Bajaj Corp.: Solid performance; retain BUY :: Kotak Securities

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Bajaj Corp.: Solid performance; retain BUY
 Solid volume-driven outperformance; ADHO volume growth jumps to 19%
yoy
 Margin expansion led by higher GMs; correction in LLP a key near-term
tailwind
 We remain positive; retain BUY with a revised target price of Rs495 (Rs390
earlier)

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Solid performance; retain BUY. Solid volume acceleration and benign RM
environment (we model ~25% correction in LLP prices in FY2016E) drive a ~9-10%
upward revision in our EPS estimate for FY2016E/17E. While the stock has delivered a
solid outperformance over the past month, valuations remain modest at 19X FY2017E.
Retain BUY rating and raise our target price to `495 (`390 earlier) based on P/E of 23X
December 2016E EPS (at 25% discount to the sector, ex-ITC).

Solid volume-driven outperformance; ADHO volume growth jumps to 19% yoy

Bajaj Corp delivered a solid volume-driven outperformance for the quarter (21.1% volume

growth, including NOMARKs) – revenues were `2.05 bn (+30%; KIE: `1.96 bn), EBITDA was

`587 mn (up 39% yoy; KIE: `547 mn) and recurring PAT came in at `535 mn (up 31% yoy; KIE:

`517 mn). Adjusted for NOMARKs (registered a revenue of `136 mn, flattish qoq), organic

revenues grew 25.6% yoy. ADHO volumes grew at a solid 19.2% yoy, significantly higher

versus our estimate of 12% growth and 4% volume growth witnessed in 2QFY15, aided by low

base and dealer re-stocking (led by improved secondary sales). Overall hair oil volumes grew

19.7% yoy while price/mix-led growth in ADHO was 5%.

Margin expansion led by higher GMs; correction in LLP a key near-term tailwind

EBITDA margin expanded 180 bps yoy to 28.6%, 130 bps higher versus our estimate, led by

lower staff costs (down 90 bps yoy) and lower other expenditure (down 200 bps yoy). GMs

expanded 200 bps yoy/110 bps qoq to 62.5% aided by lower LLP prices, which declined 11%

qoq to `75/kg (down 1% yoy). However, the company invested part of GM gains into higher

A&SP (up 170 bps yoy; 180 bps qoq); we note Bajaj Corp’s A&SP has reached historical high

levels of 19.6% (as % of sales). Correction in LLP, led by a sharp drop in crude oil prices, can

emerge as a key margin tailwind for the company in the ensuing quarters (LLP has already

corrected to `66/kg). We note LLP (a crude derivative) constitutes ~35-40% of input costs.

We remain positive; retain BUY with a revised target price of `495 (`390 earlier)

We have revised our revenue estimates by ~3-6% for FY2016E/17E as we bake in higher ADHO

volume growth (partially adjusted for lower value growth). We have also revised our EPS

estimates by ~9-10% for FY2016E/17E led by lower LLP prices (we bake in ~25% correction in

LLP prices in FY2016E) and higher operating leverage (led by stronger revenue growth). We note

we have built in higher A&SP expenses – we expect A&SP (as % of sales) to increase from 18%

in FY2015E to 19.3% in FY2016E. We retain our BUY rating on the stock with a revised target

price of `495 (`390 earlier) based on P/E of 23X December 2016E earnings (up from 20X; still

at ~25% discount to the sector, ex-ITC) based on – (1) stronger volume growth (model 16.5%

CAGR in ADHO volumes over FY2015-17E) and (2) better earnings visibility (RM tailwinds and

higher operating leverage; we model 23% CAGR in PAT over FY2015-17E)

LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily13012015ba.pdf