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Bajaj Corp: Slowdown pangs continue

May 2, 2014

Bajaj Corp Limited has announced its third quarter financial results of 2013-2014 (3QFY14). The company has reported 0.3% YoY increase in sales and 2% YoY rise in net profits. Here is our analysis of the results.

Performance summary
  • Bajaj Corp (BCL) clocked flat topline in 4QFY14 on a 6.4%YoY decline in offtake. For FY14, revenues grew by 11% YOY led by a volume growth of 6.2%.
  • The company has managed to improve operating margins by 0.4% YoY in 4QFY14 backed by lower ad-spends and reduced raw material costs and wages. For FY14, the operating margin contracted by 0.7% YoY due to steep rise in other expenses.
  • Excluding the impact of brand amortization of Rs 117.5 m, the net profits have grown by 1.8% in 4QFY14 aided by lower tax outgo. For FY14, net profits without brand amortization have grown by a relatively slower 7% YoY due to high interest outgo.

Financial performance snapshot
Rs(m) 4QFY13 4QFY14 Change FY13 FY14 Change
Revenues 1,842 1,845 0.2% 6067 6717 10.7%
Expenditure 1,323 1,317 -0.4% 4339 4851 11.8%
Operating profit (EBDITA) 518 528 1.8% 1,728 1,867 8.0%
EBDITA margin (%) 28.2% 28.6% 0.4% 28.5% 27.8% -0.7%
Other income 107 83 -22.6% 401 401 0.2%
Interest 0 16   1 59 7075.6%
Depreciation   8 10 13.4% 33 37 11.9%
Profit before tax 617 584 -5.2% 2,095 2,172 3.7%
Extraordinary inc/(exp) - (117)   0 (286)  
Tax 125 84 -33.0% 421 382 -9.4%
Profit after tax/(loss) 492 383 -22.1% 1,674 1,504 -10.1%
Net profit margin (%) 26.7% 20.8% -5.9% 27.6% 22.4% -5.2%
No. of shares (m)         147.5  
Diluted earnings per share (Rs)*         10.2  
Price to earnings ratio (x)*         20.4  
*trailing twelve months

What has driven performance in 4QFY14?
  • After a muted growth in 3QFY14 due to reduction in stocks at the distributor and retail level, BCL's revenues remained flat in 4QFY14 on a 6.4% YoY drop in offtake. While offtake of its flagship brand Almond Drops Hair Oil (ADHO) was down by 10.4% during the quarter, the decline in sales was limited to 5.3% YoY on strong pricing power. Even sales of Kailash Parbat cooling oil and Brahmi Amla hair oil were down during the quarter. Sales from the acquired NOMARKS brand stood at Rs 105,2 m for the quarter constituting 6% of overall sales.

    Cost break-up
      4QFY13 4QFY14 Change in basis points
    Raw material 41.6% 41.1% -53.69
    Employee 4.9% 4.7% -22.17
    Advertisement 7.4% 5.5% -180.66
    Other expenditure 18.0% 20.1% 211.87

  • Despite a 6% YoY rise in average price of Liquid Light Paraffin (LLP), the company continued to benefit from low cost inventory that got exhausted in February 2014. However, average price of refined oil was down by 6% YoY during the quarter. As a result, the company's raw material cost to sales ratio was down by 0.5%. Even ad-spends in proportion to sales were down by 1.8%. These cost savings were partially offset by a 2.1% rise in other expense to sales ratio. The company's operating margin improved by 0.4% during the quarter.

  • The net profits fell by 22% on account of brand amortization of Rs 117.5 m charged to revenue account. Excluding the impact of this exceptional item, the net profits have grown by 1.8% during the quarter. The other income earned has fallen by 23% YoY during the quarter. The loan of Rs 1 bn taken to fund the NOMARKS acquisition has been repaid by the company making it fully debt-free. The tax incidence fell to 14% in 4QFY14 from 20% in the year-ago quarter.
What to expect?
Bajaj Corp present in value added hair oils has been adversely impacted by slowdown in discretionary spending particularly in the last two quarters of FY14. However, the company's flagship ADHO continues to remain the market leader with a 60% market share. We believe that these are short term pressures and the company is expected to regain its momentum as economic sentiment improves.

At the current price of Rs 208, the stock is trading at a multiple of 16 times its FY16 earnings. We had given a BUY recommendation on this stock on 16th October 2013. But with the pick-up in growth momentum taking time, we have revised the target price downwards from Rs 330 to Rs 280. At the current price level, valuations continue to remain attractive and we maintain a BUY view on the stock from a 2 years perspective.

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