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Bajaj Corp: Sales momentum picks up - Views on News from Equitymaster
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Bajaj Corp: Sales momentum picks up
Aug 13, 2014

Bajaj Corp Limited has announced its first quarter financial results of 2014-2015 (1QFY15). The company has reported 12.4% YoY increase in sales and 15.7% YoY fall in net profits. Here is our analysis of the results.

Performance summary
  • Bajaj Corp (BCL) posted a revenue growth of 12.4% YoY led by 3.5% YoY growth in volumes.
  • The company's operating margin saw a slight dip as savings from ad-spends partially neutralized higher input costs and other expenses (all as a proportion of sales).
  • Excluding the impact of brand amortization of Rs 117.5 m, the net profits have grown by 9.2%. However, net margin still contracted by 0.8% YoY due to lower other income earned during the quarter.

Financial performance snapshot
Rs(m) 1QFY14 1QFY15 Change
Revenues 1,702 1,913 12.4%
Expenditure 1,220 1,376 12.8%
Operating profit (EBDITA) 482 537 11.3%
EBDITA margin (%) 28.3% 28.1% -0.3%
Other income 121 91 -24.8%
Interest 0 0  
Depreciation 8 9 9.8%
Profit before tax 595 619 4.0%
Extraordinary inc/(exp) - 117  
Tax 125 105 -15.7%
Profit after tax/(loss) 470 396 -15.7%
Net profit margin (%) 27.6% 20.7% -6.9%
No. of shares (m)     147.5
Diluted earnings per share (Rs)*     9.7
Price to earnings ratio (x)*     24.9
*trailing twelve months

What has driven growth in 1QFY15?
  • BCL posted a pick-up in revenue growth in June 2014 quarter after reporting flat growth in March 2014 quarter. Backed by 3.5% rise in offtake, the company's topline grew by 12.4% in June 2014 quarter. The offtake of flagship brand Almond Drops Hair Oil (ADHO) was down by 1% YoY in June 2014 quarter as compared to a 6.4% drop in volumes reported in March 2014 quarter. Aided by a 5.5% hike effected in April 2014, ADHO's sales in value terms have grown by 5% YoY for the June 2014 quarter. However, sales of Kailash Parbat cooling hair oil fell by 33% due to massive slowdown in cooling hair oil segment. Sales from the acquired NOMARKS brand stood at Rs 141 m for the quarter constituting 7% of overall sales.

    Cost break-up
      1QFY14 1QFY15 Change in basis points
    Raw material 39.9% 40.8% 81.76
    Employee 4.9% 5.0% 15.39
    Advertisement 8.8% 6.9% -191.86
    Other expenditure 18.0% 19.3% 122.20

  • The company witnessed commodity inflation during the quarter after the average price of largest input Liquid Light Paraffin (LLP) was up by 17% YoY and the company exhausted its low cost inventory in February 2014. Even the price of glass was up by 5% YoY. However, the price of refined oil declined by 2.3% for the quarter. As a result, the company's raw material cost to sales ratio was up by 0.8% YoY. Even the proportion of other expenses to sales increased by 1.2% YoY. The impact of higher expenses was partially offset by 1.9% drop in ad-spends to sales ratio. The company's operating margin dipped by 0.3% for the quarter.

  • The net profits fell by 15.7% 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 9.2% during the quarter. The other income earned has fallen by 25% YoY during the quarter.
What to expect?
Faster growth in rural sales has insulated Bajaj Corp from slowdown in urban India. Backed by higher stock points, van operations and faster rise in sachet sales, rural sales now contribute 40% to BCL's overall sales. The company is witnessing early signs of improvement in sales of its flagship brand ADHO present in value added hair oil segment. As per the company, retailer downstocking of ADHO has stopped for the last two months. While as per Nielsen's data ADHO volumes fell by 2.7%, the primary sales of ADHO for the company declined by a mere 1%. This indicates that the stock correction for ADHO at the retailer and distributor level is likely to take place in the coming future.

We believe that BCL's ADHO is expected to witness pick-up with recovery in discretionary spending. As economic sentiment improves, ADHO being the market leader in Light Hair Oil is expected to drive sales as coconut oil and unbranded hair oil users upgrade to value added hair oils. Moreover the company has been expanding the reach of the acquired NOMARKS brand which is presently available in 3.5 lakh retail outlets. The company has plans of widening its reach to 5 lakh outlets in FY15. On the international front, its operations in Bangladesh have stabilized while its UAE operations are expected to commence in 2QFY15. International operations contribute 3% to overall sales which the company wants to increase to 5%.

At the current price of Rs 242, the stock is trading at a multiple of 14 times its FY17 earnings. WE have given a BUY recommendation on this stock on 16th October 2013. As valuations still continue to remain attractive, we maintain a BUY view on the stock from a 2-3 years perspective.

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