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Bajaj Corp: Lower input costs boost margins - Views on News from Equitymaster
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Bajaj Corp: Lower input costs boost margins
Aug 24, 2015

Bajaj Corp (BCL) declared results for the quarter ended June 2015. Here is our analysis of the results.

Performance summary
  • BCL clocked a revenue growth of 14.5% YoY in 1QFY16.
  • The operating margin expanded by 2.2% backed by controlled input costs.
  • The net profit grew by 19.9% YoY on the back of 23.6% increase in operating income and lower interest costs. The other income earned was lower by 25% YoY during the quarter.

Standalone financial performance
(Rs m) 1QFY15 1QFY16 Change
Net sales 1,913 2,191 14.5%
Expenditure 1,376 1,527 11.0%
Operating profit (EBDITA) 537 664 23.6%
EBDITA margin (%) 28.1% 30.3%  
Other income 91 68 -24.9%
Depreciation 9 10 17.2%
Interest 0.2 0.11 -34.9%
Profit before tax 619 722 16.6%
Exceptional Items (117) (117) 0.0%
Tax 105 129  
Profit after tax/(loss) 396 475 19.9%
Net profit margin (%) 20.7% 21.7%  
No. of shares (m)   147.5  
Diluted earnings per share (Rs)*   3.2  
Price to earnings ratio (x)   40.7  
(*On a trailing 12-month basis)

What has driven performance in 1QFY16?
  • Aided by robust volume growth of 12.1%, BCL's topline gained momentum in 1QFY16 and registered a rise of 14.5% YoY. Bajaj Almond Drops Hair Oil (ADHO) contributed to 90.6% of the total turnover of the company and the product segment has shown a volume growth of 11% on a Y-o-Y basis.

  • The company has managed to expand operating margin by 2.2% backed by lower input costs. During the quarter, there was a steep fall in the price of Liquid Light Parraffin (LLP). As against an average of Rs 86/kg in the 1QFY15, the rate in 1QFY16 was down to Rs 59.51/kg. LLP constitutes 32.80% of the total cost to the company. The cost of goods sold to sales ratio was down by 5.5% YoY during the quarter.

    Cost break-up
      1QFY15 1QFY16 % change
    Cost of goods sold 40.76% 35.26% -5.5
    Employee 5.03% 5.08% 0.05
    Advertisement 6.88% 6.97% 0.09
    Other expenditure 19.26% 22.40% 3.14

  • At the net level, margin expanded by 1% YoY due to a 25% fall in other income earned during the quarter. The interest outgo has reduced whereas the tax incidence remained the same during the quarter.
What to expect?
Even though the hair oil industry has degrown by 8.6% inn volume terms for the first 5 months of this year, the light hair oil industry has shown a growth of 5% for the same period. However, the offtake of the company's core brand ADHO has grown in double-digits during the June 2015 quarter. The rural demand for ADHO has remained subdued and the volumes have declined to 8% on a Q-o-Q basis from 13%. BCL has re-launched its 'Amla' hair oil brand in four key states and has received good response. The management stated that if there is a potential to sell the 'Amla' hair oil brand profitably over the next 6 months they would extend the brand to other states. In case of the acquired 'No Marks' brand, the company has laid down a strategy to emphasize more on 'Face wash' segment and reduce dependence on the 'Anti Marks' cream. This segment is a low margin business and faces tough competition from other players. The 'No Marks' brand currently accounts for 5% of the total turnover of the company.

The margins will see pressure going forward due to higher advertisement expenditure to endorse the new products. Being a market leader in light hair oil segment, the company is likely to benefit from higher uptrading as economy gets back on track. However, the recent rally in the stock price leaves very little on the table for investors. At the CMP of Rs 500, the stock is currently trading at 40.7 times its trailing twelve months earnings. As valuations appear stretched, we recommend investors not to Buy the stock at current levels.

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