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Bajaj Corp: Weak input price boosts margin - Views on News from Equitymaster

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Bajaj Corp: Weak input price boosts margin
Aug 21, 2012

Bajaj Corp Limited has announced its first quarter financial results of 2012-2013 (1QFY13). The company has reported 29.5% YoY increase in sales and 32% YoY rise in net profits. Here is our analysis of the results.

Performance summary
  • Bajaj Corp Ltd (BCL) posted a 30% rise in revenues driven by 22% growth in volumes.
  • The company's operating margin expanded by 330 basis points led by lower raw material costs and ad-spends (both as a proportion of sales).
  • Earnings grew by a relatively subdued 32% due to reduction in other income and higher depreciation outgo.

Financial performance snapshot
Rs(m) 1QFY12 1QFY13 Change
Revenues 1,067 1,382 29.6%
Expenditure 801 993 24.0%
Operating profit (EBDITA) 266 389 46.3%
EBDITA margin (%) 24.9% 28.2%  
Other income 95 90 -5.6%
Interest 0.2 0.1 -35.9%
Depreciation 5 8 64.6%
Profit before tax 356 471 32.2%
Extraordinary inc/(exp) - -  
Tax 72 95 31.5%
Profit after tax/(loss) 284 376 32.4%
Net profit margin (%) 26.6% 27.2%  
No. of shares (m)   147.5  
Diluted earnings per share (Rs)*   8.76  
Price to earnings ratio (x)*   20.0  
*trailing twelve months

What has driven growth in 1QFY13?
  • BCL continued to grow ahead of the light hair-oil category during the quarter. Offtake of its flagship brand Almond Drops Hair Oil (ADHO) grew by 24.4% compared to 15.6% growth in overall category volumes reaching market share of 51.9%. Coupled with 8.6% price-hike in March 2012, ADHO sales grew by 31% resulting in a 29.5% rise in total sales. The growth of ADHO offtake has been 11.5% faster in rural region compared to urban region. The company reported more than 100% jump in the retail offtake of Kailash Parbat Cooling Oil (KPCO), but the growth remained flat after including distributor offtake due to high base of inventory build-up in the year-ago quarter. This recently launched cooling hair oil brand now has a 2.1% market share and contributes 4% to overall revenues.

    Cost break-up
      1QFY12 1QFY13 Change in basis points
    Raw material 47.1% 44.3% -275.09
    Employee 5.1% 5.0% -5.48
    Advertisement 8.2% 7.1% -108.14
    Other expenditure 14.7% 15.4% 67.07

  • BCL has posted a significant expansion of 330 basis points in operating margin on the back of higher realizations coupled with lower price of key input. Average price of key ingredient Liquid Light Paraffin (LLP), constituting 38.5% of overall costs, fell by 6.8% YoY. However, prices of glass bottles and refined vegetable oil firmed up by 8% and 22%, respectively. The prices of other inputs remained stable. This along with price-hikes of over 8% taken in both ADHO and KPCL has led to a 275 basis points fall in the cost of goods (as a percentage of sales). Even ad-spends to sales ratio was down by 108 basis points during the quarter.

  • On account of a 5.6% drop in other income earned and a 64.6% rise in depreciation outgo, earnings increased by relatively subdued 32.4% during the quarter.

What to expect?
Being a market leader in the second largest & rapidly increasing light hair oil segment, Bajaj Corp's sales have been growing ahead of the category. Its rural sales have been growing much faster than urban sales in the past 2-3 years. Even its recently launched cooling hair oil has gained a 2.5% market share. Going forward, the company is expected to benefit from increased penetration of light hair oil in rural region and higher usage in the urban region. The company wants its cooling oil product to break-even before it can launch new products.

At the current price of Rs 175, the stock is trading at a multiple of 13 times our estimated FY15 earnings. WE had given a BUY recommendation on this stock which has already surpassed our target price. At current valuations, the stock appears fairly priced and we advice a SELL on the stock.

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