Bajaj Corp Ltd. Rural penetration led robust volume growth…::Ventura

Outlook Bajaj Corp Ltd (BCL) continued to post a robust volume growth of 23.4% in its flagship brand ADHO (Almond Drops Hair Oil) primarily driven by rural penetration (increased distribution reach). We have incorporated FY15 forecasted financials from this quarter and accordingly expect revenues to grow at a CAGR of 24.7% to Rs 916.9 crore over the forecast period of FY13-15 on the back of steady volume growth (~20% avg.) and sustained leadership position in its flagship brand Almond Drops. At a CMP of Rs 253, Bajaj Corp is trading at 19.6x and 17.7x its estimated earnings for FY14 and FY15. Given the stretched valuations, we reiterate a HOLD on the stock with the revised price target of Rs 271 (as against our revised target of Rs 209) representing a limited potential upside of ~6.2%. However, prospective inorganic growth, strong cash availability (~Rs 477 crore) and potential new product launches is an added attraction. Key Takeaways BCL yet again reported a robust top-line growth of 31.8% YoY to Rs 148.1 crore in Q3FY13 as against Rs 112.3 crore in Q2FY12 primarily led by volume growth of ~23.4% YoY from its flagship brand (Almond drops). The growth is also attributable to the rural penetration on the back of increased distribution reach (2.54 mn retail outlets vs. 2.43 mn in Q2FY13). The company reported net profit at Rs 42.2 crore in Q3FY13 as against Rs 28.9 crore in Q3FY12 (+46.2% YoY) partially attributable to the price hike (~8.5%) taken in April 2012 and softening raw material prices (benefit of ~Rs 1.85 crore in Q3FY13).
EBITDA margin at 29.03% for the quarter, expanded by 352 bps YoY on account of price hike taken in April, 2012 and decline in RM costs (LLP – Rs 79.1/kg; ~ -4.5% YoY) partially offset by rising refined oil prices (Rs 80.2/kg; +14.1% YoY). Moreover, BCL has entered into a deal with its LLP supplier (its key raw material; ~36.8% of total cost) which will enable it to buy LLP at an average price of ~Rs 75/kg in Q4FY13. This, we believe will help BCL to maintain its EBITDA margin in the range of ~26-27% in FY13 amidst volatile raw material prices.
BCL’s flagship brand ADHO witnessed a healthy volume growth (23.4% YoY) and value growth (33.1% YoY) which was far ahead from the LHO market growth (volume - ~17.9% YoY and value - ~26.1% YoY). The volume and value market share enjoyed by Almond drops continue to command leadership status i.e. ~51.9% and ~54.6% respectively. Moreover, we believe that Dabur’s foray into LHO category (Dabur Almond Hair Oil)

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is likely to encourage healthy competition which will eventually lead to expansion in the LHO market size. BCL being the leader in this category is best placed to benefit from this.
While BCL’s Kailash Parbat (cooling hair oil segment) brand posted a decent volume growth of 20.8% YoY, its market share has declined marginally from 2.6% in Q2FY13 to 2.4% in Nov, 2012. This decline is attributable to the seasonally weak quarter and we expect KPCO to regain its lost market share. Going ahead, we believe that the company’s distribution network leverage is likely to augment revenues from the brand as it establishes its hold in the segment.
Other Key Highlights
 According to management, no major capex is expected in FY14 except for the construction work on its new corporate headquarters building at Worli (Mumbai) land ( BCL has incorporated a wholly owned subsidiary – Bajaj Bangladesh Ltd and is planning to foray in Bangladesh. According to management, its LHO industry is at a nascent stage and ~90% of hair oil industry being dominated by coconut oil.
 BCL has stipulated that it is evaluating various options with respect to promoter holding bringing down to 75% from current 84.75% (by August, 2013).