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Bajaj Corp Offer for sale: Our view - Views on News from Equitymaster

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Bajaj Corp Offer for sale: Our view
Jul 19, 2013

SKB Roop Commercial LLP, a part of the promoter group of Bajaj Corp Ltd (BCL), is set to sell its stake in the company. The promoter wants to offload a 9.8% stake in the equity share capital of the company. Presently the promoter shareholding stands at 84.8%. The sale would also make the company compliant with the 25% public shareholding norm of SEBI.

BCL is a leading producer of hair oil. It is part of the Shishir Bajaj Group of companies and subsidiary of Bajaj Consumer Care Limited (BCCL). It is also the market leader with a 55% share in the rapidly growing Light Hair Oil (LHO) segment through its Almond Drops Hair Oil (ADHO). Due to the strong leadership position and pricing power enjoyed in a premium category, the company's operating margin is more than two times that earned by closest rival, Marico. Additionally, the company's interest cost is low due to almost zero dependence on borrowed funds. BCL, also enjoys a low tax rate as all its plants are located in tax-free states. Thus the company boasts of superior earnings and high shareholder's returns..

Profitable operations have added to BCL's reserves kitty. In 2010, the company raised funds to the tune of Rs 2.9 bn through an Initial Public Offering. As at the end of March 2013, the company's Reserves & Surplus stood at Rs 4.7 bn. Of the four products to be launched each year since FY11, the company launched the first one, cooling oil, in May 2011. Two of the remaining products are expected to be launched within a year. The company is on the look-out of acquisition of niche brands in the FMCG and the hair oil market as part of its long term growth strategy. The net IPO proceeds of Rs 2.5 bn, pending utilization, have been invested in interest bearing securities, mutual funds and bank deposits.

Issue details

The offer for sale (OFS) is for 14.4 m equity shares of the face value of Re 1 each. There is no fresh issue of equity. Bajaj Corp has fixed the Floor Price at Rs 200 per share. The OFS would take place through a separate window designated by the Stock Exchanges on 19th July 2013 from 9.15 am to 3.30 pm. The price set is at a discount of around 18% to the stock's closing price on 18th July 2013.

Our View

We had suggested that investors buy the stock of Bajaj Corp on 4th January 2012 and this recommendation was finally closed on 16th August 2012 after meeting our target price.

Bajaj Corp is currently trading at 22 times its FY13 earnings per share. Even at the floor price of Rs 200, it is trading at 18 times. We are of the view that given the company's fundamentals, it deserves a lower valuation as that would offer a larger margin of safety. Since the current valuations are relatively higher than our comfort levels, we recommend investors to AVOID the issue.

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