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Bajaj Corp: Promotional spends shrink margins

Apr 28, 2012

Bajaj Corp Limited has announced its fourth quarter financial results of 2011-2012 (4QFY12). The company has reported 33.5% YoY increase in sales and 26.6% YoY rise in net profits. Here is our analysis of the results.

Performance Summary
  • Bajaj Corp Ltd (BCL) recorded a 33.5% YoY rise in turnover led by 22.3% volume growth in 4QFY12. During FY12, sales were up by 31.7% YoY aided by 21.2% growth in offtake.
  • The company’s operating margin depleted by 510 basis points due to a steep rise in advertisement expenses as a proportion of sales. For FY12, operating margin contracted by 570 basis points due to higher raw material costs and promotional expenses.
  • Earnings were higher by 26.6% YoY on account of extraordinary expense of Rs 63 m incurred in the year-ago quarter. In FY12, the company’s earnings registered a jump of 42.8% backed by a 120% surge in other income.

Financial performance snapshot
Rs(m) 4QFY11 4QFY12 Change FY11 FY12 Change
Revenues 1,101 1,470 33.5% 3594.4 4733.14 31.7%
Expenditure 791 1,131 43.0% 2505.11 3,566.8 42.4%
Operating profit (EBDITA) 310 340 9.4% 1,089 1,166 7.1%
EBDITA margin (%) 28.2% 23.1%   30.3% 24.6%  
Other income 95 100 5.4% 170 373.76 119.7%
Interest 0.3 0.2 -31.0% 1.05 0.78 -25.7%
Depreciation 5 8 72.6% 18 25.99 44.9%
Profit before tax 401 432 7.8% 1,240 1,513 22.0%
Extraordinary inc/(exp) (63) -   -189.62 0  
Tax 69 91 33.1% 209.8 312.49 48.9%
Profit after tax/(loss) 269 340 26.6% 841 1,201 42.8%
Net profit margin (%) 24.4% 23.2%   23.4% 25.4%  
No. of shares (m)         147.5  
Diluted earnings per share (Rs)*         8.14  
Price to earnings ratio (x)*         15.5  

What has driven growth in 4QFY12?
  • Riding on a 22.3% rise in offtake, BCL clocked a 33.5% increase in turnover. Its flagship brand Bajaj Almond Drops Hair Oil, with a lion’s share of 94%, reported 29.2% jump in sales during the quarter. The company earned revenues of Rs 65.8 m from Kailash Parbat Cooling Oil (KPCO). This recently launched cooling hair oil brand now has a 1.7% market share and contributes 4.5% to the company’s overall turnover. Among other hair oils, Amla Shikakai Hair Oil continued to de-grow whereas other oils reported flat growth during the quarter. Rural markets, which contribute 54% of overall volumes, saw 6.9% faster sales growth than the urban market.

    Cost break-up 4QFY11 4QFY12 Change in basis points
    Raw material 46.2% 46.8% 63.97
    Employee 3.7% 4.0% 29.45
    Advertisement 4.7% 9.1% 432.34
    Other expenditure 17.2% 17.0% -14.10

  • Despite robust growth in topline, the operating profitability has been severely hit by a surge in advertisement spends. Ad spends to sales ratio shot up by 432 basis points, of which a sizeable 281 basis points were spent in the promotion of Kailash Parbat cooling hair oil and the balance for Bajaj Almond Drops Oil. Among key ingredients, prices of Liquid Light Paraffin (LLP) remained fairly stable but that of vegetable oils and glass bottles increased by over 10% YoY. As a result, the cost of goods (as a percentage of sales) rose by 64 basis points. The proportion of only other expenditure in sales fell marginally. Consequently BCL’s operating margin contracted by 510 basis points to 23% during the quarter.

  • Notwithstanding lowered operating margin, BCL managed to clock a 26.6% increase in earnings in 4QFY12 aided by a 5% rise in other income. Additionally, extraordinary expenses booked were zero during the quarter as compared to Rs 63 m incurred during the year-ago quarter that further added to the growth in bottomline.

What to expect?
At the current price of Rs 126, the stock is trading at a multiple of 11 times our estimated FY14 earnings.

Bajaj Corp has been reaping dividend from its leadership position in the light hair oil (LHO) market that is growing faster than the overall branded hair oil market. In FY12, its sales increased by 32% on a 21% volume growth. However, a steep rise in raw material costs and higher advertisement and promotional spends (A&P) have pulled down operating profitability by 570 basis points. Going forward, raw material prices are expected to ease, but A&P spends will continue to remain high on account of pick-up in competition in its flagship almond hair oil as well higher spends on new launches. The company raised prices on almond hair oil by 8.6% in March.

Going forward, BCL’s sales are expected to grow at a robust pace, albeit margins are expected to remain under pressure. The company has indicated that it is likely to launch a new product in future and is also on the look-out for acquisitions. At current valuations, the stock appears underpriced and we would advice investors to HOLD on to the stock

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