AC Choksi - Moneycontrol

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A C Choksi
Share Brokers Private Limited
INITIATION REPORT | BAJAJ CORP LTD.
A C Choksi Institutional Research Sector: FMCG Recommendation: BUY Target Price: Rs. 148.13 Recommendation Price: Rs. 123.65 Sept 09, 2011
BAJAJ CORP LTD.
Conversion and increasing penetration will drive growth…
Swati Gupta
Senior Analyst
Tel: 91-22-6159 5146
Email: [email protected]
1 A C Choksi
148.1
123.7
19.8%
16866.97
Key Financials
Shares Outstanding (mn)
Face Value (Rs.)
Market Capital (Rs. bn)
Free Float (Rs. bn)
Dividend Yield (%)
•
Stock Data
BSE Code
NSE Code
Bloomberg
Reuters Code
52-Week Range (Rs.)
•
Strong volume growth of Almond hair oil:
During Q1FY12, ADHO had achieved a dominant market share
(volume) of 50.4% in LHO category as compared to 38.4% in FY08.
With rising disposable income, consumers tend to up-trade and ADHO
emerged as a key beneficiary of changing consumer preferences.
533299
BAJAJCORP
BJCOR IN
BACO.BO
151.50/73.30 •
Pricing Power and Premium Margins:
Bajaj Corp has created a niche for itself which enables it to command
premium prices as compared to its peers. The company has successfully
increased its prices at 7 year CAGR of 6.4%, without hampering volume
growth. The company commands one of the highest EBITDA margins
in the industry. We believe that ADHO will continue to maintain
premium pricing going forward due to strong brand equity and niche
category positioning.
th
Share Holding Pattern 30 June 2011 DII, 4%
Almond Drops- Market leader in LHO Category:
Bajaj Corp is the market leader in the LHO category in India through its
flagship brand “Bajaj Almond Drops Hair Oil (ADHO)”. Almond hair
oil category witnessed 29% CAGR by volume and 37.5% CAGR by
value over FY07-FY11. ADHO commands dominant market share in
LHO category. Its market share by value improved from 40.3% during
FY08 to 54.2% during Q1FY12. The company is targeting 60-65%
market share over the next 3-4 years.
147.5
1
18.57
3.68
1.5%
Others, 6
%
FII, 5%
•
Promoter,
85%
A C Choksi Institutional Research Investment Summary:
Recommendation: BUY
Target Price (Rs.)
Recommendation Price (Rs.)
Potential Return (%)
BSE Sensex
Sept 09, 2011
Conversion and strong distribution network to drive growth:
ADHO is gaining market share at the expense of its peers. Going
forward, it is expected to derive conversion from unbranded oils,
coconut oil and amla oil. Further, Bajaj Corp is rapidly expanding its
distribution reach as reaches urban and rural consumers through 2.02
mn retail outlets serviced by 5690 direct distributors and 10,085
wholesalers. Going forward, the company is likely to continue its thrust
to strengthen its distribution reach to expand its market share in LHO
category.
•
Valuation:
We Initiate coverage on Bajaj Corp for 12-18 month horizon, with a
target price of Rs. 148.13 per share based on DCF valuation method.
Our DCF-based target price implies an earnings multiple of 14.55x
FY13 earnings. This multiple is at significant discount as compared to
its peers, which factors in the risk of it being a single product company.
2 A C Choksi
Sept 09, 2011
A C Choksi Institutional Research Company Background:
Bajaj Corp Ltd. (BCL), a leading producer of hair oils in India is a part of Shishir Bajaj
Group of Companies. It was incorporated as ‘Bhaumik Agro Products Private Limited’
on April 25, 2006. The name of the company was changed to Bajaj Corp Pvt. Ltd.
Thereafter, the company was converted into public limited company in 2007 and the
name changed to Bajaj Corp Ltd. The company commenced its business in April 2008.
However, the products have been in existence since 1953 and were sold by different
Bajaj group companies.
Bajaj Corp Ltd is one of the leading FMCG Company in India with brands in Hair care
category. The brands have a track record of eight decades and the company is a part of
one of the oldest business houses of the country. Bajaj Corp is promoted by Shishir
Bajaj Group of companies. Mr. Kushagra Nayan Bajaj is the chairman of the company.
The company has a strong brand loyalty across the spectrum of Hair Oil category.
Business Overview:
The legacy of BCL’s products extends back to 1953 when Mr. Kamal Nayan Bajaj
established Bajaj Sevahram (BSL) to market and sell hair oils and other beauty
products. In 2001, in view of the impending Bajaj family settlement, the business was
demerged to to form Bajaj Consumer Care Ltd (BCCL) in 2001 when BSL transferred
its operating business and assigned all trademarks to BCCL. Subsequently, BCCL
licensed these brands to BCL, pursuant to the Trademark License Agreement for a
period of 99 years in 2008. As per the agreement, BCL will pay Royalty @ 1% of
annual net sales turnover to BCCL.
The company began operating as Bajaj Corp Ltd in April 2008. The company has since
become India's third largest producer of hair oils and the largest producer of light hair
oils, capturing an estimated 54.2% of the light hair oil market (based on value) in
Q1FY12, according to Nielsen Retail Audit Report.
The company’s key product is Bajaj Almond Drops Hair Oil (ADHO), a premium
brand that is currently the market leader in the light hair oil segment. In addition, the
company also markets other hair oil brands viz., Brahmi Amla Hair Oil (BAHO), Amla
Shikakai (ASHO) and Jasmine Hair Oil (JHO). The company also produces oral care
products under the brand name Bajaj Black Tooth Powder (BTP). During Q1FY12,
Bajaj Corp forayed into cooling oil category with Kailash Parbat Cooling Oil (KPCO).
3 A C Choksi
Sept 09, 2011
Sales Break-up in Q1FY12 by Brand
JHO 0.36%
ASHO 0.44%
BAHO 2.29%
ADHO 91.56%
KPCO 5.08%
BTP 0.36%
Source: Company
Manufacturing Facilities
Owned/Leased
Products
Parwanoo, Himachal Pradesh
Leased
ADHO, ASHO
Dehradun, Uttar Pradeh
Owned
ADHO
Paonta Sahib, Himachal Pradesh
Owned
ADHO
Excise Duty Exemption
Income Tax Exemption
Company Operated
Installed Capacity
Total Production in FY11
Capacity Utilization
Starting from FY10, for 10
years
years
years
100% for 5 years, 30% for
following 5 years
following 5 years
following 5 years
77.00 mn Ltrs
11.02 mn Ltrs
14.3%
Third Party
ADHO, BAHO &
JHO
BTP
Parwanoo, Himachal Pradesh
Udaipur, Rajasthan
years
NA
NA
NA
Source: Company
A C Choksi Institutional Research Other 8.53%
4 A C Choksi
Sept 09, 2011
A C Choksi Institutional Research Key Management Details:
Mr Kushagra Bajaj: Non Executive Chairman and one of the promoters of the
company. He has 10 years of experience in the consumer & sugar industry and holds
directorship other Bajaj group companies including Bajaj Hindusthan Ltd.
Equity Research Team
022 6159 5146
Mr. Roshan F. Hinger: Vice Chairman and Whole time director of the company with
[email protected]
over 45 years of experience in FMCG business.
Mr Sumit Malhotra: Whole time director of the company. He is Director of Sales and
Marketing department of the company. He has 23 years of experience in FMCG
sector.
Mr Apoorv Bajaj: Executive President and also a promoter of the company.
Mr. V.C. Nagori: Vice President – Finance. He has 25 years of experience in finance,
taxation, audit and legal compliance.
Mr. D. K. Maloo: General Manager - Finance and company secretary. He has 22 years
of experience in finance, taxation, audit and legal compliance.
5 A C Choksi
Sept 09, 2011
A C Choksi Institutional Research Investment Rationale:
Hair Oil Industry; growing at par with FMCG Industry Average:
Hair care products contribute approximately 8% of the total FMCG market (Rs
1338.76 bn) in India (Source: A C Nielsen). Hair care industry is growing at par with
overall industry average of approximately 13-14%. Shampoo and hair oils, including
coconut oils, continue to be the key components of this segment. Hair oils category
constitute more than 55% of the overall hair care industry in India. Hair oil category
witnessed a volume growth of 16.7% CAGR from FY 2007 to FY 2011whereas it
witnessed value growth of 20% CAGR over the same period. This growth is primarily
attributed to the improvement in distribution network and supply chain efficiency.
Hair Care Industry Size (Value) and Structure
Hair Care (Rs. 10,243 cr)
Hair Oils( Rs. 5,326 cr)
Coconut Oil (Rs.2,151 cr)
Other Hair care products( Rs. 4,917 cr)
Perfumed Oil (Rs. 3,175 cr)
Source: A C Nielsen
6 A C Choksi
Sept 09, 2011
Overall Hair Oil Market by Volume
300
200
Rs. bn
mn Ltr.
250
150
100
50
0
FY07
FY08
FY09
FY10
70
60
50
40
30
20
10
0
FY07
FY11 Q1FY12
FY08
FY09
FY10
FY11
Q1FY12
Source: A C Nielsen
Light Hair Oil Segment is growing faster than overall hair oil market:
Light Hair Oil (LHO) category is growing faster than overall Hair oil market in India.
LHO category grew at 17.6% CAGR from FY07 to FY11 in volume terms while it
grew at 25.5% CAGR from FY07 to FY11 in value terms.
Light Hair Oil Market by Value
25
10
20
8
15
6
Rs. bn
mn Ltr.
Light Hair Oil Market by Volume
10
5
4
2
0
0
FY07
FY08
FY09
FY10
FY11 Q1FY12
FY07
FY08
FY09
FY10
FY11
Q1FY12
Source: A C Nielsen
A C Choksi Institutional Research Overall Hair Oil Market by Value
Thus, share of LHO category increased consistently in overall hair oil category during
past few years. This steady increase in LHO share was primarily driven by an increase
in realizations which signifies a structural shift in consumer preference for non-sticky
hair oils for which consumers are willing to pay premium price. This shift in consumer
preference is attributable to rapid urbanization, favorable demographics, increase in
disposable income, better distribution network and increasing penetration of branded
oils in low SKUs.
7 A C Choksi
Sept 09, 2011
LHO share as a % of Overall Hair oil Market (by volume and value)
Source: A C Nielsen
A C Choksi Institutional Research From the following tables we can depict that penetration of branded hair oils is
increasing steadily in India owing to conversion from unbranded hair oil to branded
oils. The penetration of Hair oils grew 4% during 2010 and is currently at a penetration
of 88.3%. On the other hand the unbranded Hair Oils which form 41% of the Hair Oil
usage has seen a decline of 3% in the year 2010.
Penetration Level 100%
92%
87%
90%
88%
88%
84%
80%
70%
60%
58%
57%
51%
50%
40%
29%
30%
35%
37%
47%
41%
44%
40%
20%
10%
0%
2000
2003
Unbranded Oil
2005
Branded Oil
2006
Total Hair Oil
2010
Source: A C Nielsen
8 A C Choksi
Sept 09, 2011
Usage ratio of Branded Oil in Urban and Rural Market 80%
61%
59%
60%
52%
46%
50%
40%
26%
30%
35%
30%
20%
10%
0%
2000
2003
Urban (%)
2005
Rural (%)
2006
Source: A C Nielsen
Almond Drops- Market leader in fast growing LHO Category:
Bajaj Corp is the market leader in the LHO category in India through its flagship brand
“Bajaj Almond Drops Hair Oil (ADHO)”. As per Nielsen data, Almond hair oil
category witnessed 29% CAGR by volume and 37.5% CAGR by value over FY07FY11. ADHO commands dominant market share in LHO category. Its market share
by value improved from 40.3% during FY08 to 54.2% during Q1FY12.
Almond Hair Oil (AHO) Market-Volume
Almond Hair Oil (AHO) Market-Value
12
5
10
4
Rs. bn
mn Ltrs
8
6
4
3
2
1
2
0
0
FY07
FY08
FY09
FY10
FY11
Q1FY12
FY07
FY08
FY09
FY10
FY11
Q1FY12
Source: A C Nielsen
A C Choksi Institutional Research 68%
70%
9 A C Choksi
Sept 09, 2011
25
60%
20
50%
40%
15
30%
10
20%
5
10%
0
0%
FY07
AHO
FY08
LHO
FY09
FY10
FY11
AHO volume as a % of LHO volume
60%
9
8
7
6
5
4
3
2
1
0
50%
40%
30%
20%
10%
0%
FY07
AHO
FY08
LHO
FY09
FY10
FY11
AHO value as a % of LHO value
Source: A C Nielsen
A C Choksi Institutional Research AHO share as a % of LHO - Value
Rs. bn
mn Ltr
AHO share as a % of LHO - Volume
Strong volume growth of Almond hair oil:
During Q1FY12, ADHO had achieved a dominant market share (volume) of 50.4% in
LHO category as compared to 38.4% in FY08. During the period, Almond hair oil
category registered ~29% CAGR by volume far higher than LHO category’s ~18%
CAGR and overall Hair oil’s ~17% CAGR. Heavy hair oils like coconut oil and Amla
oils are growing in high single digits while LHO are growing in high teens. It is visible
that ADHO gained market share at the expense of its competitors. With rising
disposable income, consumers tend to up-trade and ADHO emerged as a key
beneficiary of changing consumer preferences. ADHO is gaining market share from
coconut hair oil, amla oils, other LHO and unbranded hair oil. Major conversion came
from Marico’s Parachute Coconut Oil (CNO) and Dey’s Keo Karpin. While Marico
maintained its dominant market share in CNO category due to continuous conversion
from unbranded hair oil users to branded CNO users, Dey’s Medical’s Keo Karpin lost
its dominant position in LHO segment. Keo Karpin had market share of 42% in LHO
category during FY04 which declined to 19% in FY11.
10 A C Choksi
Sept 09, 2011
A C Choksi Institutional Research Premium positioning; High Realizations:
ADHO is positioned as premium value-added hair oil due to its differentiation
properties in terms of product (almond based) and packaging (glass bottle). The
product is made from almond extracts with added Vitamin E and it is packaged in a
glass-bottle instead of a PET-bottle, which helps to preserves the product properties
for a longer period of time. Thus, Bajaj Corp has created a niche category of Almond
Oil in LHO category which enables it to command premium prices as compared to its
peers. The company has successfully increased its prices from Rs 28 for 100ml in
Mar’03 to Rs 46 in Apr’11 (CAGR of 6.4%), without hampering volume growth. The
brand’s strong pricing power is evident from improvement in market share (by value)
from 31.4% in FY06 to 54.2% in Q1FY12. In LHO category, ADHO’s closest
competitors are Dey’s Medical’s Keo Karpin with ~19% market share and Marico’s
Hair & Care with ~16% market share. While 100 ml SKU of Keo Karpin and Hair &
Care are available at Rs. 37 and Rs. 42 respectively, ADHO’s 100 ml SKU is available
at Rs. 46. We believe that ADHO will continue to maintain premium pricing going
forward due to strong brand equity and niche category positioning.
Premium Pricing as compared to competitors 100 ml
ADHO
46
Hair & Care
42
Keo Karpin
37
0
10
20
Prices( Rs.)
30
40
50
Source: Company
11 A C Choksi
A C Choksi Institutional Research Increasing focus on rural market without diluting margins:
Light hair oils are primarily considered as an urban-centric product due to its premium
pricing. However, it is unlikely to ignore 70% of total population living in rural India
which is willing to up-trade with the rise in disposable income. In rural India
disposable incomes are rising as farmers are shifting towards cash-crops and rural
employment generation schemes are already in place. With growing exposure to
information and media, rural consumers are well aware of branded products and are
willing to up-trade. However, there is a significant difference between consumption
pattern of rural and urban consumers. While consumption in urban India can be
defined as “Small population-consuming a lot”, rural consumption can be defined as
“Large population-consuming little”. Thus, it is important for a company looking
forward to improve its traction in rural India to launch low-priced SKUs. Bajaj Corp is
increasing its penetration in rural market with ADHO’s LPUs of 3 ml sachet and 20 ml
which are priced at Rs. 1 and Rs. 10 respectively. Proportion of rural sales in overall
revenues is increasing consistently. During FY05, 3 ml sachet contributed 0.8% of
overall sales while during FY11 contribution of sachets increased to 10.4%. However,
it is important to note that sachets are considered a low margin SKU due to high price
sensitivity. However, Bajaj Corp happened to maintain its margins even in sachets due
to cost rationalization in packaging material as sachet packaging is cheaper than glass
bottle packaging. Thus, it gives Bajaj Corp an edge over its competitors who would
have to dilute their margins to increase traction in rural India. As a result, Bajaj Corp
has a dominant market share of ~ 57.5% in LHO category in rural market. During
FY11, sachet and 20 ml SKUs registered strong growth of 63% and 49.8% respectively
which reinforces the fact of fast growing presence of Bajaj Corp in rural market.
Strong Growth in Low priced SKUs 300
200
ADHO SKUs (ml)
Sept 09, 2011
100
75
50
20
Sachet 0%
10%
20%
30%
40%
50%
60%
70%
Source: Company
12 A C Choksi
Sept 09, 2011
A C Choksi Institutional Research Sachets contribution increased consistently in overall sales 100.0%
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
1.9%
0.8%
0.0%
FY05
Sachet
FY06
20
50
2.9%
3.5%
5.8%
FY07
75
FY08
100
FY09
200
10.4%
7.4%
FY10
300
FY11
500
Source: Company
Strong Presence in North India:
LHO sales are geographically concentrated specifically in the northern regions of the
country due to willingness of consumers to try new products. Whereas, south India is
still a major consumer of coconut oil due to its deep rooted traditional values. This
can be depicted from the following chart as southern region contributes only 4% of
total LHO sales while northern region contributes whopping 51%. On the other hand,
contributions of eastern and western regions are almost similar at 22-23% level.
Eastern region primarily uses mustard oil, amla oil, cooling oils and LHOs, while
western region primarily uses coconut oil, mustard oil, groundnut oil and LHOs. Bajaj
Corp has a strong presence in North, East and Western regions with its well
entrenched distribution network.
13 A C Choksi
Sept 09, 2011
A C Choksi Institutional Research Region wise break up of LHO Market South, 4%
East , 22%
North, 51%
West, 23%
Source: Company
ADHO’s strong position in most of the states (except southern states) 80
ADHO Market Share % (Vol) 70
60
50
40
30
20
10
Total
Urban
Kerala Tamil Nadu A.P.
Karnataka Maharashtra Chattisgarh M.P.
Gujarat W.Bengal Orissa Jharkhand Bihar Assam Uttaranchal U. P.
Rajasthan Delhi
Haryana Punjab All India 0
Rural
Source: Company
14 A C Choksi
Sept 09, 2011
A C Choksi Institutional Research Strong Distribution network:
Bajaj Corp has established strong distribution network in past few years. It reaches
urban and rural consumers through 2.02 mn retail outlets serviced by 5690 direct
distributors and 10,085 wholesalers. Northern Region is the major market for LHO
category. Thus, approximately 49% of Bajaj corp’s stockists are based in North India,
which ensures high penetration of ADHO in rural and urban area in the region. Bajaj
Corp is rapidly expanding its distribution reach as its stockists strength has grown from
less than 1500 in FY05 to 5690 in Q1FY12. Going forward, the company is likely to
continue its thrust to strengthen its distribution reach to expand its market share in
LHO category. Bajaj Corp has 32 regional distribution centers which further distributes
to rural and urban stockists.
Approximately 80% sales are derived through dominant distribution channels:
Local Grocery stores and general stores are dominant distribution channels for LHO
category as approximately 79% sales occur through these channels. Approximately
80% of ADHO’s sales are derived through these channels. From distribution
perspective, retailers play an important role to push a brand or influence purchase of
consumers. Thus, ADHO which has already become a generic name for Almond oils
provides the company an edge over its competitors.
Moderate Competitive intensity:
Marico, Dabur, Bajaj Corp and Emami are the leading players in branded hair oil in
India. Hair oil category is unlikely to face fierce competition from MNCs as hair oils
are not widely used in different geographies across the globe. Although hair oil
category is highly penetrated, approximately 40% of total market is with unorganized
players. Hence, with rising income levels and changing consumer preference there is a
huge scope for all leading players to register healthy growth going forward. All four
domestic players are market leader in their own niche. While Marico is a leading player
with approximately 46% market share in branded CNO category, Dabur is leading in
Amla oil category with ~70% market share. On the other hand, Emami is a dominant
player in cooling oils with a market share of approximately 54.4% whereas Bajaj Corp
is market leader in LHO category. Thus, all the players have stable growth coming
from their flagship product whereas they are trying to gain market share in other hair
oil categories.
15 A C Choksi
Sept 09, 2011
A C Choksi Institutional Research ADHO’S Outlook:
•
Volume Outlook:
We believe ADHO will register 15% volume growth during FY12 driven by
conversion from peers, increasing penetration in rural market and expanding
distribution reach. ADHO’s volume growth is primarily driven by conversion
from coconut oil users, amla oil users, unbranded oil users and other LHO
users. Amongst these, conversion from coconut oil users is approximately 40%
whereas conversion from amla oil users is approximately 18%. During FY10,
ADHO registered volume growth of 14.8% whereas during FY11 it registered
a volume growth of 18.3%. It is important to note that, during FY10, ADHO’s
100 ml SKU was available at 100% premium over Parachute’s 100 ml SKU.
Whereas during FY11 copra prices increased significantly and Marico took a
price increase of ~ 35%. On the other hand, ADHO took a price increase of
~5% during the year. This resulted into a decline in premium (from 100% to
56%) charged by ADHO over Parachute CNO. This reflected in more-thanaverage increase in ADHO’s volumes during FY11. However, increasing LLP
(light Liquid Paraffin) prices necessitated Bajaj Corp to take further price
increase and during Apr’11 Bajaj Corp had taken a weighted average price
increase of 8.5%. On the other hand, copra prices started stabilizing due to
flush season. Thus, during current year premium of ADHO over Parachute
widened to ~70%. As per our estimates, during FY12 Marico is unlikely to take
any steep price increase. Bajaj Corp is also not expected to take further price
increase as LLP prices are expected to correct from H2FY12. Thus, this
premium of 70% is expected to remain stable during the year. Local Grocery
stores and general stores are dominant distribution channels for LHO category
as approximately 79% sales occur through these channels.
Dabur Amla’s 100 ml SKU is available at Rs. 36. During FY10 and FY11,
ADHO’s 100 ml SKU commanded a premium of 18% and 17% respectively
over Dabur Amla’s 100 ml SKU. However, during Q1FY12 this premium
increased to 28% as ADHO had taken price increase of ~8.5% during Apr’11.
During Q1FY12, Army which is one of the largest customers of Amla oil had
downscaled business due to overall tightening up mandate by the government.
Thus, volumes of Dabur Amla oil are likely to get hampered during FY12
which will deter Dabur to take further price increase during the year.
Thus, premium of ADHO over CNO and Amla oil widened during Q1FY12
as compared to FY11. Hence, we can conclude that ADHO’s volume growth
will remain at normalized level of 15% during FY12.
16 A C Choksi
Sept 09, 2011
A C Choksi Institutional Research •
Realizations Outlook:
We have factored in 10% and 6% increase in realizations during FY12 and
FY13 respectively. Bajaj Corp had already taken a weighted average price
increase of 8.5% during Apr’11. As LLP prices are likely to correct from
Q3FY12, we don’t anticipate any significant price increase during FY12.
•
Raw Materials Outlook:
LLP, glass bottles and refined oil are major raw material for Bajaj Corp.
LLP: LLP constitutes approximately 40-42% of total raw material cost of
ADHO. During FY11, LLP cost registered a sharp increase of 49.5% due to
high crude prices. We have factored in an increase of 28.2% in LLP prices
during FY12. Further, as per our estimates LLP prices are expected to correct
by 5.2 % during FY13.
LLP (Rs./Kg)
90
80
70
60
50
40
30
Source: Company, A C Choksi Institutional Research
17 A C Choksi
A C Choksi Institutional Research Sept 09, 2011
Glass: Glass bottles constitute approximately 25-26% of total raw material cost
of ADHO. We have factored in an increase of 17% during FY12 driven by an
increase in soda ash prices. Major supplier for Bajaj Corp’s glass bottles, has
already taken price increases during Q1FY12 and it is unlikely to take further
price increase during the year unless there is an abnormal increase in soda ash
prices.
Glass Index
145
140
135
130
125
120
115
110
105
100
Apr‐05
Apr‐06
Apr‐07
Apr‐08
Glass Index
Apr‐09
Apr‐10
Apr‐11
Soda Ash (Rs./Kg)
32
30
Soda Ash (Rs./Kg)
28
26
24
22
20
18
16
14
12
10
18 A C Choksi
Sept 09, 2011
A C Choksi Institutional Research Refined oil: It constitutes approximately 8% of total raw material cost of
ADHO. Production of groundnut and mustard are expected to increase by
21% and 18% respectively, during the current crop season. However, due to
high food inflation we have factored in an increase of 10% during FY12.
Foray in emerging categories like cooling oils:
Cooling oil is a fast growing category with a 5 year CAGR of ~20%. Bajaj Corp
entered into this category with its Kailash Parbat Cooling oil (KPCO) brand during
May’11 at pan-India level. During Q1FY12, KPCO registered sales of Rs. 54.2 mn.
Emami is the market leader with approximately 54.4% market share in this category
with its Navratna brand. Bajaj Corp is vying to create its niche in this category by
positioning its product with differentiation factor. KPCO has extract of sandal which is
known for its cooling properties and the product has different colour and fragrance as
compared to other products available in this category. Bajaj Corp has a strong
distribution network to achieve pan-India scale for a new product at a faster pace. The
product is gaining rapid traction in states like Punjab, Madhya Pradesh, Rajasthan and
Gujarat where Bajaj Corp has a very strong distribution network. In cooling oil
category, it primarily competes with Emami which has a smaller distribution network
as compared to Bajaj Corp. There is a regional brand Himgange which has the second
highest market share of ~25%. This brand is focused in U.P., Bihar, Chhattisgarh and
Jharkhand. Marico is also prototyping its cooling oil “Parachute Advansed Coconut
Cooling Oil” in Andhra Pradesh and is likely to expand its reach in near term in
southern region where it has a strong foothold. Thus, we believe that strong
distribution network and product differentiation will aid Bajaj Corp to gain traction
and create its niche in this fast growing category.
Shrinking investment behind under-performing categories:
Bajaj Corp has presence in Amla oil category with its Bajaj Brahmi Amla Hair Oil
(BAHO) and Bajaj Amla Shikakai Hair Oil (ASHO). Dabur is the market leader in
Amla oil category with approximately 70% market share. However, despite of
substantial advertisement and promotional spend these products were unable to get
significant market share due to the lack of product differentiation. Thus, the company
is unlikely to invest behind these products unless it finds a differentiation factor. Their
contribution in sales and sales in absolute terms is declining consistently. Thus, we
have factored in a decline of 16.0% in BAHO sales and 20.8% decline in ASHO sales
during FY12.
19 A C Choksi
Sept 09, 2011
BAHO's Contribution to sales (%)
5.00%
500
4.50%
400
Rs. mn.
4.00%
3.50%
3.00%
2.50%
300
200
100
2.00%
FY10
H1FY11
FY11
0
Q1FY12
Q1
BAHO's Contribution to sales (%)
Q2
FY11
Q3
FY10
Q4
ASHO's Contribution to sales (%)
ASHO Sales Value
200
1.50%
150
Rs. mn
2.00%
1.00%
100
0.50%
50
0.00%
FY10
H1FY11
FY11
Q1FY12
0
Q1
ASHO's Contribution to sales (%)
Q2
FY11
Q3
Q4
FY10
A C Choksi Institutional Research BAHO Sales Value
20 A C Choksi
Sept 09, 2011
A C Choksi Institutional Research Financial Projections:
Revenue to grow at 2-year CAGR of 21.3% by FY13:
We expect market share of ADHO to increase going forward driven by its strong
brand positioning, conversion from loose oils/coconut oil/amla oil users to ADHO
and wider and deeper distribution network. Further, KPCO is expected to garner
healthy traction in cooling oil category due to its product differentiation properties. In
addition, Bajaj Corp is exploring options to extend its brand into high growth and high
margin hair care and/or personal care categories to capitalize upon its brand equity and
for optimum utilization of its wide spread distribution network. The company has
sufficient cash, raised through IPO, to fund any inorganic or organic growth plans.
Foray into cooling oil category and expansion in other categories will reduce its
dependence on its core product ADHO. Hence, we believe Bajaj Corp is well on track
for a steady revenue growth momentum. Going forward, overall revenues of the
company are expected to grow at 2-year CAGR of 21.3% by FY13.
Revenue & Revenue Growth
6000
40.0%
35.0%
5000
30.0%
4000
25.0%
3000
20.0%
15.0%
2000
10.0%
1000
5.0%
0
0.0%
FY10
FY11
Total Sales FY12E
FY13E
Sales Growth
21 A C Choksi
Sept 09, 2011
A C Choksi Institutional Research Operating profit to witness healthy growth:
Bajaj Corp’s operating margin is expected to grow at 2-year CAGR of 16.8% till FY13.
However, during Q1FY12, raw material inflation remained intact. Further, during the
quarter Bajaj Corp had launched KPCO which increased its A&P expenditure during
the quarter. These factors will have dilutive impact on operating margin of the
company during the year. Thus, we expect operating margins to contract by 351 bps yo-y during FY12. However, Management expects KPCO to achieve break even during
second year of the launch with approximately 6% market share. Further, we expect a
decline in LLP cost during FY13. This will result into margin expansion by 129 bps
during FY13 as compared to FY12.
EBITDA (Rs. Mn) & EBITDA Margin
1600.0
35.0%
1400.0
30.0%
1200.0
25.0%
1000.0
20.0%
800.0
15.0%
600.0
10.0%
400.0
200.0
5.0%
0.0
0.0%
FY10
FY11
EBITDA
FY12E
FY13E
EBITDA Margin
Strong growth in net profit:
We expect net profit to grow at 20.7% 2-year CAGR by FY13. We have factored in tax
rate of 20% during FY12 and FY13. Despite of high tax rate as compared to FY11 and
margin contraction at operating level, net margin is expected to contract by just 117
bps during FY12, primarily due to an increase in other income. During FY13, PAT
margin is expected to expand by 86 bps.
22 A C Choksi
Sept 09, 2011
A C Choksi Institutional Research PAT (Rs. Mn) & PAT Margin
29.0%
28.8%
28.6%
28.4%
28.2%
28.0%
27.8%
27.6%
27.4%
27.2%
27.0%
26.8%
1600
1400
1200
1000
800
600
400
200
0
FY10
FY11
FY12E
Adjusted PAT
FY13E
Net Margin
Negative Working Capital Cycle:
Bajaj Corp has a policy to sell in cash. Thus, its trade account receivable days were as
low as 6.14 during FY11. This resulted into negative working capital cycle during the
year. Going forward, we believe that the company will maintain its strong receivable
policy. Further, inventory days are expected to decline from FY13, as exceptionally
high raw material cost scenario seems to be over which will lead to a decline in raw
material position building. Thus, we expect that the company will continue to maintain
negative working capital cycle going forward.
Cash rich business model; capable to fund capex through internal accruals:
During FY10, Bajaj Corp had raised Rs. 2,970 mn through IPO. Out of this, the
company had allocated Rs. 2200 mn for promotion of new products and Rs. 500 mn
for acquisitions and strategic activities. In the recent past, acquisitions deals
commanded high valuations in FMCG space. Thus, we believe that Bajaj Corp is
scouting for a regional brand which it will scale up at pan-India level leveraging on its
wide-spread distribution network. The company generates healthy cash flow at
operational level; it generated Rs 1,014.6 mn for FY11 and will continue to generate
healthy cash flows in future on account of negative working capital cycle. We have
factored in a maintenance capex of Rs. 150 mn and Rs. 180 mn during FY12 and FY13
in our estimates.
23 A C Choksi
Sept 09, 2011
Valuation:
In our DCF model we have derived explicit free cash flow projections till FY 2020
after which we have assumed a terminal value. Based on a WACC of 10.90% and a
perpetual growth rate of 5% we arrive at a DCF fair value of Rs. 148.13 for Bajaj Corp.
We initiate the coverage on the stock with “BUY” recommendation with potential
upside of 19.8%. DCF-Valuation
Particulars (Rs. Mn)
FY 2011A
Net revenues
EBIT
EBIT margin
Net income (Adjusted)
3,587
1,063
29.6%
1,031
4,475
1,164
26.0%
1,234
5,282
1,435
27.2%
1,502
6,074
1,680
27.7%
1,719
6,985
1,929
27.6%
1,844
7,963
2,117
26.6%
1,982
8,998
2,388
26.5%
2,210
10,078
2,570
25.5%
2,371
11,186
2,848
25.5%
2,606
12,305
3,066
24.9%
2,500
855
28
(212)
(150)
945
8,001
5.00%
10.90%
31,622
13,035
(813)
Net Debt
147.5
Outstanding shares (mn)
Fair Value per share (Rs.)
148.13
1,059
39
(149)
(180)
1,067
1,250
51
(156)
(207)
1,250
1,347
61
(170)
(237)
1,341
1,456
73
(184)
(271)
1,442
1,652
86
(196)
(306)
1,628
1,779
101
(207)
(343)
1,744
1,979
116
(214)
(380)
1,929
1,835
133
(218)
(409)
1,777
Free Cash Flow (FCF) analysis
NOPLAT
Depreciation
Change in working capital
Capex
Free cash flow
Discounted Free Cash Flow
Perpetual growth rate
WACC
Terminal Value
Discounted Terminal Value
853
18
(455)
(62)
1,264
A C Choksi Institutional Research FY 2012E FY 2013E FY 2014E FY 2015E FY 2016E FY 2017E FY 2018E FY 2019E FY 2020E
DCF sensitivity analysis
148.13
9.90%
10.40%
WACC 10.90%
11.40%
11.90%
3.00%
142.1
132.7
124.5
117.3
110.9
Terminal growth rate
4.00%
5.00%
6.00%
156.6
177.0
207.9
144.7
161.2
185.2
134.6
148.1
167.2
125.8
137.1
152.5
118.2
127.6
140.3
7.00%
260.0
223.3
196.0
174.9
158.1
Source: A C Choksi Institutional Research
24 A C Choksi
Sept 09, 2011
A C Choksi Institutional Research Investment Concerns:
•
Single Product Concentration: ADHO contributes approximately 92% of overall
sales. Although, ADHO enjoys pricing power due to its dominant market share in
LHO category any unhealthy competitive activity can hamper its market share
and/or premium margins. However, the company is in the process of reducing this
risk by diversifying its product portfolio through new product launches.
•
Volatility in raw material prices: LLP, glass bottles and vegetable oils are major
raw material for Bajaj Corp. For LLP requirement, the company enters into future
contracts while glass bottles and vegetable oils are purchased at spot prices. During
FY11, raw material prices increased significantly and continue to move up till
Q1FY12. The company had already taken price increase to mitigate the impact of
input cost inflation. However, if raw material prices increases more than our
estimates, it may adversely affect Bajaj Corp by either affecting margins or volumes.
This will lead to deviation from our estimates.
•
Unsuccessful new product launches: The company is in the process of launching
new products. However, any unsuccessful launch will impact profitability of the
company and will burn its cash reserves. Along with that, it can also hamper brand
equity of the company.
•
Risk related to acquisitions: The company is on a look out for acquisition.
However, Bajaj Corp is keeping a conservative stance to fund these acquisitions
(largely through internal accruals). Recent acquisition deals in FMCG space
happened at exorbitant valuations. Thus, it will be tough to identify a strong regional
player at reasonable valuations. Further, after a successful acquisition, the company
runs a risk of being unable to create market for a regional brand at national level.
•
Slowdown in consumer spending: During macro-economic slowdown and rising
inflation consumers tend to reduce spending by down trading. Considering Bajaj
Corp’s premium priced flagship product, a slowdown in consumer spending would
be a risk to our earnings estimates and target price as consumers tend to down-trade
in such a scenario.
•
Low Float: Bajaj Consumer Care Ltd. Holds 84.75% stake in Bajaj Corp. Thus,
Bajaj Corp has low liquidity which makes stock vulnerable to steep downward
movement in case of unfavorable news. However, as per new SEBI guidelines,
promoters need to gradually reduce their holding to 75% or below, over a period of
time. This mandate will address the low liquidity concern in the stock.
25 A C Choksi
Sept 09, 2011
FINANCIALS:
INCOME STATEMENT
FY10A
FY11A
FY12E
FY13E
Total Revenues (Net of Excise)
Cost of goods sold
Gross profit
Gross profit Margin
2,946
1,177
1,769
60.0%
3,587
1,585
2,002
55.8%
4,475
2,121
2,354
52.6%
5,282
2,407
2,874
54.4%
Selling, Gen & Adm Expenses
Ad. & Sales Promotion
Staff Cost
EBITDA
EBITDA Margin
Depreciation & Amortization
EBIT
EBIT Margin
Other Income
Exceptional Items
Adjusted PBT
284
373
138
973
33.0%
8
964
32.7%
51
0
1,016
354
405
163
1,081
30.1%
18
1,063
29.6%
178
190
1,240
446
512
205
1,191
26.6%
28
1,164
26.0%
379
0
1,542
527
629
245
1,474
27.9%
39
1,435
27.2%
442
0
1,877
Provision for Income Taxes
Reported PAT
Adjusted PAT
PAT Margin
Diluted Weighted Average shares (mn)
Diluted EPS (Rs.)
Dividends
Dividend Tax
176
839
839
28.5%
125
6.71
920
156
210
841
1,031
28.7%
148
6.99
280
47
308
1,234
1,234
27.6%
148
8.36
411
68
375
1,502
1,502
28.4%
148
10.18
500
83
A C Choksi Institutional Research 26 A C Choksi
BALANCE SHEET
FY10A
FY11A
FY12E
FY13E
Current Assets
Cash and cash equivalents
Trade accounts receivable
Inventories
Loans and Advances
Total current assets
168
29
99
25
320
813
60
144
43
1,061
1,660
76
198
54
1,988
2,586
91
216
69
2,963
Fixed Assets
Gross Block
Less: Accumulated Depreciation
Net Block
Capital WIP
Intangible Assets
Investments
Deffered Tax assets
Misc. Expenses
Total non-current assets
196
13
184
0
0
21
-1
23
227
247
30
217
3
0
3,301
0
1
3521
397
58
339
0
0
3,301
0
0
3640
577
97
480
0
0
3,301
0
0
3781
Total assets
547
4,581
5,628
6,744
Current liabilities
Sundry Creditors
Advance from Customers
Deposits from C&Fs and others
Statutory Liabilities
Other Liabilities
Provisions
Total current liabilities
145
19
4
43
7
49
268
356
21
4
53
9
375
818
479
23
4
64
10
530
1,110
554
25
4
76
11
637
1,308
0
0
0
0
0
0
0
0
0
0
0
0
Minority Interest
Share Capital
Share Premium
Reserves & Surplus
0
125
0
154
0
148
2,948
668
0
148
2,948
1,423
0
148
2,948
2,341
Total liabilities and equity
547
4,581
5,628
6,744
Long term debt
Other long term liabilities
Total long term liabilities
27 A C Choksi
CASH FLOW STATEMENT
FY10A
FY11A
FY12E
FY13E
1,016
976
(26)
(22)
64
8
6
24
1031
(170)
861
1,240
1,089
(29)
(45)
(14)
219
11
(1)
1228
(214)
1015
1,542
1,199
(16)
(53)
(11)
125
12
2
1258
(308)
950
1,877
1,481
(15)
(19)
(15)
77
14
3
1526
(375)
1151
Cash flow from investing activities
Capital Expenditures
Capital WIP
Interest Received
Dividend Received
(Purchase)/Sale of Investment (Net)
Defferred tax liability
Misc. expenses
Net cash used in investing activities
(128)
0
46
0
(19)
0
0
(102)
(62)
0
113
5
(3227)
0
0
(3171)
(150)
3
324
5
42
(0)
1
224
(180)
0
396
5
34
0
0
254
Cash flows from financing activities
Proceeds from the issue of share capital
Payment of Dividend
Payment of Dividend Tax
Share Issue Expenses
Net Cash from financing activities
0
(923)
(157)
(23)
(1102)
2970
0
0
(168)
2802
0
(280)
(47)
0
(327)
0
(411)
(68)
0
(479)
(343)
510
168
646
168
813
847
813
1,660
Net income (loss) before taxes
Operating profit before working capital changes
(Increase)/decrease in Debtors
(Increase)/decrease in Inventories
(Increase)/decrease in Other Loans & Advances
Increase/(decrease) in Creditors
Increase/(decrease) in Other liabilities
Increase/(decrease) in Provisions
Cash generated from operations
Tax Paid
Net cash from operating activities
Increase/Decrease in cash and cash equivalents
Cash and cash equivalents at the beginning
Cash and cash equivalents at the end
926
1,660
2,586
28 A C Choksi
Sept 09, 2011
RATIOS
FY11A
FY12E
FY13E
Growth (%)
Total sales
EBITDA
Net profit
EPS
21.8%
11.1%
22.8%
4.1%
24.8%
10.2%
19.7%
19.7%
18.0%
23.7%
21.7%
21.7%
Per Share
Earnings
Dividends
Book value
Cash
Div Yield
6.99
1.90
25.51
5.58
1.5%
8.36
2.79
30.63
8.18
2.3%
10.18
3.39
36.85
9.92
2.8%
Margins (%)
Gross Margin
EBITDA
PAT
44.2%
30.1%
28.7%
47.4%
26.6%
27.6%
45.6%
27.9%
28.4%
Financial
Creditor Days
Debtor Days
Inventory Days
Dividend Payout Ratio
82
6.1
33.2
27.2%
83
6.2
34.0
33.3%
84
6.3
32.8
33.3%
17.6
4.8
16.0
4.8
51%
51%
14.7
4.0
13.8
3.7
30%
30%
12.1
3.3
10.6
2.9
30%
30%
Valuations
PE (x)
P/BV (x)
EV/EBITDA (x)
EV/Sales (x)
ROE
ROCE
A C Choksi Institutional Research 29 A C Choksi
Sept 09, 2011
Swati Gupta- 022 6159 5146
[email protected]
Disclaimer The information and views presented in this report are prepared by A C Choksi Share Brokers Private Limited. The information contained herein is based on our analysis and up on sources that we consider reliable. We, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and we are not responsible for any loss incurred based upon it. The investments discussed or recommended in this report may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advice, as they believe necessary. While acting upon any information or analysis mentioned in this report, investors may please note that neither A C Choksi Share Brokers Private Limited nor any person connected with any associated companies of A C Choksi Share Brokers Private Limited accepts any liability arising from the use of this information and views mentioned in this document. The analysts for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. Disclosure of Interest
Analyst ownership of the stock
Broking Relationship with the company covered
Investment Banking relationship with the company covered
Discretionary Portfolio Management Services
A C Choksi Institutional Research NO
NO
NO
NO
30

AC Choksi - Moneycontrol

Transcription

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