Bajaj Consumer Care Ltd - Stock Valuation and Financial Performance

At par result.

Healthy performance, with broad based growth across SKUs.

Event Update: 60% of the promoter's stake was pledged for its sister concern, Bajaj Hindustan. Promoter of Bajaj Consumer Care sold around 22% of their stake in the company to various institutional investors at 195/share. This led to sharp fall in stock price (-15%). Upon receiving this sum, promoter may pare their debt in Bajaj Hindustan.

This development would bring down pledge percentage of promoter’s stake. We believe high debt in sister concern took up promoter's bandwidth. We may see more focused approach toward Bajaj Consumer Care going forward.

(Bajaj Consumer & Bajaj Hindustan have separated from Bajaj Group led by Rahul Bajaj and cousins)

Quarterly Result update

Results: Bajaj Consumer Care reports 2.6% growth in sales. Operating profit barely grew by 2.71% year on year. 

Sales growth came with a set of challenges like:-

• Stress in rural incomes has led to fall in volume growth for hair oil industry.

Stable operating margin:-

• Gross margins were lower from higher raw material costs however, the operating margin remained stable due to better cost management.

Outlook: The management expects that the recent good monsoon would aid demand recovery through the course of the year. However, the company has so far not delivered on its hair-oils market share gains strategy – the flagship product Bajaj Almond Drops Hair Oil faced a marginal share decline. It still remains a single product dominant company. Pushing and growing a single brand is difficult as dealers/retailers may refuse to stock single brand versus similar offering from other companies with multiple brands. 

The stock has fallen below its discounted price but we do not find any trigger in near term for share price appreciation. We await new marketing strategy or pick-up in growth before we recommend buying the stock. Those who have smaller allocation may choose to hold on attractive valuation. 

Bajaj Corp reported decline in Sales volumes because destocking at wholesale segment for various reasons including demonetization. The company has not taken a price hike this month as it seeks more clarity on GST. Management is currently setting up facilities at Guwahati and Baroda to supply goods in respective regions. Nomarks marketing strategy is yet to show any effects. It recently started new marketing and integrated sales campaign in just two states.

We believe that we may see sluggish sales in coming quarters too due to low rural income. We expect the sales growth to kick start from Q3FY18. The stock price has not yet reacted to slow growth expectations. If stock corrects further to 300/share, it gives us good buying opportunity.

Some of our subscribers may have bought small amounts in the stock can continue to hold and add more at Rs. 300-330/share. Remember we are buying a stock for long term with expectation of 13%+ CAGR returns. Don't judge any business from its short term performance. Stock prices may move +/-20-30% but underlying businesses are quite stable.

Bajaj Corp currently holds 10% market share in hair oil market. Bajaj Almond Oil has strong brand awareness and decent penetration. The customer base is relatively sticky as they can’t give up on fragrance of hair oil they use in day to day life. Don’t make a mistake to assume it’s pure almond oil. It only has fragrance and applied to hair and body in cold weather.

Volumes growth in hair oil market has been subdued for last two years. Still many FMCG companies were clocking higher earnings growth due to lower raw material prices. We had mentioned this fact in our Marico note and Blog: “Investors’ common mistake in bullish market.” However, since the momentum of lower commodity prices is over, the stock has corrected to reflect its actual valuation.  

Bajaj Corp is focused on just two product of which Bajaj Almond Oil is single largest product. Other product being NOMARKS which the management acquired in 2013. Bajaj Almond Oil is now a household name thanks to distribution reach and advertisement spends. The peak margins the company has been enjoying will come off due to competitive pressures as we are seeing pricing war in hair oil market by unorganised and organised players like Parachute light hair oil. Even though the company sells Almond Oil (A light hair oil), it can’t have substantially higher pricing.

Rural volumes have been low in last two years. On low base of last two years, we expect volume growth at 13-15% CAGR over long term 4-5 years including exports and NOMARKS renewed launch. We also expect 4-5% value growth as FMCG companies can also pass on inflation to customers thanks to brand and sticky customer base. Apart from that, the company has employed less than 100 Cr to earn almost 200 Cr in profits.  That ~100% return on investment. Cash and Cash Equivalents on books is close to 300 Cr. Since the company doesn’t require lot of money to run the business, it throws away high dividends. Last two years the company paid out more than 80% of profits in dividends. If we buy the stock at an average price of 300-328/share, we would get Rs 11.5/share in dividends. That’s like 3.5% in dividend yield in first year itself. When the company grows, the dividends will rise further to 4-4.5% on our purchase price. Even if the company grows at 10-12% CAGR much lower than our estimate, we still end up making 13-16% CAGR (10-12%+3-4% dividend yield) over long term.

Since that would be a lucrative opportunity we are not sure whether the stock will correct to our average price of 300-330/share. Hence, we recommend to buying first trance at current price and later buy heavily when the price would correct to our attractive buying price. We may see slight slowdown in earnings in coming quarters due to demonetization. This will provide good opportunity to buy more.

Please follow discipline while buying the stock. Don’t buy more than recommended allocation. Always buy in 2-3 tranches for better average price. This may sound tedious but matters a lot if practiced across purchases. In case of any queries feel free to write to us or call us at the time of purchase/sell.

Currently, the broader markets have cooled down a bit on basic metrics. Use this opportunity to buy stocks as per our recommendations. Don't be fully invested at these levels. Uninvested cash should be parked in money market/liquid funds/fixed deposits earning 6-7% pre-tax returns.

A portfolio must be held for the long term, which we define as at least 5-7 years. However, this does not mean every stock will perform in each year. Our performance should be judged on the basis of the overall portfolio over 2-3 years at least, not on the basis of short-term performance of individual stocks.