Well Oiled Bajaj Corp (BCL), the market leader (with a 54% market share) in the light hair oil (LHO) segment, has been growing faster than the overall hair oil market driven by increased preference for non-sticky LHOs and the company’s unique product positioning (almond-based oil) backed by aggressive promotion. We expect BCL to gain further market share as the current trend is likely to continue, which along with stabilisation of its key raw material LLP (liquid light paraffin) prices would drive earnings CAGR of 22% over FY12-FY14E as against 20% CAGR over FY10-12. We expect BCL to generate free cash flow of Rs2.5bn and post improvement in RoCE/RoE by 366bps/220bps, respectively, over FY12-FY14E. Given its strong brand equity, higher cash flow generation and dividend payout (57%) along with improvement in return ratios, we believe the current discount (44%) to its peers is very steep and unwarranted. We assign a Buy rating to BCL with a TP of Rs220 based on 18.3x FY14E earnings.
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Strong free cash flow, return ratios: BCL operated on negative working capital, generating Rs1.7bn of free cash flow over FY10-FY12. We expect the trend to continue and forecast Rs2.5bn of free cash flow generation over FY12-14E. This will help BCL pursue inorganic growth opportunities. Following higher asset turnover led by strong volume growth (18% CAGR over FY12-14E), stable OPM and negative working capital. RoCE/RoE would improve by 366bps/220bps to 30.2%/30.3%, respectively, over FY12-14E and also result in expansion of valuation multiples. Consequently, our FY14E earnings are 4% above Bloomberg consensus. Dominant market position: BCL is the market leader in the LHO segment in India with 51% and 54% market share in volume and value terms, respectively, as of end- June 2012. The company has developed strong brand equity backed by its unique positioning (almond-based oil), strong distribution network and consumers’ preference shifting towards the LHO segment. Its pricing is at a 15-20% premium to next two competitors in the LHO segment, while it is 35-85% higher from its rivals in amla hair oil and coconut hair oil segments. Despite this, BCL has emerged as the prime beneficiary of premiumisation, growing significantly faster than the market. We expect the trend to continue and forecast 24% revenue CAGR over FY12-FY14E. Stock trades at attractive valuation: At the CMP, BCL trades at 14.7x P/E based on our FY14E estimates, which is at a 44% discount to peers despite better performance expected (22% earnings CAGR versus 17% CAGR of the FMCG universe likely over FY12-FY14E). Dividend yield stands at 2.5%, higher than peers at the CMP assuming similar dividend payout for FY13E. While BCL’s single-product concentration warrants discounted valuation, we feel the current discount to peers is too steep. Therefore, we assign a TP of Rs220 i.e.18.3x (30% discount to peers) on FY14E EPS of Rs12, implying 24% upside from the CMP
Valuation
We believe BCL is well placed in the high-growth LHO market with its strong brand, Bajaj Almond Drops. We expect the market share for BCL’s lead brand to increase from the current level of 54% to 65% over the next five years following rising urbanisation, which will make the consumers to spend more on lifestyle products and also shift their preference from unbranded hair oils (~31% market share) towards branded products. Also, BCL’s unique product positioning (non-sticky, almond-based oil and with 300% more Vitamin E than coconut oil) suits young consumers well, who comprise 60% of India’s population. This is likely to result in a 22% profit CAGR over FY12-14E and higher dividend payout. At the CMP, the stock trades at 14.7x P/E based on FY14E earnings, which is at a 44% discount to the FMCG universe. We believe that given BCL’s higher dependence on a single product, its stock will continue to trade at a discount to peers, but a steep discount is unwarranted. We expect BCL to sustain a growth rate of around 18-20% over the medium term. Hence, we assign a TP of Rs220 i.e. 18.3x (30% discount to peers) FY14E EPS of Rs12, implying 24% upside from CMP.
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