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Bajaj Corp: Sluggish offtake and margins hit - Views on News from Equitymaster
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Bajaj Corp: Sluggish offtake and margins hit
Feb 17, 2014

Bajaj Corp Limited has announced its third quarter financial results of 2013-2014 (3QFY14). The company has reported 7% YoY increase in sales and 31% YoY fall in net profits. Here is our analysis of the results.

Performance summary
  • In 3QFY14, Bajaj Corp (BCL) clocked a 7% YoY growth in revenues on a low growth of 1% in offtake. For 9mY14, revenues increased by 15% YoY led by a volume growth of 11.7%.
  • Due to a steep rise in sales promotion expenses, the operating margin contracted by 2% in 3QFY14. For 9mFY14, the operating margin fell by 1.1%.
  • Net profit slumped by 31% in 3QFY14 due to brand amortization of Rs 117.5 m and high interest costs on loans taken to fund the acquisition. For 9mFY14, the net profit was lower by 5.2%.
  • The company has declared a dividend of Rs 6.50 per share on a face value of Rs 1 per share.

Rs(m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
Revenues 1,483 1,586 6.9% 4225 4872 15.3%
Expenditure 1,053 1,158 10.0% 3016 3533 17.2%
Operating profit (EBDITA) 430 428 -0.5% 1,210 1,339 10.7%
EBDITA margin (%) 29.0% 27.0% -2.0% 28.6% 27.5% -1.1%
Other income 105 97 -8.1% 294 318 8.5%
Interest 0 29   0 42 8912.8%
Depreciation 8 10 14.9% 24 27 11.3%
Profit before tax 526 486 -7.8% 1,479 1,588 7.4%
Extraordinary inc/(exp) - (117)   0 (169)  
Tax 104 77 -26.1% 296 298 0.6%
Profit after tax/(loss) 422 291 -31.1% 1,182 1,121 -5.2%
Net profit margin (%) 28.5% 18.4% -10.1% 28.0% 23.0% -5.0%
No. of shares (m)         147.5  
Diluted earnings per share (Rs)*         10.93  
Price to earnings ratio (x)*         18.5  
*trailing twelve months

What has driven growth in 3QFY14?
  • BCL posted a muted topline growth of 7% due to a slow volume growth of 1%. The sluggish growth has been account of reduction in stocks at the distributor and retail level. Even growth momentum in rural India tapered down significantly reducing the differential with urban growth. However the redeeming factor is that its secondary sales remained robust with Almond Drops Hair Oil (ADHO) registering a volume growth of 12% much higher than the 4.6% volume growth in the Light Hair Oil market (as per Nielsen’s figures). Notwithstanding slow demand due to down trading and low conversion from unbranded to branded, BCL’s market share of ADHO touched 60% during the quarter making it the 2nd largest hair oil brand in India.

    Cost break-up
      3QFY13 3QFY14 Change in basis points
    Raw material 42.1% 39.4% -270.58
    Employee 4.6% 5.3% 65.84
    Advertisement 6.7% 5.4% -126.64
    Other expenditure 17.6% 22.9% 532.83

  • The company continued to reap the benefits of low cost inventory of Liquid Light Paraffin (LLP) that is likely to get exhausted by February 2014. As a result the company’s raw material to sales ratio fell by 2.7% during the quarter. Even ad-spends as a proportion of sales were down by 1.3%. However higher sales promotion saw a steep 5.3% jump in other expenses to sales ratio, offsetting savings in input costs and ad-spends. Resultantly, the operating margin contracted by 2% for the quarter.

  • The net profits fell by 31% on account of brand amortization of Rs 117.5 m charged to revenue account coupled with interest outgo of Rs 29 m on loan of Rs 1 bn taken to fund the NOMARKS acquisition. As per the company, the entire debt will be repaid in February 2014 without any pre-payment penalty. The tax incidence fell to 16% in 3QFY14 from 19.8% in the year-ago quarter. Excluding the impact of amortization, net profits have fallen by a mere 3.2% during the quarter.
What to expect?
Slowdown in discretionary spending has impacted the offtake of the company’s core brand ADHO. Its volume growth has moderated to 13% for 9mFY14 from 16.3% in FY13. However, BCL continues to grow ahead of the LHO category that grew by a mere 6% in 9mFY14. Its strong brand equity saw its market share touch 60% in December 2014 quarter. Therefore we believe that company is expected to regain its growth momentum once these short term slowdown pressures ease.

Even its NOMARKS brand is expected to gain traction after logistic issues in the Guwahati plant have been resolved though third party manufacturing in Himachal Pradesh. The company would be widening the reach of NOMARK through its network in rural and semi-urban regions. The company has also set up a subsidiary in UAE for trading in skin care products. The subsidiary is expected to start operations in April 2014.

At the current price of Rs 202, the stock is trading at a multiple of 14 times its FY16 earnings. WE have given a BUY recommendation on this stock on 16th October 2013. As valuations continue to remain attractive, we maintain a BUY view on the stock from a 2-3 years perspective.

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