’s volumes during FY11. However, increasing LLP (light Liquid Paraffin) prices necessitated Bajaj Corp to take further price increase and during Apr’11 Bajaj Corp had taken a weighted average price increase of 8.5%. On the other hand, copra prices started stabilizing due to flush season. Thus, during current year premium of ADHO over Parachute widened to ~70%. As per our estimates, during FY12 Marico is unlikely to take any steep price increase. Bajaj Corp is also not expected to take further price increase as LLP prices are expected to correct from H2FY12. Thus, this premium of 70% is expected to remain stable during the year. Local Grocery stores and general stores are dominant distribution channels for LHO category as approximately 79% sales occur through these channels.

Dabur Amla’s 100 ml SKU is available at Rs. 36. During FY10 and FY11, ADHO’s 100 ml SKU commanded a premium of 18% and 17% respectively over Dabur Amla’s 100 ml SKU. However, during Q1FY12 this premium increased to 28% as ADHO had taken price increase of ~8.5% during Apr’11. During Q1FY12, Army which is one of the largest customers of Amla oil had downscaled business due to overall tightening up mandate by the government. Thus, volumes of Dabur Amla oil are likely to get hampered during FY12 which will deter Dabur to take further price increase during the year.

Thus, premium of ADHO over CNO and Amla oil widened during Q1FY12 as compared to FY11. Hence, we can conclude that ADHO’s volume growth will remain at normalized level of 15% during FY12.




• Realizations Outlook:

We have factored in 10% and 6% increase in realizations during FY12 and FY13 respectively. Bajaj Corp had already taken a weighted average price increase of 8.5% during Apr’11. As LLP prices are likely to correct from Q3FY12, we don’t anticipate any significant price increase during FY12.

• Raw Materials Outlook:

LLP, glass bottles and refined oil are major raw material for Bajaj Corp. LLP: LLP constitutes approximately 40-42% of total raw material cost of ADHO. During FY11, LLP cost registered a sharp increase of 49.5% due to high crude prices. We have factored in an increase of 28.2% in LLP prices during FY12. Further, as per our estimates LLP prices are expected to correct by 5.2 % during FY13.

LLP (Rs./Kg)

30

40

50

60

70

80

90

Source: Company, A C Choksi Institutional Research




Glass: Glass bottles constitute approximately 25-26% of total raw material cost of ADHO. We have factored in an increase of 17% during FY12 driven by an increase in soda ash prices. Major supplier for Bajaj Corp’s glass bottles, has already taken price increases during Q1FY12 and it is unlikely to take further price increase during the year unless there is an abnormal increase in soda ash prices.

Glass Index

100

105

110

115

120

125

130

135

140

145

Apr‐05 Apr‐06 Apr‐07 Apr‐08 Apr‐09 Apr‐10 Apr‐11Glass Index


Soda Ash (Rs./Kg)

10

12

14

16

18

20

22

24

26

28

30

32

Soda Ash (Rs./Kg)





Refined oil: It constitutes approximately 8% of total raw material cost of ADHO. Production of groundnut and mustard are expected to increase by 21% and 18% respectively, during the current crop season. However, due to high food inflation we have factored in an increase of 10% during FY12.

Foray in emerging categories like cooling oils:

Cooling oil is a fast growing category with a 5 year CAGR of ~20%. Bajaj Corp entered into this category with its Kailash Parbat Cooling oil (KPCO) brand during May’11 at pan-India level. During Q1FY12, KPCO registered sales of Rs. 54.2 mn. Emami is the market leader with approximately 54.4% market share in this category with its Navratna brand. Bajaj Corp is vying to create its niche in this category by positioning its product with differentiation factor. KPCO has extract of sandal which is known for its cooling properties and the product has different colour and fragrance as compared to other products available in this category. Bajaj Corp has a strong distribution network to achieve pan-India scale for a new product at a faster pace. The product is gaining rapid traction in states like Punjab, Madhya Pradesh, Rajasthan and Gujarat where Bajaj Corp has a very strong distribution network. In cooling oil category, it primarily competes with Emami which has a smaller distribution network as compared to Bajaj Corp. There is a regional brand Himgange which has the second highest market share of ~25%. This brand is focused in U.P., Bihar, Chhattisgarh and Jharkhand. Marico is also prototyping its cooling oil “Parachute Advansed Coconut Cooling Oil” in Andhra Pradesh and is likely to expand its reach in near term in southern region where it has a strong foothold. Thus, we believe that strong distribution network and product differentiation will aid Bajaj Corp to gain traction and create its niche in this fast growing category. Shrinking investment behind under-performing categories:

Bajaj Corp has presence in Amla oil category with its Bajaj Brahmi Amla Hair Oil (BAHO) and Bajaj Amla Shikakai Hair Oil (ASHO). Dabur is the market leader in Amla oil category with approximately 70% market share. However, despite of substantial advertisement and promotional spend these products were unable to get significant market share due to the lack of product differentiation. Thus, the company is unlikely to invest behind these products unless it finds a differentiation factor. Their contribution in sales and sales in absolute terms is declining consistently. Thus, we have factored in a decline of 16.0% in BAHO sales and 20.8% decline in ASHO sales during FY12.




BAHO's Contribution to sales (%) BAHO Sales Value

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

FY10 H1FY11 FY11 Q1FY12

BAHO's Contribution to sales (%)

0

100

200

300

400

500

Q1 Q2 Q3 Q4

Rs. m

n.

FY11 FY10


ASHO's Contribution to sales (%) ASHO Sales Value

0.00%

0.50%

1.00%

1.50%

2.00%

FY10 H1FY11 FY11 Q1FY12

ASHO's Contribution to sales (%)

0

50

100

150

200

Q1 Q2 Q3 Q4

Rs. m

n

FY11 FY10





Financial Projections:

Revenue to grow at 2-year CAGR of 21.3% by FY13:

We expect market share of ADHO to increase going forward driven by its strong brand positioning, conversion from loose oils/coconut oil/amla oil users to ADHO and wider and deeper distribution network. Further, KPCO is expected to garner healthy traction in cooling oil category due to its product differentiation properties. In addition, Bajaj Corp is exploring options to extend its brand into high growth and high margin hair care and/or personal care categories to capitalize upon its brand equity and for optimum utilization of its wide spread distribution network. The company has sufficient cash, raised through IPO, to fund any inorganic or organic growth plans. Foray into cooling oil category and expansion in other categories will reduce its dependence on its core product ADHO. Hence, we believe Bajaj Corp is well on track for a steady revenue growth momentum. Going forward, overall revenues of the company are expected to grow at 2-year CAGR of 21.3% by FY13.

Revenue & Revenue Growth

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

0

1000

2000

3000

4000

5000

6000

FY10 FY11 FY12E FY13E

Total Sales Sales Growth





Operating profit to witness healthy growth:

Bajaj Corp’s operating margin is expected to grow at 2-year CAGR of 16.8% till FY13. However, during Q1FY12, raw material inflation remained intact. Further, during the quarter Bajaj Corp had launched KPCO which increased its A&P expenditure during the quarter. These factors will have dilutive impact on operating margin of the company during the year. Thus, we expect operating margins to contract by 351 bps y-o-y during FY12. However, Management expects KPCO to achieve break even during second year of the launch with approximately 6% market share. Further, we expect a decline in LLP cost during FY13. This will result into margin expansion by 129 bps during FY13 as compared to FY12.

EBITDA (Rs. Mn) & EBITDA Margin

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

0.0

200.0

400.0

600.0

800.0

1000.0

1200.0

1400.0

1600.0


EBITDA EBITDA Margin


Strong growth in net profit:

We expect net profit to grow at 20.7% 2-year CAGR by FY13. We have factored in tax rate of 20% during FY12 and FY13. Despite of high tax rate as compared to FY11 and margin contraction at operating level, net margin is expected to contract by just 117 bps during FY12, primarily due to an increase in other income. During FY13, PAT margin is expected to expand by 86 bps.




PAT (Rs. Mn) & PAT Margin

26.8%27.0%27.2%27.4%27.6%27.8%28.0%28.2%28.4%28.6%28.8%29.0%

0

200

400

600

800

1000

1200

1400

1600


Adjusted PAT Net Margin


Negative Working Capital Cycle:

Bajaj Corp has a policy to sell in cash. Thus, its trade account receivable days were as low as 6.14 during FY11. This resulted into negative working capital cycle during the year. Going forward, we believe that the company will maintain its strong receivable policy. Further, inventory days are expected to decline from FY13, as exceptionally high raw material cost scenario seems to be over which will lead to a decline in raw material position building. Thus, we expect that the company will continue to maintain negative working capital cycle going forward.

Cash rich business model; capable to fund capex through internal accruals:

During FY10, Bajaj Corp had raised Rs. 2,970 mn through IPO. Out of this, the company had allocated Rs. 2200 mn for promotion of new products and Rs. 500 mn for acquisitions and strategic activities. In the recent past, acquisitions deals commanded high valuations in FMCG space. Thus, we believe that Bajaj Corp is scouting for a regional brand which it will scale up at pan-India level leveraging on its wide-spread distribution network. The company generates healthy cash flow at operational level; it generated Rs 1,014.6 mn for FY11 and will continue to generate healthy cash flows in future on account of negative working capital cycle. We have factored in a maintenance capex of Rs. 150 mn and Rs. 180 mn during FY12 and FY13 in our estimates.




Valuation:

In our DCF model we have derived explicit free cash flow projections till FY 2020 after which we have assumed a terminal value. Based on a WACC of 10.90% and a perpetual growth rate of 5% we arrive at a DCF fair value of Rs. 148.13 for Bajaj Corp. We initiate the coverage on the stock with “BUY” recommendation with potential upside of 19.8%.

Particulars (Rs. Mn) FY 2011A FY 2012E FY 2013E FY 2014E FY 2015E FY 2016E FY 2017E FY 2018E FY 2019E FY 2020E

Net revenues 3,587 4,475 5,282 6,074 6,985 7,963 8,998 10,078 11,186 12,305 EBIT 1,063 1,164 1,435 1,680 1,929 2,117 2,388 2,570 2,848 3,066 EBIT margin 29.6% 26.0% 27.2% 27.7% 27.6% 26.6% 26.5% 25.5% 25.5% 24.9%Net income (Adjusted) 1,031 1,234 1,502 1,719 1,844 1,982 2,210 2,371 2,606 2,500

NOPLAT 853 855 1,059 1,250 1,347 1,456 1,652 1,779 1,979 1,835 Depreciation 18 28 39 51 61 73 86 101 116 133 Change in working capital (455) (212) (149) (156) (170) (184) (196) (207) (214) (218)Capex (62) (150) (180) (207) (237) (271) (306) (343) (380) (409)Free cash flow 1,264 945 1,067 1,250 1,341 1,442 1,628 1,744 1,929 1,777

Discounted Free Cash Flow 8,001 Perpetual growth rate 5.00%WACC 10.90%Terminal Value 31,622 Discounted Terminal Value 13,035

Net Debt (813)

Outstanding shares (mn) 147.5 Fair Value per share (Rs.) 148.13

DCF-Valuation

Free Cash Flow (FCF) analysis


DCF sensitivity analysisTerminal growth rate

148.13 3.00% 4.00% 5.00% 6.00% 7.00%9.90% 142.1 156.6 177.0 207.9 260.010.40% 132.7 144.7 161.2 185.2 223.3

WACC 10.90% 124.5 134.6 148.1 167.2 196.011.40% 117.3 125.8 137.1 152.5 174.911.90% 110.9 118.2 127.6 140.3 158.1

Source: A C Choksi Institutional Research




Investment Concerns:

• Single Product Concentration: ADHO contributes approximately 92% of overall sales. Although, ADHO enjoys pricing power due to its dominant market share in LHO category any unhealthy competitive activity can hamper its market share and/or premium margins. However, the company is in the process of reducing this risk by diversifying its product portfolio through new product launches.

• Volatility in raw material prices: LLP, glass bottles and vegetable oils are major raw material for Bajaj Corp. For LLP requirement, the company enters into future contracts while glass bottles and vegetable oils are purchased at spot prices. During FY11, raw material prices increased significantly and continue to move up till Q1FY12. The company had already taken price increase to mitigate the impact of input cost inflation. However, if raw material prices increases more than our estimates, it may adversely affect Bajaj Corp by either affecting margins or volumes. This will lead to deviation from our estimates.

• Unsuccessful new product launches: The company is in the process of launching new products. However, any unsuccessful launch will impact profitability of the company and will burn its cash reserves. Along with that, it can also hamper brand equity of the company.

• Risk related to acquisitions: The company is on a look out for acquisition. However, Bajaj Corp is keeping a conservative stance to fund these acquisitions (largely through internal accruals). Recent acquisition deals in FMCG space happened at exorbitant valuations. Thus, it will be tough to identify a strong regional player at reasonable valuations. Further, after a successful acquisition, the company runs a risk of being unable to create market for a regional brand at national level.

• Slowdown in consumer spending: During macro-economic slowdown and rising inflation consumers tend to reduce spending by down trading. Considering Bajaj Corp’s premium priced flagship product, a slowdown in consumer spending would be a risk to our earnings estimates and target price as consumers tend to down-trade in such a scenario.

• Low Float: Bajaj Consumer Care Ltd. Holds 84.75% stake in Bajaj Corp. Thus, Bajaj Corp has low liquidity which makes stock vulnerable to steep downward movement in case of unfavorable news. However, as per new SEBI guidelines, promoters need to gradually reduce their holding to 75% or below, over a period of time. This mandate will address the low liquidity concern in the stock.




FINANCIALS:

INCOME STATEMENT

Particulars (Rs. Mn) FY10A FY11A FY12E FY13E

Total Revenues (Net of Excise) 2,946 3,587 4,475 5,282Cost of goods sold 1,177 1,585 2,121 2,407Gross profit 1,769 2,002 2,354 2,874Gross profit Margin 60.0% 55.8% 52.6% 54.4%

Selling, Gen & Adm Expenses 284 354 446 527Ad. & Sales Promotion 373 405 512 629Staff Cost 138 163 205 245EBITDA 973 1,081 1,191 1,474EBITDA Margin 33.0% 30.1% 26.6% 27.9%Depreciation & Amortization 8 18 28 39 EBIT 964 1,063 1,164 1,435EBIT Margin 32.7% 29.6% 26.0% 27.2%Other Income 51 178 379 442 Exceptional Items 0 190 0 0 Adjusted PBT 1,016 1,240 1,542 1,877

Provision for Income Taxes 176 210 308 375 Reported PAT 839 841 1,234 1,502Adjusted PAT 839 1,031 1,234 1,502PAT Margin 28.5% 28.7% 27.6% 28.4%Diluted Weighted Average shares (mn) 125 148 148 148 Diluted EPS (Rs.) 6.71 6.99 8.36 10.18Dividends 920 280 411 500Dividend Tax 156 47 68 83Source: Company, A C Choksi Institutional Research




BALANCE SHEET


Current AssetsCash and cash equivalents 168 813 1,660 2,586Trade accounts receivable 29 60 76 91Inventories 99 144 198 216Loans and Advances 25 43 54 69Total current assets 320 1,061 1,988 2,963

Fixed AssetsGross Block 196 247 397 577Less: Accumulated Depreciation 13 30 58 97Net Block 184 217 339 480Capital WIP 0 3 0 0

Intangible Assets 0 0 0 0Investments 21 3,301 3,301 3,301Deffered Tax assets -1 0 0 0Misc. Expenses 23 1 0 0Total non-current assets 227 3521 3640 3781

Total assets 547 4,581 5,628 6,744

Current liabilitiesSundry Creditors 145 356 479 554Advance from Customers 19 21 23 25Deposits from C&Fs and others 4 4 4 4Statutory Liabilities 43 53 64 76Other Liabilities 7 9 10 11Provisions 49 375 530 637Total current liabilities 268 818 1,110 1,308

Long term debt 0 0 0 0Other long term liabilities 0 0 0 0Total long term liabilities 0 0 0 0

Minority Interest 0 0 0 0Share Capital 125 148 148 148Share Premium 0 2,948 2,948 2,948Reserves & Surplus 154 668 1,423 2,341

Total liabilities and equity 547 4,581 5,628 6,744Source: Company, A C Choksi Institutional Research




CASH FLOW STATEMENT


Net income (loss) before taxes 1,016 1,240 1,542 1,877Operating profit before working capital changes 976 1,089 1,199 1,481(Increase)/decrease in Debtors (26) (29) (16) (15)(Increase)/decrease in Inventories (22) (45) (53) (19)(Increase)/decrease in Other Loans & Advances 64 (14) (11) (15)Increase/(decrease) in Creditors 8 219 125 77Increase/(decrease) in Other liabilities 6 11 12 14Increase/(decrease) in Provisions 24 (1) 2 3Cash generated from operations 1031 1228 1258 1526Tax Paid (170) (214) (308) (375)Net cash from operating activities 861 1015 950 1151

Cash flow from investing activitiesCapital Expenditures (128) (62) (150) (180)Capital WIP 0 0 3 0Interest Received 46 113 324 396Dividend Received 0 5 5 5(Purchase)/Sale of Investment (Net) (19) (3227) 42 34Defferred tax liability 0 0 (0) 0Misc. expenses 0 0 1 0Net cash used in investing activities (102) (3171) 224 254

Cash flows from financing activitiesProceeds from the issue of share capital 0 2970 0 0Payment of Dividend (923) 0 (280) (411)Payment of Dividend Tax (157) 0 (47) (68)Share Issue Expenses (23) (168) 0 0Net Cash from financing activities (1102) 2802 (327) (479)

Increase/Decrease in cash and cash equivalents (343) 646 847 926Cash and cash equivalents at the beginning 510 168 813 1,660Cash and cash equivalents at the end 168 813 1,660 2,586Source: Company, A C Choksi Institutional Research




RATIOS

Particulars (Rs. Mn) FY11A FY12E FY13E

Growth (%)Total sales 21.8% 24.8% 18.0%EBITDA 11.1% 10.2% 23.7%Net profit 22.8% 19.7% 21.7%EPS 4.1% 19.7% 21.7%

Per ShareEarnings 6.99 8.36 10.18Dividends 1.90 2.79 3.39Book value 25.51 30.63 36.85Cash 5.58 8.18 9.92Div Yield 1.5% 2.3% 2.8%

Margins (%)Gross Margin 44.2% 47.4% 45.6%EBITDA 30.1% 26.6% 27.9%PAT 28.7% 27.6% 28.4%

FinancialCreditor Days 82 83 84Debtor Days 6.1 6.2 6.3Inventory Days 33.2 34.0 32.8Dividend Payout Ratio 27.2% 33.3% 33.3%

ValuationsPE (x) 17.6 14.7 12.1P/BV (x) 4.8 4.0 3.3EV/EBITDA (x) 16.0 13.8 10.6EV/Sales (x) 4.8 3.7 2.9ROE 51% 30% 30%ROCE 51% 30% 30%Source: Company, A C Choksi Institutional Research




Disclaimer

The information and views presented in this report are prepared by A C Choksi Share Brokers Private Limited. The information contained herein is based on our analysis and up on sources that we consider reliable. We, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and we are not responsible for any loss incurred based upon it. The investments discussed or recommended in this report may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advice, as they believe necessary. While acting upon any information or analysis mentioned in this report, investors may please note that neither A C Choksi Share Brokers Private Limited nor any person connected with any associated companies of A C Choksi Share Brokers Private Limited accepts any liability arising from the use of this information and views mentioned in this document. The analysts for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.

Disclosure of Interest Analyst ownership of the stock NO Broking Relationship with the company covered NO Investment Banking relationship with the company covered NO Discretionary Portfolio Management Services NO

Swati Gupta- 022 6159 5146

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