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Reuters: BACO.BO; Bloomberg: BJCOR IN

Bajaj Corp

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. 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.

BUY

Sector: FMCG

CMP: Rs177

Target Price: Rs220

Upside: 24%

Param Desai [email protected] +91-22-3926 8128

Nikhil Gaggar [email protected] +91-22-3926 8251

Key Data

Current Shares O/S (mn) 147.5

Mkt Cap (Rsbn/US$mn) 26.1./468.1

52 Wk H / L (Rs) 185/94

Daily Vol. (3M NSE Avg.) 218,713

Share holding (%) 3QFY12 4QFY12 1QFY13

Promoter 84.8 84.8 84.8

FII 7.3 9.4 9.5

DII 1.9 0.3 0.5

Corporate 2.6 2.0 1.6

General Public 3.5 3.6 3.7

One Year Indexed Stock Performance

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130

140

150

160

Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12

BAJAJ CORP LTD NSE S&P CNX NIFTY INDEX

Price Performance (%)

1 M 6 M 1 Yr

Bajaj Corp 24.8 52.9 48.3

Nifty Index 1.1 (1.8) 5.8

Source: Bloomberg

Y/E March (Rsmn) FY10 FY11 FY12 FY13E FY14E

Revenue 2,946 3,587 4,733 5,994 7,247

YoY (%) 20.5 21.8 32.0 26.6 20.9

EBITDA 973 1,081 1,165 1,474 1,819

EBITDA (%) 33.0 30.1 24.6 24.6 25.1

Adj. PAT 839 1,031 1,201 1,437 1,774

YoY (%) 78.6 22.8 16.5 19.7 23.4

Adjusted EPS 5.7 7.0 8.1 9.7 12.0

RoE (%) 327.7* 27.4 28.1 29.1 30.3

RoCE (%) 344.7* 28.2 26.6 29.0 30.2

P/E (x) 31.1 25.3 21.7 18.2 14.7

P/BV 79.3 6.9 6.1 5.3 4.5

EV/EBITDA (x) 26.6 20.4 19.5 14.9 11.6

Note :* Higher FY10 RoCE/RoE are pre-listing (listed in August 2010) due to low base of net worth/share capital

Source: Company, Nirmal Bang Institutional Equities Research

31 August 2012


Bajaj Corp 2

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.

Exhibit 1: Comparative valuation

Company CMP (Rs)

Mkt. cap (Rsbn)

EPS CAGR (%) (FY12-FY14E)

PE (x) FY14E

PB (x) FY14E

EV/EBITDA (x) (FY14E)

Asian Paints 3,696 355 18.8 25.4 8.5 16.2

ITC 271 2,123 17.2 24.5 9.4 16.2

Marico 198 127 25.8 24.2 5.4 17.0

Godrej Consumer 695 236 24.4 25.6 5.9 18.3

Dabur India 124 216 18.6 23.8 8.3 18.1

GlaxoSmithKline Consumer* 2,916 123 20.5 23.8 7.5 17.2

Hindustan Unilever 529 1,143 13.2 31.9 22.6 24.7

Jyothy Laboratories 148 24 19.0 20.2 2.3 21.0

Britannia Industries 490 58 18.9 20.7 8.1 14.1

Colgate-Palmolive (India) 1,209 164 16.2 28.0 29.0 20.6

Emami 499 75 18.4 20.8 6.9 17.7

Industry-weighted average - - 17.1 26.2 12.8 18.7

Bajaj Corp 177 26 21.6 14.7 4.5 11.6

Note: * December year-end; Source: Bloomberg, Nirmal Bang Institutional Equities Research

The stock has underperformed the BSE FMCG index by 44% since its listing in August 2010, given its limited operations history, thereby resulting in its trading at a significant discount to peers despite a strong performance. Further, in FY12, BCL gave corporate guarantee for a loan availed by the promoters’ group company which was later revoked. It also acquired land at Worli, Mumbai, from Uptown Properties and Leasing for Rs750mn. The management has categorically indicated that the company intends to centralise its entire operations at one place and has no intention to enter into the real estate business. Due to these reasons, its stock traded at a 40% discount compared to other hair oil companies (Marico, Dabur India, Emami) as well as companies dependent highly on single products like Colgate-Palmolive (India) and GlaxoSmithKline Consumer. While we believe the valuation discount to peers will continue, the current discount is too high and undermines BCL’s strong growth prospects (22% earnings CAGR versus 17% CAGR of the FMCG universe expected over FY12-FY14E), widening of the gap with its nearest competitor (currently 3.6x higher than that of the second- largest competitor) and strong growth potential in the LHO segment.

Exhibit 2: Bajaj Corp stock’s performance (since listing) versus BSE FMCG index

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20

40

60

80

100

120

140

160

180

Aug

-10

Oct

-10

Dec

-10

Feb-

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Apr

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Jun-

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Aug

-11

Oct

-11

Dec

-11

Feb-

12

Apr

-12

Jun-

12

Aug

-12

Bajaj Corp FMCG

(x)

Source: Bloomberg, Nirmal Bang Institutional Equities Research


Bajaj Corp 3

Our FY14 earnings estimate is 4% higher than consensus projection

We are 0.4%/3.8% above consensus estimates in respect of FY13E/FY14E PAT, respectively, as we are assuming higher volume growth. We have factored in higher volume CAGR of 18% over FY12-FY14E as we believe there will be a structural shift in volume from unbranded oils and coconut oils to light hair oils. Hence, our FY14E revenue estimate is 5% ahead of consensus estimate. In addition, we expect 50bp improvement in operating margins over FY12-FY14E as we have factored in a 2% fall in the price of LLP, a key raw material for BCL.

Exhibit 3: Our estimates versus Bloomberg consensus

FY13E FY14E

(Rsmn) NBIE estimates Consensus est. Variation (%) NBIE estimates Consensus est. Variation (%)

Revenue 5,994 5,859 2.3 7,247 6,904 5.0

EBITDA 1,474 1,447 1.9 1,819 1,735 4.8

OPM (%) 24.6 24.7 10bps 25.1 25.1 0.0

PAT 1,437 1,431 0.4 1,774 1,709 3.8


Exhibit 4: One-year forward PE Exhibit 5: One-year forward PBV

-

5

10

15

20

25

Au

g-1

0

Oct

-10

De

c-1

0

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Ap

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-12

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(x)

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2.5

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6.0A

ug

-10

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Fe

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2

Ap

r-1

2

Jun

-12

Au

g-1

2

(x)

Source:Bloomberg, Nirmal Bang Institutional Equities Research Source: Bloomberg, Nirmal Bang Institutional Equities Research

Exhibit 6: One-year forward EV/EBITDA

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2

4

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g-1

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-12

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(x)



Bajaj Corp 4

Investment Arguments

Strong free cash flow, return ratios

BCL operates on negative working capital, generating Rs1.7bn of cash flow after accounting for capex over FY10-12. We expect this trend to continue and forecast Rs2.5bn of cash flow generation over FY12-FY14E. This will help the company to pursue inorganic growth opportunities. Following higher asset turnover, stable operating margin and negative working capital, RoCE/RoE should improve by 366bps/220bps to 30.2%/30.3%, respectively, over FY12-14E and also result in expansion of valuation multiples.

Exhibit 7: Return ratios to improve

24

25

26

27

28

29

30

31

FY11 FY12 FY13E FY14E

RoE RoCE

(%)


Scouting inorganic growth opportunities

BCL’s net cash balance stood at Rs3.4bn (14% of current market capitalisation) in FY12 which placed BCL strongly to leverage on inorganic growth opportunities. The company appointed Mr. Jimmy Ankleseria to look out for inorganic growth opportunities, domestic as well as global. Prior to joining Bajaj Corporation, Mr. Ankleseria worked for Godrej Consumer Products overlooking various inorganic growth opportunities. The management has stated that it intends to pursue inorganic opportunities in the personal care segment, thereby diversifying its product portfolio. It has given acquisition size guidance to the extent of 2x its existing cash balance of Rs3.4bn.

Stability in input costs is a key factor

The company’s principal raw materials comprise petroleum-based liquid light paraffin or LLP (16% of sales), vegetable oils (refined mustard oil and ground nut oil, 4% of sales), glass bottles (10% of sales) and perfume (3% of sales). BCL sources its major raw material LLP primarily from local processors, who import their crude oil requirement from South Korea and the US. Over the past two years, LLP prices have gone up from Rs55.0/kg to Rs83.5/kg on account of the rise in crude oil prices along with rupee depreciation. Consequently, this has impacted OPM, which slipped from 33.0% in FY10 to 24.6% in FY12. We have factored in a 2% decline in LLP prices over FY12-FY14E, at Rs81.7/kg. It may be noted that BCL’s gross margin improved 2.8% YoY (they improved from 52.9% in 1QFY12 to 55.7% in 1QFY13) in 1QFY13 following a fall in crude oil prices. Our sensitivity analysis shows that a 3% increase/decrease in our LLP price assumption will impact our EPS estimate by 4.4%.


Bajaj Corp 5

Exhibit 8: LLP price trend

40

45

50

55

60

65

70

75

80

85

90

1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13

(Rs/kg)


Exhibit 9: Sensitivity analysis - LLP prices

Increase/(decrease) in LLP prices 6% 3% Base case (3%) (6%)

LLP prices (Rs/kg) 86.7 84.2 81.7 79.2 76.9

OPM (%) 22.4 23.7 25.1 26.5 27.8

Impact on EPS from our base assumption (%) (8.8) (4.4) 0.0 4.4 8.8

Source: Nirmal Bang Institutional Equities Research

Higher dividend payout

BCL was listed on stock exchanges in August 2010. Its dividend payout increased from 39% in FY11 to 57% in FY12. We expect the trend to continue. At the CMP and assuming similar dividend payout in FY13E, the dividend yield works out to 2.5%, higher than its peers.

Exhibit 10: Annual dividend payout of over 50%

0

10

20

30

40

50

60

FY11 FY12 FY13E FY14E

(%)



Bajaj Corp 6

Exhibit 11: Dividend yield for FMCG companies - FY13E

Company Dividend yield (%)

Asian Paints 1.32

ITC 2.13

Marico 0.54

Godrej Consumer 1.03

Dabur India 1.34

GlaxoSmithKline Consumer 1.53

HUL 1.82

Jyothy Labs 1.21

Britannia Industries 2.02

Colgate-Palmolive (India) 2.41

Emami 1.41

Bajaj Corp* 2.54

Note: * NBIE estimate for Bajaj Corp, Bloomberg consensus for rest


Strong 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 a strong brand equity backed by unique positioning (almond-based oil), strong distribution network and consumers’ preference shifting towards the LHO segment.

Hair oil market in India to touch Rs100bn by FY15

Of the estimated Rs1,670bn FMCG branded market in India, hair care constitutes ~8% (Rs128bn). The Indian hair care market is mainly dominated by hair oils (52%), shampoos (31%) and others (hair conditioners, hair dyes). The branded hair oil segment has shown 12.5% and 19.8% CAGR in volume and value terms, respectively, over FY07-12. The overall hair oil segment has witnessed market penetration of over 90%, the highest penetration by any FMCG segment in India. Given the fact that the hair oil segment is well penetrated we believe the next leg of growth for branded hair oils (penetration at ~60%) will come from the shift in consumers preference from unbranded to branded hair oils led by rising urbanisation. We expect hair oil market to touch Rs100bn by FY15, indicating a 13% CAGR over the next three years. We believe such a growth is achievable, despite higher market penetration and introduction of substitutes such as hair gels and hair creams, given the traditional benefits of hair oils in the form of nutrition and conditioning.

Exhibit 12: Trend in branded hair oil market in value terms

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80

FY07 FY08 FY09 FY10 FY11 FY12

(Rsbn)



Bajaj Corp 7

Characteristics of hair oil market growth

Taking a closer look at the growth of the Indian hair oil market, following are the three key trends.

Of the total branded hair oil segment, coconut-based oils constitute 48%, perfumed-based oils constitute 30% (LHO-15%, amla-based oil 15%), cooling oil accounts for 12% and others (hair creams, gels) 10%. The LHO segment has grown faster than the overall hair oil market, with its market share rising from 14% in January 2011 to 15% in June 2012.

\

Exhibit 13: Branded hair oil market break-up as of Jan-end 2011 Exhibit 14: Branded hair oil market break-up as of Jun-end 2012

51

15

14

12

8

Coconut hair oil Amla hair oil Light hair oil Cooling hair oil Others

48

15

15

12

10

Coconut hair oil Amla hair oil Light hair oil Cooling hair oil Others Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research

The hair oil consumption pattern differs across various regions of the country. Coconut oil is very popular in the southern region, while people in the northern region prefer perfumed-based oils such as almond oil, sesame oil, rapeseed oil, etc.

Exhibit 15: Break-up of LHO (Bajaj Almond Drops) sales as of Jun-end 2012 (%)

49

23

22

4 2

North West East South Others


Over the years, the market leader in each category of hair oil has gained market share and the difference is 2x-5x when compared to the second-largest player in each category. This indicates that each player has created first-mover advantage and strong brand equity, thereby making it difficult to replace them.

Structural shift of consumers’ preference towards LHO segment

Light hair oil is an urban area-dominated segment, primarily due to its comparatively high cost. There has been a structural shift towards perfumed-based oils like LHOs following rising urbanisation and changing consumer taste. Rising urbanisation has led unbranded hair oil consumers to shift towards branded hair oils like Bajaj Almond Drops, while consumers’ preference of non-sticky oils has shifted the demand from pure coconut oil to perfumed-based hair oils. This has resulted in higher growth in the LHO market (25.8% CAGR over FY07-12) compared to the overall hair oil market. We expect the trend to continue in the medium term.

(%) (%)


Bajaj Corp 8

Exhibit 16: Trend in light hair oil market in value terms Exhibit 17: Trend in light hair oil market in volume terms

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12


(Rsbn)

-

5,000

10,000

15,000

20,000

25,000

30,000


(Kilo Litre)

Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research

Bajaj Almond Drops well positioned in LHO segment

Bajaj Almond Drops is a 22-year-old premium light hair oil brand containing almond oil and Vitamin E (300% more than in coconut oil), which adds to the product's reputation for leaving its users with a healthier hair. Unlike most hair oils which are packaged in plastic PET bottles, Bajaj Almond Drops is packed in glass bottles, which preserves the product for a longer period of time even in high temperatures generally experienced throughout India. This leads to unique product positioning compared to peers. Recently, Dabur India launched a similar almond oil-based product in the LHO segment with a lower price to capture market share. However, we would like to highlight that BCL has the first-mover advantage and it will be an uphill task for new entrants to gain market share. This is quite visible as Marico, which has the largest-selling hair oil brand and is a leader in the coconut oil segment, has been unable to garner market share in the LHO segment with its Hair & Care brand. We have witnessed a similar trend in other hair oil segments where the leader in each category of hair oil has gained market share and the variance is 2x-5x when compared to the second-largest player. This indicates that each player has created the first-mover advantage and strong brand equity, thereby making it difficult to replace them.

Exhibit 18: First-mover advantage for market leaders

Segment Market leader Market share (%) Relative share vs. nearest competitor (x)

Coconut hair oil Marico 55 >5.0

Amla hair oil Dabur 62 3.5

Light hair oil Bajaj Corp. 54 3.6

Cooling hair oil Emami 54 2.0

Source: Industry, Nirmal Bang Institutional Equities Research

Exhibit 19: Bajaj Almond Drops growing faster than overall LHO and hair oil market (volume terms)

0

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200,000

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300,000


Hair oil market

(Kilo Litre)

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LHO market

(Kilo Litre)

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Bajaj Almond Drops market

(Kilo Litre)



Bajaj Corp 9

Exhibit 20: Bajaj Almond Drops market growing faster than overall LHO and hair oil market (value terms)

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Hair oil market

(Rsbn)(Rsbn)

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LHO market

(Rsbn)

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Bajaj Almond Drops market

(Rsmn)


Exhibit 21: Relative market share compared to nearest competitor (rising gap)

2.1

2.7

3.23.3

3.6

0.0

0.5

1.0

1.5

2.0

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CY08 CY09 CY10 CY11 1HCY12


Bajaj Almond Drops’ pricing is at a 15-20% premium to its next two competitors in the LHO segment, while the pricing is 35-85% higher than its competitors in amla and coconut hair oil segments, respectively. Despite this, BCL has emerged as the prime beneficiary of premiumisation, growing significantly faster than the market.

Exhibit 22: BCL emerges as prime beneficiary of premiumisation in hair oil market

27

3842 42 44

5055

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Pa

rach

ute

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o K

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tika

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ir &

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Ba

jaj A

lmo

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vra

tna

(Rs/100ml pack)


Strong distribution network

Bajaj Almond Drops is available at over 2.38mn retail outlets which are serviced by 6,178 direct distributors and 13,548 wholesalers. Its sales mix is still largely dependent on traditional channels where local grocery stores (52%) and general stores (28%) account for a major portion of the sales. However, the management has indicated that alternate channels like modern retailing have shown a higher growth rate. As indicated earlier, 49% of sales of Bajaj Almond Drops are accounted for by the northern region, with the western region being the fastest growing region. Given the dominance of urban markets, large packs account for bulk of the sales. However, smaller packs of 3ml have increased rural penetration. The management has indicated that with rising disposable income, sales of 500ml packs are also on the rise in rural markets.


Bajaj Corp 10

Exhibit 23: Bajaj Almonds Drops – Share of distribution channels (%)

52

28

7

42

7

Local grocery stores General stores ChemIsts

Cosmetics shops Modern trader Others


New initiatives to improve market penetration

In FY12, BCL launched new initiatives to improve market penetration and increase product availability in rural areas, villages and semi-urban towns. The rural promotional van scheme in West Bengal met with great success. Hence, the company is planning to go for it in five other states in FY13. This will help in increasing the market share in states where the company has a limited presence. On the other hand, the company has such vans in Rajasthan and Madhya Pradesh where its lead brand has a higher market share. The expenses incurred on these vans are shared between the company and super stockists covering the areas. The main objective of these vans is extending the distribution network to small towns and villages which hitherto get their stock from wholesalers in bigger towns. This is an economical way of reaching out to small towns and villages and the initiative will be extended to other states where the company’s lead brand has a higher market share.

Catering to the needs of all segments of its customer base

BCL sells its lead brand Bajaj Almond Drops in 3ml to 500ml packs or stock-keeping units (SKU), thereby catering to all segments of its customer base. Unlike its peers, BCL sells 3ml to 300ml of the oil in glass bottles which keeps the shelf life of the product higher. BCL recently introduced 500ml of the oil in PET bottles which has generated strong response from the market. The share of 500ml packs in total volume has risen to 6% in FY12. Further, its 3ml (sachet) pack has gained popularity in rural India, leading to 51% YoY growth in sachet sales in FY12.

Exhibit 24: Volume saliency - Bajaj Almond Drops

(SKU) FY07 FY08 FY09 FY10 FY11 FY12

20ml 0.7 0.9 1.3 2.2 2.8 3.0

50ml 18.3 17.4 17.0 17.6 16.3 16.0

75ml 2.9 4.7 5.5 4.4 4.0 3.0

100ml 41.5 39.0 37.9 34.4 32.6 29.0

200ml 27.9 24.2 21.7 21.0 20.0 19.0

300ml 5.8 10.4 10.8 13.1 13.6 11.0

Sachet (3ml) 2.9 3.5 5.8 7.4 10.4 13.0

500ml 0.0 0.0 0.0 0.0 0.3 6.0

Grand total 100 100 100 100 100 100



Bajaj Corp 11

Rising urbanisation augurs well for Bajaj Almond Drops

Bajaj Almond Drops is an urban-dominated product due to its relative higher pricing where urban areas account for 66% of its sales. As per the United Nations, urbanisation in India is expected to increase from about 30% in 2010 to about 40% by 2030 and the number of people living in urban areas is expected to rise by about 62% to 59bn. Also, the middle class population in the country is expected to rise by about 12 times to 580mn, constituting 41% of the total population by 2025 as against about 5% in 2005.

For BCL, rising urbanisation leads to two key benefits. Firstly, urban consumers are more likely to spend on lifestyle products. Secondly, one of the largest segments of hair oil users (around 31%) is currently using unbranded hair oils, leading to a likely shift towards branded products.

Exhibit 25: Urbanisation rate – country-wise

26 27 28 29 30

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20

30

40

50

60

70

80

90

100

1,990 1,995 2,000 2,005 2,010

India China South America Russian federation Brazil

(%)

Source: UN, Nirmal Bang Institutional Equities Research

Diversifying its product base with a foray into cooling oil segment

Cooling oil has emerged as an important segment in the Indian hair oil market, with the oil meant for cooling the scalp during the harsh summer months. The ingredients in the cooling hair oil give immediate relief by cooling the scalp and so the demand for this oil is robust during summer months. The CAGR of this category of oil has been 16.5% over the past four years with the size of the market standing at Rs8bn as of 31 December 2011. The company launched its first cooling oil product Kailash Parbat Thanda Tel in FY12 with its unique selling proposition of sandalwood as compared to peers. The brand is now available at 202,000 outlets across India and has garnered market share of 2% during the first year of its launch. We expect 30% revenue CAGR at Rs221mn in FY14E from its cooling hair oil segment.

Exhibit 26: Market share in cooling hair oil

0.0

0.3

0.8

1.01.1

1.2

1.0 1.0

1.2 1.2

1.7 1.71.6

1.9

2.1

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1.0

1.5

2.0

2.5

Ap

r-1

1

Ma

y-1

1

Jun

-11

Jul-1

1

Au

g-1

1

Se

p-1

1

Oct

-11

No

v-1

1

De

c-1

1

Jan

-12

Fe

b-1

2

Ma

r-1

2

Ap

r-1

2

Ma

y-1

2

Jun

-12

(%)



Bajaj Corp 12

Exhibit 27: Distribution trend ( ‘000 outlets)

1

47

94

125145

162 167 172 168 158172

202

231

292

322

0

50

100

150

200

250

300

350

Ap

r-1

1

Ma

y-1

1

Jun

-11

Jul-1

1

Au

g-1

1

Se

p-1

1

Oct

-11

No

v-1

1

De

c-1

1

Jan

-12

Fe

b-1

2

Ma

r-1

2

Ap

r-1

2

Ma

y-1

2

Jun

-12


Higher advertising expenditure likely to increase market share

Most of the companies have used a combination of price hikes and cost rationalisation such as a cut in advertising expenses to limit the downside in EBITDA margin in FY12 in order to combat rising input costs. However, BCL was able to raise prices with a minimal impact on volume growth along with sustained growth in advertising expenses because of its dominant brand. This has helped in garnering market share for BCL. The company has been consistently doing promotion for its lead brand with highly visible media campaigns and distribution-led retail push. It has launched a pan-India advertising campaign for Bajaj Almond Drops brand with noted actress Ms. Kangana Ranaut as a brand ambassador for style, nutrition, modernity and value for money. The company has increased its share of advertising for its lead brand from 9% in FY09 to 12% (% of sales) in FY12, which has led to a substantial increase in market share from 44% to 52% in volume terms as on end-June 2012. Further, with its recent entry into the cooling hair oil segment, the company has allocated 2% of its total sales revenue for promotional activity. We expect the current trend to continue and have factored in 14.5% of sales revenue towards advertising and sales promotion expenses in FY13E/FY14E.

Exhibit 28: Gaining market share in lead brand Bajaj Almond Drops (Volume)

Exhibit 29: Rising advertising expenditure on account of entry into cooling hair oil segment

38.4

44.148.0 49.1

50.9 51.9

0

10

20

30

40

50

60


(%)

12.7

11.3

13.714.5 14.5

0

2

4

6

8

10

12

14

16

-

200

400

600

800

1,000

1,200

FY10 FY11 FY12 FY13E FY14E

Adertising & sales promotion (ASP) expenses ASP to sales

(%)(Rsmn)

Source:Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research


Bajaj Corp 13

Financials

Volumes to drive revenue CAGR to 24% over FY12-FY14E

As much as 94% of BCL’s FY12 revenue came from its lead brand Bajaj Almond Drops. We have factored in volume growth of 18.6% and 17.2% for FY13E and FY14E, respectively, for Bajaj Almond Drops. Volumes will be largely driven by rising urbanisation and structural shift of consumers’ preference from coconut oil and unbranded hair oil to branded LHOs. BCL has undertaken a price hike of 8% with effect from April 2012 for Bajaj Almond Drops, which will be fully reflected in 1HFY12 numbers. We have factored in price hike for Bajaj Almond Drops of 7.8% and 2.9% in FY13E and FY14E, respectively. Consequently, we expect 24.4% revenue CAGR at Rs6.9bn for FY14E in the case of Bajaj Almond Drops. We expect 30% revenue CAGR at Rs221mn for FY14E from its cooling hair oil segment on account of a lower base. Further, we expect flat growth in revenue from other products, which contribute 2% to total revenue. Consequently, we expect 24% total revenue CAGR at Rs7.2bn over FY12-FY14E.

Exhibit 30: Volume trend Exhibit 31: Revenue trend

-

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000


(cases)

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000


(Rsmn)

Source:Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research

Stable operating margin

BCL’s operating margin slipped from 30% in FY10 to 24% in FY12 following the rise in crude oil prices, thereby impacting the prices of LLP, its major raw material. In order to combat volatility in LLP prices, BCL has started building up one-month LLP inventory as against three-four days earlier. We have factored in a 2% reduction in LLP prices and have assumed stable prices for other inputs like perfume, vegetable oil and glass bottles. It must be noted that BCL’s gross margin has improved by 2.5% in 1QFY13 with the fall in crude oil prices. However, we have factored in a 70bps rise in advertising and sales promotion expenses following increased promotion for its new product Kailash Parbat in the cooling hair oil space.

Exhibit 32: We factor in stable OPM over FY12-FY14E

33.0

30.1

24.6

24.625.1

15

17

19

21

23

25

27

29

31

33

35

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000


EBITDA (LHS) OPM (RHS)

(Rsmn) (%)

Source:Company, Nirmal Bang Institutional Equities Research


Bajaj Corp 14

Lower yields on cash, we expect 22% earnings CAGR over FY12-FY14E

BCL’s net cash balance stood at Rs3.4bn in FY12, which is expected to rise to Rs5.1bn at the end of FY14. This is on account of sustained strong cash flow generation with negative working capital and higher growth from its lead brand Bajaj Almond Drops. However, the management has guided the yield on investment to come down from 10% to 9%, thereby leading to moderate CAGR in other income of 11% over FY12-FY14E. Further, we have factored in unchanged tax rate of 20.6% as the company continues to enjoy fiscal benefits for having its manufacturing plant in Himachal Pradesh. Consequently, we expect 21.6% earnings CAGR at Rs1.8bn over FY12-FY14E.

Exhibit 33: PAT trend

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000


(Rsmn)


Expect 17% net worth CAGR over FY12-FY14E

BCL reported Rs839mn profits for FY10, but it paid Rs1,076mn by way of dividend (including tax), thereby resulting in a decline in net worth by Rs237mn. Further, it came out with an initial public offer in August 2010 with an issue size of Rs3bn, thereby increasing its net worth by a whopping 1,248% YoY in FY11. We expect 21% earnings CAGR at Rs1.8bn over FY12-FY14E and have factored in dividend payout of 46% and 42% for FY13E and FY14E, respectively. Consequently, we expect 17% net worth CAGR at Rs5.8bn over FY12-FY14E.

Exhibit 34: Net worth trend

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

FY09 FY10 FY11 FY12 FY13E FY14E

(Rsmn)



Bajaj Corp 15

Key risks

Higher dependence on a single product

BCL’s derives 94% of its revenue from a single product, Bajaj Almond Drops. Therefore, any change in consumer preference will impact demand and thereby our volume assumptions. However, we reiterate our view that hair oil remains an integral part of any household’s daily lifestyle products which is difficult to replace, given the traditional benefits of nourishment and conditioning. Further, if the company acquires meaningful size in the personal care segment through the inorganic route, it will reduce dependence on a single product.

Volatility in raw material prices

Over the past two years, BCL’s OPM was impacted due to rising crude oil prices. We have factored in a 2% fall in LLP prices and assumed stable prices for other inputs like perfume, vegetable oil and glass bottles. If cost inflation continues, it will impact margins downwards and thereby our margin assumption. In order to combat volatility in LLP prices, BCL has started building up one-month LLP inventory as against just three-four days’ inventory earlier.


Bajaj Corp 16

Company background

Bajaj Corp is a part of Shishir Bajaj Group of companies which has business interests in various industries including sugar, consumer goods, power generation and infrastructure development. Bajaj Corp is the third-largest player in the hair oil industry. Established in 1953 by Kamal Narayan Bajaj as Bajaj Sevashram, the company was demerged into Bajaj Consumer Care in 2001, as a result of which the company changed its name to Bajaj Corp in 2008. BCL is the exclusive licensee of the brands owned by Bajaj Resources (BRL), a Shishir Bajaj group company. The brands are licensed to BCL for a period of 99 years from 2008 with an option of 10-year extension. BCL pays 1% royalty of net sales to BRL annually. The company's brands include Bajaj Kailash Parbat Thanda Tel, Bajaj Almond Drops Hair Oil, Bajaj Brahmi Amla Hair Oil, Bajaj Amla Shikakai Hair Oil and Bajaj Jasmine Hair Oil. Bajaj Almond Drops Hair Oil is the key product of the company with a 54% LHO market share and 94% contribution to top-line. BCL also manufactures Bajaj Black Tooth Powder. The company has five production facilities (including third-party manufacturing facility), of which three units are self owned. They are located in Himachal Pradesh (Parwanoo and Paonta Sahib) one in Uttarakhand (Dehradun) for manufacturing variants of hair oils and another unit in Udaipur, Rajasthan, for manufacturing its oral care product.

Exhibit 35: BCL’s production facilities

Plant location Capacity Product

Parwanoo, Himachal Pradesh 39mn litre

ADHO, ASHO

Dehradun, Uttarakhand ADHO, ASHO

Paonta Sahib, Himachal Pradesh 35mn litre ADHO, ASHO

Third-party facility 9mn litre ADHO, ASHO, BAHO, JHO

Total capacity 83mn litre -


Exhibit 36: Product profile

Source: Company


Bajaj Corp 17

Financials

Exhibit 37: Income statement


Net sales 2,946 3,587 4,733 5,994 7,247

% growth 20.5 21.8 32.0 26.6 20.9

Raw materials costs 1,168 1,566 2,199 2,757 3,312

Employee costs 138 163 229 282 341

Advertising & sales promotion exp. 373 405 647 869 1,051

Others 294 373 493 611 725

Total expenditure 1,973 2,506 3,568 4,519 5,428

EBITDA 973 1,081 1,165 1,474 1,819

% growth 88.4 11.1 7.8 26.5 23.4

EBITDA margin (%) 33.0 30.1 24.6 24.6 25.1

Other income 51 178 374 373 460

Interest costs - - 1 - -

Gross profit 1,024 1,258 1,538 1,847 2,279

% growth 92.0 22.9 22.2 20.1 23.4

Depreciation 8 18 26 37 45

Profit before tax 1,016 1,240 1,512 1,810 2,234

% growth 92.0 22.1 21.9 19.7 23.4

Tax 176 210 311 373 460

Effective tax rate (%) 17.4 16.9 20.6 20.6 20.6

Net profit 839 1,031 1,201 1,437 1,774

% growth 78.6 22.8 16.5 19.7 23.4

Exceptional items/MI - (190) - - -

Reported net profit 839 841 1,201 1,437 1,774

% growth 78.6 0.2 42.8 19.7 23.4

Adjusted EPS (Rs) 5.7 7.0 8.1 9.7 12.0

% growth 78.6 22.8 16.5 19.7 23.4

DPS (Rs) 6.2 1.9 4.0 4.5 5.0

Payout (%) 128.3 38.9 57.1 53.7 48.3


Exhibit 39: Balance Sheet


Equity 125 148 148 148 148

Reserves 154 3,616 4,131 4,797 5,714

Net worth 256 3,763 4,278 4,944 5,861

Total loans - - - - -

Deferred tax liability 1 0 10 10 10

Liabilities 257 3,764 4,288 4,954 5,871

Gross block 196 247 445 545 645


Net block 184 217 389 452 508

Capital work-in-progress - 3 - - -

Liquid Investments 21 3,301 3,126 3,126 3,126

Goodwill - - 430 430 430

Deferred tax asset - - - - -

Inventories 99 144 619 646 698

Debtors 29 60 51 57 62

Cash 168 813 275 997 1,958

Loans & advances 25 8 21 23 25

Other current assets - 35 29 32 35

Total current assets 320 1,062 995 1,755 2,778

Creditors 219 477 648 805 967

Other current liabilities 49 342 4 4 4

Total current liabilities 268 818 653 809 971

Net current assets 52 243 343 946 1,807

Total assets 257 3,764 4,288 4,954 5,871


Exhibit 38: Cash flow


EBIT 964 1,063 1,139 1,437 1,774

(Inc.)/dec. in working capital 54 140 28 120 99

Cash flow from operations 1,018 1,202 1,168 1,557 1,874

Other income 51 178 374 373 460


Interest paid (-) - - (1) - -

Tax paid (-) (170) (214) (306) (373) (460)

Dividends paid (-) (945) (168) (1,013) (771) (857)

Net cash from operations (37) 1,017 248 823 1,061

Capital expenditure (-) (128) (62) (196) (100) (100)

Net cash after capex (165) 955 52 723 961

Inc./(dec.) in borrowings - - - - -

(Inc.)/dec. in investments (19) (3,227) (556) - -

Equity issue/(buyback) - 2,970 - - -

Cash from financial activities (19) (257) (556) - -

Others (158) (52) (34) - -

Opening cash 511 168 813 275 997

Closing cash 168 814 275 997 1,958

Change in cash (343) 646 (539) 723 961


Exhibit 40: Key ratios

Y/E March FY10 FY11 FY12 FY13E FY14E

Per share data (Rs)

EPS 5.7 7.0 8.1 9.7 12.0

Cash EPS 5.7 7.1 8.3 10.0 12.3

DPS 6.2 1.9 4.0 4.5 5.0

Book value 2 26 29 34 39.7

DuPont analysis

Profit margin 28.5 28.7 25.4 24.0 24.5

Financial leverage 1.00 1.00 1.00 1.00 1.00

Asset turnover (x) 11.5 1.0 1.1 1.2 1.2

RoE 327.7 27.4 28.1 29.1 30.3

Return ratios (%)

RoE 327.7 27.4 28.1 29.1 30.3

RoCE 344.7 28.2 26.6 29.0 30.2

Dividend payout 128.3 38.9 57.1 53.7 48.3

Valuation ratios (x)

P/E 31.1 25.3 21.7 18.2 14.7

P/E (cash EPS) 30.8 24.9 21.3 17.7 14.4

P/BV 79.3 6.9 6.1 5.3 4.5

EV / EBITDA 26.6 20.4 19.5 14.9 11.6

EV/sales 8.8 6.1 4.8 3.7 2.9

Turnover ratios (x)

Asset turnover ratio 11.5 1.0 1.1 1.2 1.2

Debtor days 2 5 4 3 3

Inventory days 11 12 29 39 34

Creditor days 42 58 68 65 61

Solvency ratio(x)

Debt-equity 0.0 0.0 0.0 0.0 0.0



Bajaj Corp 18

Disclaimer

Stock Ratings Absolute Returns

BUY > 15%

HOLD 0-15%

SELL < 0%

This report is published by Nirmal Bang’s Institutional Equities Research desk. Nirmal Bang has other business units with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. This report is for the personal information of the authorised recipient and is not for public distribution. This should not be reproduced or redistributed to any other person or in any form. This report is for the general information for the clients of Nirmal Bang Equities Pvt. Ltd., a division of Nirmal Bang, and should not be construed as an offer or solicitation of an offer to buy/sell any securities. We have exercised due diligence in checking the correctness and authenticity of the information contained herein, so far as it relates to current and historical information, but do not guarantee its accuracy or completeness. The opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. Nirmal Bang or any persons connected with it do not accept any liability arising from the use of this document or the information contained therein. The recipients of this material should rely on their own judgment and take their own professional advice before acting on this information. Nirmal Bang or any of its connected persons including its directors or subsidiaries or associates or employees or agents shall not be in any way responsible for any loss or damage that may arise to any person/s from any inadvertent error in the information contained, views and opinions expressed in this publication.

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