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Bajaj Corp: Dip in operating margin continues - Views on News from Equitymaster
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Bajaj Corp: Dip in operating margin continues
Feb 10, 2012

Bajaj Corp Limited has announced its third quarter financial results of 2011-2012 (3QFY12). The company has reported 30.7% YoY increase in sales and 48.8% YoY rise in net profits. Here is our analysis of the results.

Performance summary
  • Bajaj Corp Ltd (BCL) recorded a 30.6% YoY rise in revenues led by 20.5% volume growth in 3QFY12. During 9mFY12, sales were up by 30.9% YoY aided by 20.8% growth in offtake.
  • The company's operating margins slid by 450 basis points due to a steep rise in raw material and other expenses as a proportion of sales. For 9mFY12, operating margin contracted by 590 basis points to 25.3%.
  • BCL has posted a 48.8% YoY jump in earnings aided by a steep rise of 60% in other income earned during quarter. For 9mFY12, net profits were up by 50.4%.


Financial performance snapshot
Rs(m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Revenues 862 1,125 30.6% 2493.28 3262.79 30.9%
Expenditure 601 839 39.4% 1714.4 2,436.1 42.1%
Operating profit (EBDITA) 260 286 10.1% 779 827 6.1%
EBDITA margin (%) 30.2% 25.5%   31.2% 25.3%  
Other income 49 79 60.3% 75 273.32 265.2%
Interest 0 0 -55.6% 0.8 0.6 -25.0%
Depreciation 5 8 67.8% 13 17.93 35.2%
Profit before tax 304 358 17.4% 840 1,082 28.8%
Extraordinary inc/(exp) (63) -   -126.35 0  
Tax 47 69 45.7% 141.12 221.1 56.7%
Profit after tax/(loss) 194 289 48.8% 572 860 50.4%
Net profit margin (%) 22.5% 25.7%   22.9% 26.4%  
No. of shares (m)         147.5  
Diluted earnings per share (Rs)*         7.68  
Price to earnings ratio (x)*         15.1  
*trailing twelve months

What has driven performance in 3QFY12?
  • Backed by 20.5% growth in offtake and 8.5% higher realisations of its flagship product Bajaj Almond Drops Hair oil (accounting for 96% sales share), BCL's sales rose by 30.7% in 3QFY12. The company earned revenues of Rs 1.6 m from the recent launch of cooling oil. Among the rest of the products, accounting for a miniscule 4% of total sales, revenues from Bajaj Hair oil grew by 37.4% whereas Amla Shikakai hair oil sales stagnated during the quarter. Rural sales, which account 53% of overall volumes, grew 6.4% faster than urban sales.

    Cost break-up 3QFY11 3QFY12 Change in basis points
    Raw material 43.6% 45.7% 209.64
    Employee 4.6% 5.3% 66.18
    Other expenditure 21.6% 23.5% 197.21

  • The robust topline growth has been at the expense of a huge contraction in the operating margins earned during the quarter. Owing to over 20% jump in the prices of key ingredients Liquid Light Paraffin (LLP) and vegetable oil coupled with10% rise in cost of glass bottles, BCL's raw material to sales ratio increased by 210 basis points. Even other expenses, majorly comprising of advertisement & promotional spends appreciated by 197 basis points. Consequently, the company's operating margin contracted by 450 basis points to 25.5%.

  • Despite a slower 10% rise in operating profit, BCL's earnings surged by 48.8% on the back of a 55.6% jump in other income. The net IPO proceeds of Rs 2.6 bn, that are yet to be utlised, have been invested in interest bearing liquid instruments, bank deposits and other financial products. Moreover, the company had incurred an extraordinary loss of Rs 63 m in the year-ago quarter which further bolstered the company's earnings in 3QFY12.

What to expect?
Bajaj Corp continues to grow at a stellar pace backed by the leadership position (53.3% share) in the light hair oil (LHO) market that is witnessing brisk offtake. To capitalize on the demand potential, Dabur recently entered the LHO market through its almond hair oil offering and managed to garner 1% share. BCL is well positioned to continue reaping benefits from its strong brand equity in future. Although margins are under pressure, they are not likely to shrink further as the company has said the further input cost increases will be passed onto the consumer.

At the current price of Rs 116, the stock is trading at a multiple of 11 times our estimated FY14 earnings.

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