Bajaj+Corp+ +AC+Choksi+ +IC

7/31/2019 Bajaj+Corp+ +AC+Choksi+ +IC

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Choksi Institutional Research

A C Choksi

Share Brokers Private Limited

ITIATION REPORT | BAJAJ CORP LTD. Sept 09, 20

BAJAJ CORP LTD.

Conversion and increasing penetration will drive growth

Swati Gupta

Senior Analyst

Tel: 91-22-6159 5146

Email: [email protected]

Sector:FMCGRecommendation:BUYTargetPrice:Rs.148.13RecommendationPrice:Rs.123.


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A C Choksi



Investment Summary:

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.

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.

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 nichecategory positioning.

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.

ecommendation: BUYarget Price (Rs.) 148.1

ecommendation Price (Rs.) 123.7

tential Return (%) 19.8%

SE Sensex 16866.97

ey Financials

ares Outstanding (mn) 147.5

ce Value (Rs.) 1

arket Capital (Rs. bn) 18.57

ee Float (Rs. bn) 3.68

vidend Yield (%) 1.5%

ock DataE Code 533299

SE Code BAJAJCORP

oomberg BJCOR IN

uters Code BACO.BO

-Week Range (Rs.) 151.50/73.30 Share Holding Pattern 30th June 2011

Promoter,

85%

FII,5%

DII,4%Others,6

%


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A C Choksi



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 ofone 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 BCLs 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 transferredits 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 companys 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).


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A C Choksi



Sales Break-up in Q1FY12 by Brand

ADHO91.56%KPCO5.08%

BAHO2.29%

ASHO0.44%JHO0.36%

BTP0.36%

Other8.53%

Source: Company

Manufacturing Facilities Owned/Leased Products Excise Duty Exemption Income Tax Exemption

Company Operated

Parwanoo, Himachal Pradesh Leased ADHO, ASHOStarting from FY10, for 10

years

100% for 5 years, 30% for

following 5 years

Dehradun, Uttar Pradeh Owned ADHOStarting from FY11, for 10

years


following 5 years

Paonta Sahib, Himachal Pradesh Owned ADHOStarting from FY11, for 10

years


following 5 years

Installed Capacity 77.00 mn Ltrs

Total Production in FY11 11.02 mn Ltrs

Capacity Utilization 14.3%

Third Party

Parwanoo, Himachal PradeshADHO, BAHO &

JHOStarting from FY04, for 10

yearsNA

Udaipur, Rajasthan BTP NA NA

Source: Company


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Equity Research Team

022 6159 5146

[email protected]

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.

Mr. Roshan F. Hinger:Vice Chairman and Whole time director of the company with

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.


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A C Choksi



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 i

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

HairCare(Rs.10,243cr)

HairOils(Rs.5,326cr)

CoconutOil(Rs.2,151cr)

PerfumedOil(Rs.3,175cr)

OtherHaircareproducts(Rs.

4,917cr)

Source: A C Nielsen


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A C Choksi



Overall Hair Oil Market by Volume Overall Hair Oil Market by Value

0

50

100

150

200

250

300

FY0 7 FY0 8 FY0 9 FY10 FY1 1 Q1 FY12

mnLtr.

0

10

20

30

40

50

60

70

FY07 FY08 FY09 FY10 FY11 Q 1FY12

Rs.

bn

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 i

grew at 25.5% CAGR from FY07 to FY11 in value terms.

Light Hair Oil Market by Volume Light Hair Oil Market by Value

0

5

10

15

20

25

FY07 FY08 FY09 FY10 FY11 Q1FY12

mnLtr.

0

2

4

6

8

10


Rs.

bn

Source: A C Nielsen

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.


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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 Oi

usage has seen a decline of 3% in the year 2010.

Penetration Level

58% 57%51%

40% 41%

29%35% 37%

44%47%

87%92%

88%84%

88%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000 2003 2005 2006 2010

UnbrandedOil BrandedOil TotalHairOil

Source: A C Nielsen

LHO share as a % of Overall Hair oil Market (by volume and value)

Source: A C Nielsen


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Usage ratio of Branded Oil in Urban and Rural Market

52%59% 61%

68%

26%30%

35%

46%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2000 2003 2005 2006

Urban(%) Rural

(%)

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 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.

Almond Hair Oil (AHO) Market-Volume Almond Hair Oil (AHO) Market-Value

0

2

4

6

8

10

12


m

nLtrs

0

1

2

3

4

5


R

s.bn

Source: A C Nielsen


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A C Choksi



AHO share as a % of LHO - Volume AHO share as a % of LHO - Value

0%

10%

20%

30%

40%

50%

60%

0

5

10

15

20

25

FY07 FY08 FY09 FY10 FY11

mnLtr

AHO LHO AHOvolumeasa%ofLHOvolume

0%

10%

20%

30%

40%

50%

60%

0

1

2

3

4

5

6

7

8

9

FY07 FY08 FY09 FY10 FY11

Rs.

bn

AHO LHO AHOvalueasa%ofLHOvalue

Source: A C Nielsen

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 oi

category registered ~29% CAGR by volume far higher than LHO categorys ~18%

CAGR and overall Hair oils ~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 visiblethat 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 Maricos Parachute Coconut Oil (CNO) and Deys 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, Deys Medicals 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.


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A C Choksi



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

Mar03 to Rs 46 in Apr11 (CAGR of 6.4%), without hampering volume growth. The

brands 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, ADHOs closescompetitors are Deys Medicals Keo Karpin with ~19% market share and Marico

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, ADHOs 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

37

42

46

0 10 20 30 40 50

Keo

Karpin

Hair&

Care

ADHO

100ml

Prices(Rs.)

Source: Company


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A C Choksi



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 Indi

disposable incomes are rising as farmers are shifting towards cash-crops and rura

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 a

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 isincreasing its penetration in rural market with ADHOs LPUs of 3 ml sachet and 20 m

which are priced at Rs. 1 and Rs. 10 respectively. Proportion of rural sales in overal

revenues is increasing consistently. During FY05, 3 ml sachet contributed 0.8% o

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 du

to cost rationalization in packaging material as sachet packaging is cheaper than glas

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. DuringFY11, 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

0% 10% 20% 30% 40% 50% 60% 70%

Sachet

20

50

75

10 0

20 0

30 0

ADHOSKUs(ml)

Source: Company


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A C Choksi



Sachets contribution increased consistently in overall sales

0.8% 1.9% 2.9% 3.5%5.8% 7.4%

10.4%0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

FY05 FY06 FY07 FY08 FY09 FY10 FY11Sachet 20 50 75 100 200 300 500

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 i

still a major consumer of coconut oil due to its deep rooted traditional values. Thi

can be depicted from the following chart as southern region contributes only 4% o

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. Baja

Corp has a strong presence in North, East and Western regions with its wel

entrenched distribution network.


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A C Choksi



Region wise break up of LHO Market

East ,22%

West,23%

North,51%

South,4%

Source: Company

ADHOs strong position in most of the states (except southern states)

0

10

20

30

40

50

60

70

80

AllIndia

Punjab

Haryana

Delhi

Rajasthan

U.

P.

Uttaranchal

Assam

Bihar

Jharkhand

Orissa

W.B

engal

Gujarat

M.P.

Chattisgarh

Maharashtra

Karnataka

A.P.

TamilNadu

Kerala

ADHO MarketShare %(Vol)

Total Ur ban Rural

Source: Company


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A C Choksi



Strong Distribution network:

Bajaj Corp has established strong distribution network in past few years. It reacheurban and rural consumers through 2.02 mn retail outlets serviced by 5690 direc

distributors and 10,085 wholesalers. Northern Region is the major market for LHO

category. Thus, approximately 49% of Bajaj corps stockists are based in North India

which ensures high penetration of ADHO in rural and urban area in the region. Baja

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 distribute

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. Approximatel

80% of ADHOs sales are derived through these channels. From distribution

perspective, retailers play an important role to push a brand or influence purchase o

consumers. Thus, ADHO which has already become a generic name for Almond oil

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 oil

are not widely used in different geographies across the globe. Although hair oi

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 fou

domestic players are market leader in their own niche. While Marico is a leading playe

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 dominanplayer 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 comin

from their flagship product whereas they are trying to gain market share in other hai

oil categories.


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A C Choksi



ADHOS 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. ADHOs 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, ADHOs

100 ml SKU was available at 100% premium over Parachutes 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-than-

average increase in ADHOs volumes during FY11. However, increasing LLP

(light Liquid Paraffin) prices necessitated Bajaj Corp to take further price

increase and during Apr11 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 Parachutewidened 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 Amlas 100 ml SKU is available at Rs. 36. During FY10 and FY11,

ADHOs 100 ml SKU commanded a premium of 18% and 17% respectively

over Dabur Amlas 100 ml SKU. However, during Q1FY12 this premium

increased to 28% as ADHO had taken price increase of ~8.5% during Apr11.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 ADHOs volume growth

will remain at normalized level of 15% during FY12.


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A C Choksi



Realizations Outlook:We have factored in 10% and 6% increase in realizations during FY12 an

FY13 respectively. Bajaj Corp had already taken a weighted average pric

increase of 8.5% during Apr11. As LLP prices are likely to correct from

Q3FY12, we dont 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 o

ADHO. During FY11, LLP cost registered a sharp increase of 49.5% due thigh crude prices. We have factored in an increase of 28.2% in LLP price

during FY12. Further, as per our estimates LLP prices are expected to corre

by 5.2 % during FY13.

LLP (Rs./Kg)

30

40

50

60

70

80

90

Source: Company, A C Choksi Institutional Research


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A C Choksi



Glass: Glass bottles constitute approximately 25-26% of total raw material co

of ADHO. We have factored in an increase of 17% during FY12 driven by a

increase in soda ash prices. Major supplier for Bajaj Corps glass bottles, haalready taken price increases during Q1FY12 and it is unlikely to take furth

price increase during the year unless there is an abnormal increase in soda as

prices.

Glass Index

100

105

110

115

120

125

130

135

140

145

Apr 05 Apr06 Apr07 Apr08 Apr09 Apr10 Apr11

GlassIndex


Soda Ash (Rs./Kg)

10

12

14

16

18

20

22

24

26

28

30

32

SodaAsh(Rs./Kg)



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A C Choksi



Refined oil: It constitutes approximately 8% of total raw material cost o

ADHO. Production of groundnut and mustard are expected to increase b21% and 18% respectively, during the current crop season. However, due t

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 Cor

entered into this category with its Kailash Parbat Cooling oil (KPCO) brand durin

May11 at pan-India level. During Q1FY12, KPCO registered sales of Rs. 54.2 m

Emami is the market leader with approximately 54.4% market share in this categor

with its Navratna brand. Bajaj Corp is vying to create its niche in this category bpositioning its product with differentiation factor. KPCO has extract of sandal which

known for its cooling properties and the product has different colour and fragrance a

compared to other products available in this category. Bajaj Corp has a stron

distribution network to achieve pan-India scale for a new product at a faster pace. Th

product is gaining rapid traction in states like Punjab, Madhya Pradesh, Rajasthan an

Gujarat where Bajaj Corp has a very strong distribution network. In cooling o

category, it primarily competes with Emami which has a smaller distribution networ

as compared to Bajaj Corp. There is a regional brand Himgange which has the secon

highest market share of ~25%. This brand is focused in U.P., Bihar, Chhattisgarh an

Jharkhand. Marico is also prototyping its cooling oil Parachute Advansed CoconCooling Oil in Andhra Pradesh and is likely to expand its reach in near term

southern region where it has a strong foothold. Thus, we believe that stron

distribution network and product differentiation will aid Bajaj Corp to gain tractio

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 O

(BAHO) and Bajaj Amla Shikakai Hair Oil (ASHO). Dabur is the market leader

Amla oil category with approximately 70% market share. However, despite osubstantial advertisement and promotional spend these products were unable to g

significant market share due to the lack of product differentiation. Thus, the compan

is unlikely to invest behind these products unless it finds a differentiation factor. The

contribution in sales and sales in absolute terms is declining consistently. Thus, w

have factored in a decline of 16.0% in BAHO sales and 20.8% decline in ASHO sale

during FY12.


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A C Choksi



BAHO's Contribution to sales (%) BAHO Sales Value

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

FY10 H1FY11 FY11 Q1FY12

BAHO'sContribution

to

sales

(%)

0

100

200

300

400

500

Q1 Q2 Q3 Q4

Rs.

mn.

FY1 1 FY10


ASHO's Contribution to sales (%) ASHO Sales Value

0.00%

0.50%

1.00%

1.50%

2.00%

FY10 H1FY11 FY11 Q1FY12

ASHO'sContribution tosales(%)0

50

100

150

200

Q1 Q2 Q3 Q4

Rs.mn

FY1 1 FY10



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A C Choksi



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 stron

brand positioning, conversion from loose oils/coconut oil/amla oil users to ADH

and wider and deeper distribution network. Further, KPCO is expected to garn

healthy traction in cooling oil category due to its product differentiation properties. I

addition, Bajaj Corp is exploring options to extend its brand into high growth and hig

margin hair care and/or personal care categories to capitalize upon its brand equity an

for optimum utilization of its wide spread distribution network. The company hsufficient cash, raised through IPO, to fund any inorganic or organic growth plan

Foray into cooling oil category and expansion in other categories will reduce i

dependence on its core product ADHO. Hence, we believe Bajaj Corp is well on trac

for a steady revenue growth momentum. Going forward, overall revenues of th

company are expected to grow at 2-year CAGR of 21.3% by FY13.

Revenue & Revenue Growth

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

0

1000

2000

3000

4000

5000

6000

FY10 FY11 FY12E FY13E

TotalSales SalesGrowth



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Operating profit to witness healthy growth:

Bajaj Corps operating margin is expected to grow at 2-year CAGR of 16.8% till FY1

However, during Q1FY12, raw material inflation remained intact. Further, during th

quarter Bajaj Corp had launched KPCO which increased its A&P expenditure durin

the quarter. These factors will have dilutive impact on operating margin of th

company during the year. Thus, we expect operating margins to contract by 351 bps

o-y during FY12. However, Management expects KPCO to achieve break even durin

second year of the launch with approximately 6% market share. Further, we expect

decline in LLP cost during FY13. This will result into margin expansion by 129 bp

during FY13 as compared to FY12.

EBITDA (Rs. Mn) & EBITDA Margin

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

0.0

200.0

400.0

600.0

800.0

1000.0

1200.0

1400.0

1600.0


EBITDA EBITDAMargin


Strong growth in net profit:

We expect net profit to grow at 20.7% 2-year CAGR by FY13. We have factored in t

rate of 20% during FY12 and FY13. Despite of high tax rate as compared to FY11 an

margin contraction at operating level, net margin is expected to contract by just 11

bps during FY12, primarily due to an increase in other income. During FY13, PA

margin is expected to expand by 86 bps.


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PAT (Rs. Mn) & PAT Margin

26.8%

27.0%

27.2%

27.4%

27.6%

27.8%

28.0%

28.2%

28.4%

28.6%

28.8%

29.0%

0

200

400

600

800

1000

1200

1400

1600


AdjustedPAT NetMargin


Negative Working Capital Cycle:

Bajaj Corp has a policy to sell in cash. Thus, its trade account receivable days were

low as 6.14 during FY11. This resulted into negative working capital cycle during thyear. Going forward, we believe that the company will maintain its strong receivab

policy. Further, inventory days are expected to decline from FY13, as exceptiona

high raw material cost scenario seems to be over which will lead to a decline in ra

material position building. Thus, we expect that the company will continue to mainta

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, th

company had allocated Rs. 2200 mn for promotion of new products and Rs. 500 m

for acquisitions and strategic activities. In the recent past, acquisitions decommanded high valuations in FMCG space. Thus, we believe that Bajaj Corp

scouting for a regional brand which it will scale up at pan-India level leveraging on

wide-spread distribution network. The company generates healthy cash flow

operational level; it generated Rs 1,014.6 mn for FY11 and will continue to genera

healthy cash flows in future on account of negative working capital cycle. We ha

factored in a maintenance capex of Rs. 150 mn and Rs. 180 mn during FY12 and FY

in our estimates.


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Valuation:

In our DCF model we have derived explicit free cash flow projections till FY 20

after which we have assumed a terminal value. Based on a WACC of 10.90% and

perpetual growth rate of 5% we arrive at a DCF fair value of Rs. 148.13 for Bajaj Cor

We initiate the coverage on the stock with BUY recommendation with potent

upside of 19.8%.Particulars (Rs. Mn) FY 2011A FY 2012E FY 2013E FY 2014E FY 2015E FY 2016E FY 2017E FY 2018E FY 2019E FY 202

Net revenues 3,587 4,475 5,282 6,074 6,985 7,963 8,998 10,078 11,186 12,30

EBIT 1,063 1,164 1,435 1,680 1,929 2,117 2,388 2,570 2,848 3,06

EBIT margin 29.6% 26.0% 27.2% 27.7% 27.6% 26.6% 26.5% 25.5% 25.5% 24.9%Net income (Adjusted) 1,031 1,234 1,502 1,719 1,844 1,982 2,210 2,371 2,606 2,50

NOPLAT 853 855 1,059 1,250 1,347 1,456 1,652 1,779 1,979 1,83

Depreciation 18 28 39 51 61 73 86 101 116 133

Change in working capital (455) (212) (149) (156) (170) (184) (196) (207) (214) (218

Capex (62) (150) (180) (207) (237) (271) (306) (343) (380) (409

Free cash flow 1,264 945 1,067 1,250 1,341 1,442 1,628 1,744 1,929 1,77

Discounted Free Cash Flow 8,001

Perpetual growth rate 5.00%

WACC 10.90%Terminal Value 31,622

Discounted Terminal Value 13,035

Net Debt (813)

Outstanding shares (mn) 147.5

Fair Value per share (Rs.) 148.13

DCF-Valuation

Free Cash Flow (FCF) analysis


DCF sensitivity analysis

Terminal growth rate

148.13 3.00% 4.00% 5.00% 6.00% 7.00%9.90% 142.1 156.6 177.0 207.9 260.0

10.40% 132.7 144.7 161.2 185.2 223.3

WACC 10.90% 124.5 134.6 148.1 167.2 196.0

11.40% 117.3 125.8 137.1 152.5 174.9

11.90% 110.9 118.2 127.6 140.3 158.1

Source: A C Choksi Institutional Research


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Investment Concerns:

Single Product Concentration: ADHO contributes approximately 92% of oversales. Although, ADHO enjoys pricing power due to its dominant market share

LHO category any unhealthy competitive activity can hamper its market sha

and/or premium margins. However, the company is in the process of reducing th

risk by diversifying its product portfolio through new product launches.

Volatility in raw material prices: LLP, glass bottles and vegetable oils are majraw material for Bajaj Corp. For LLP requirement, the company enters into futu

contracts while glass bottles and vegetable oils are purchased at spot prices. Durin

FY11, raw material prices increased significantly and continue to move up t

Q1FY12. The company had already taken price increase to mitigate the impact input cost inflation. However, if raw material prices increases more than o

estimates, it may adversely affect Bajaj Corp by either affecting margins or volum

This will lead to deviation from our estimates.

Unsuccessful new product launches: The company is in the process of launchinew products. However, any unsuccessful launch will impact profitability of t

company and will burn its cash reserves. Along with that, it can also hamper bran

equity of the company.

Risk related to acquisitions: The company is on a look out for acquisitioHowever, Bajaj Corp is keeping a conservative stance to fund these acquisitio(largely through internal accruals). Recent acquisition deals in FMCG spa

happened at exorbitant valuations. Thus, it will be tough to identify a strong region

player at reasonable valuations. Further, after a successful acquisition, the compa

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 risiinflation consumers tend to reduce spending by down trading. Considering Ba

Corps premium priced flagship product, a slowdown in consumer spending wou

be a risk to our earnings estimates and target price as consumers tend to down-train such a scenario.

Low Float: Bajaj Consumer Care Ltd. Holds 84.75% stake in Bajaj Corp. ThuBajaj Corp has low liquidity which makes stock vulnerable to steep downwa

movement in case of unfavorable news. However, as per new SEBI guidelin

promoters need to gradually reduce their holding to 75% or below, over a period

time. This mandate will address the low liquidity concern in the stock.


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FINANCIALS:

INCOME STATEMENT

Particulars (Rs. Mn) FY10A FY11A FY12E FY13E

Total Revenues (Net of Excise) 2,946 3,587 4,475 5,282

Cost of goods sold 1,177 1,585 2,121 2,407

Gross profit 1,769 2,002 2,354 2,874

Gross profit Margin 60.0% 55.8% 52.6% 54.4%

Selling, Gen & Adm Expenses 284 354 446 527

Ad. & Sales Promotion 373 405 512 629

Staff Cost 138 163 205 245

EBITDA 973 1,081 1,191 1,474

EBITDA Margin 33.0% 30.1% 26.6% 27.9%

Depreciation & Amortization 8 18 28 39

EBIT 964 1,063 1,164 1,435

EBIT Margin 32.7% 29.6% 26.0% 27.2%

Other Income 51 178 379 442

Exceptional Items 0 190 0 0Adjusted PBT 1,016 1,240 1,542 1,877

Provision for Income Taxes 176 210 308 375

Reported PAT 839 841 1,234 1,502

Adjusted PAT 839 1,031 1,234 1,502

PAT Margin 28.5% 28.7% 27.6% 28.4%

Diluted Weighted Average shares (mn) 125 148 148 148

Diluted EPS (Rs.) 6.71 6.99 8.36 10.18

Dividends 920 280 411 500

Dividend Tax 156 47 68 83Source: Company, A C Choksi Institutional Research


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BALANCE SHEET

Particulars (Rs. Mn) FY10A FY11A FY12E FY13E

Current Assets

Cash and cash equivalents 168 813 1,660 2,586

Trade accounts receivable 29 60 76 91

Inventories 99 144 198 216

Loans and Advances 25 43 54 69

Total current assets 320 1,061 1,988 2,963

Fixed Assets

Gross Block 196 247 397 577

Less: Accumulated Depreciation 13 30 58 97Net Block 184 217 339 480

Capital WIP 0 3 0 0

Intangible Assets 0 0 0 0

Investments 21 3,301 3,301 3,301

Deffered Tax assets -1 0 0 0

Misc. Expenses 23 1 0 0

Total non-current assets 227 3521 3640 3781

Total assets 547 4,581 5,628 6,744

Current liabilitiesSundry Creditors 145 356 479 554

Advance from Customers 19 21 23 25

Deposits from C&Fs and others 4 4 4 4

Statutory Liabilities 43 53 64 76

Other Liabilities 7 9 10 11

Provisions 49 375 530 637

Total current liabilities 268 818 1,110 1,308

Long term debt 0 0 0 0

Other long term liabilities 0 0 0 0

Total long term liabilities 0 0 0 0

Minority Interest 0 0 0 0

Share Capital 125 148 148 148

Share Premium 0 2,948 2,948 2,948

Reserves & Surplus 154 668 1,423 2,341

Total liabilities and equity 547 4,581 5,628 6,744



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CASH FLOW STATEMENT

Particulars (Rs. Mn) FY10A FY11A FY12E FY13

Net income (loss) before taxes 1,016 1,240 1,542 1,87

Operating profit before working capital changes 976 1,089 1,199 1,48

(Increase)/decrease in Debtors (26) (29) (16) (1

(Increase)/decrease in Inventories (22) (45) (53) (1

(Increase)/decrease in Other Loans & Advances 64 (14) (11) (1

Increase/(decrease) in Creditors 8 219 125 7

Increase/(decrease) in Other liabilities 6 11 12 1

Increase/(decrease) in Provisions 24 (1) 2

Cash generated from operations 1031 1228 1258 152

Tax Paid (170) (214) (308) (37

Net cash from operating activities 861 1015 950 115

Cash flow from investing activities

Capital Expenditures (128) (62) (150) (18

Capital WIP 0 0 3

Interest Received 46 113 324 39

Dividend Received 0 5 5

(Purchase)/Sale of Investment (Net) (19) (3227) 42 3

Defferred tax liability 0 0 (0)

Misc. expenses 0 0 1

Net cash used in investing activities (102) (3171) 224 25

Cash flows from financing activities

Proceeds from the issue of share capital 0 2970 0

Payment of Dividend (923) 0 (280) (41

Payment of Dividend Tax (157) 0 (47) (6

Share Issue Expenses (23) (168) 0

Net Cash from financing activities (1102) 2802 (327) (47

Increase/Decrease in cash and cash equivalents (343) 646 847 92

Cash and cash equivalents at the beginning 510 168 813 1,66

Cash and cash equivalents at the end 168 813 1,660 2,58Source: Company, A C Choksi Institutional Research


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RATIOS

Particulars (Rs. Mn) FY11A FY12E FY13E

Growth (%)

Total sales 21.8% 24.8% 18.0%

EBITDA 11.1% 10.2% 23.7%

Net profit 22.8% 19.7% 21.7%

EPS 4.1% 19.7% 21.7%

Per Share

Earnings 6.99 8.36 10.18

Dividends 1.90 2.79 3.39Book value 25.51 30.63 36.85

Cash 5.58 8.18 9.92

Div Yield 1.5% 2.3% 2.8%

Margins (%)

Gross Margin 44.2% 47.4% 45.6%

EBITDA 30.1% 26.6% 27.9%

PAT 28.7% 27.6% 28.4%

Financial

Creditor Days 82 83 84

Debtor Days 6.1 6.2 6.3

Inventory Days 33.2 34.0 32.8

Dividend Payout Ratio 27.2% 33.3% 33.3%

Valuations

PE (x) 17.6 14.7 12.1

P/BV (x) 4.8 4.0 3.3

EV/EBITDA (x) 16.0 13.8 10.6EV/Sales (x) 4.8 3.7 2.9

ROE 51% 30% 30%

ROCE 51% 30% 30%



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A C Choksi



DisclaimerTheinformationandviewspresentedinthisreportarepreparedbyACChoksiShareBrokersPrivateLimited.Theinformationcontainedhereinisbasedonouranalysis and up onsourcesthat weconsiderreliable. We, however, donotvouch forthe accuracy orthe completenessthereof. Thismaterial is forpersonalinformationandwearenotresponsibleforanylossincurredbaseduponit.Theinvestmentsdiscussedorrecommendedinthisreportmaynotbesuitableforallinvestors.Investorsmustmaketheirowninvestmentdecisionsbasedontheirspecificinvestmentobjectivesandfinancialpositionandusingsuchindependentadvice,astheybelievenecessary.Whileactinguponanyinformationoranalysismentionedinthisreport,investorsmaypleasenotethatneither A C Choksi Share Brokers Private Limited nor any person connected with any associated companies of A C Choksi Share Brokers Private Limitedacceptsanyliabilityarisingfromtheuseofthisinformationandviewsmentionedinthisdocument.Theanalystsforthisreportcertifiesthatalloftheviewsexpressedinthisreportaccuratelyreflecthisorherpersonalviewsaboutthesubjectcompanyorcompaniesanditsortheirsecurities,andnopartofhisorhercompensationwas,isorwillbe,directlyorindirectlyrelatedtospecificrecommendationsorviewsexpressedinthisreport.

Disclosure of Interest

Analyst ownership of the stock NO

Broking Relationship with the company covered NO

Investment Banking relationship with the company covered NO

Discretionary Portfolio Management Services NO

Swati Gupta- 022 6159 5146

[email protected]

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