Bajaj Corp:: Strong Q3, but upsides limited – Religare

Strong Q3, but upsides limited – Maintain HOLD
BJCOR reported Q3FY13 net sales/EBITDA/adj. PAT growth of 31.8%/50.3%/ 46.2%, which came in ahead of our and consensus estimates. Volume growth was strong at 22.3% with margins expanding 360bps on lower LLP prices. We upgrade our FY14/FY15 earnings estimates by ~13% and roll over to March’15 earnings (from September’14) to get a revised March’14 TP of Rs 275. Maintain HOLD on likely volume growth moderation and limited upside from current levels.

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 Net sales growth of 31.8%YoY: BJCOR reported net sales growth of 31.8% YoY to Rs 1.48bn led by a strong 22.3% YoY growth in volumes as the company increased distribution (17% for the year) and promotional activity during the quarter. The management indicated that it is likely to sustain the current growth rate in Q4FY13.
 EBITDA growth of 50.3% YoY: BJCOR’s EBITDA grew 50.3% YoY to Rs 428mn with EBITDA margins improving 360bps YoY. Gross margins expanded 370bps YoY on account of a 5% YoY decline in LLP prices. The company has guided for a 6-7% QoQ reduction in LLP prices in Q4. Ad spends for the quarter were down 170bps; however, BJCOR more-than-doubled its promotion spends to pass on some benefit of lower input costs, which in turn pushed up other expenses by 240bps YoY. Adj. PAT grew 46.2% YoY to Rs 422mn as other income increased by 32% YoY on a higher cash balance (Rs 4.7bn vs. Rs 3.7bn in Q3FY12). The company also announced an interim dividend of Rs 6.5/share (FY12 dividend at Rs 4/share).
 Maintain HOLD with a revised March’14 TP of Rs 275: We revise our FY14/FY15 earnings by ~13% to get a revised March’14 TP of Rs 275. Maintain HOLD. Key risks to our call: (a) strong, continued growth in volumes, (b) higher-than-estimated margins due to soft RM costs and (c) value-accretive acquisitions.


Concall highlights
 Volume growth came in strong at 22.3% YoY, and the management expects the growth momentum to continue in Q4 as well.
 According to AC Neilsen, the industry’s value-added hair oil volumes grew by 6.4% in the current quarter and light hair oil volumes by 14.4%. BJCOR has seen continued traction with an impressive 27% growth in rural areas and 15% in urban. The company has not seen any slowdown in rural demand as yet.
 The rural/ urban mix for the company stood at 38%/62% in Q3FY13, which has improved from 36%/64% in the previous quarter.
 Bajaj Almond Drops reported a strong 23.4% growth in volumes with continued market share gains in the LHO category. The brand is now available in 2.54mn outlets and has seen a distribution reach expansion of 17% YoY.
 Gross margins expand 370bps led by lower LLP prices
 The market share for Kailash Prabhat in Q3FY13 stood at 2.4%, down 50bps QoQ, with the distribution reach also declining QoQ. The management has indicated that this was on account of some destocking since it was off-season for the brand.
 The gross margin expansion was led by lower RM costs. LLP costs declined by 5% YoY in the quarter to Rs 79.10/kg. BJCOR has booked forward contracts with traders for procuring LLP at Rs 75/kg in Q4FY13. Prices of refined oil, however, increased by 14% YoY and that of glass by 8% YoY. Given the subdued LLP prices, the management expects current margins to more-or-less sustain in Q4 as well.
 Advertising spends in Q3FY13 stood at Rs 99.4mn (a 5% YoY increase). However, the company increased its promotion spends by nearly 2.5x YoY to Rs 116mn.
 The management does not expect any significant capex for FY14 with the total capex requirement likely to be ~Rs 100mn, specifically for its office expansion. The company has formed a subsidiary company in Bangladesh last month and is evaluating options for production in the country (either would set up its own plant or look at third-party contract manufacturing). Management does not expect any material impact in terms of its Bangladesh foray in the near term.
 FY14 capex requirement likely at ~Rs 100mn
 BJCOR has paid an interim dividend of Rs 6.5/share (dividend yield of ~2.6%), with a cash outgo of ~Rs 1.1bn. The company had paid a dividend of Rs 4/share in FY12. The current cash balance at Q3FY13-end stood at Rs 4.8bn.