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Bajaj Corp: Profitable growth continues - Views on News from Equitymaster

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Bajaj Corp: Profitable growth continues
Oct 16, 2012

Bajaj Corp Limited has announced its second quarter financial results of 2012-2013 (2QFY13). The company has reported 27% YoY increase in sales and 33.6% YoY jump in net profits. Here is our analysis of the results.

Performance summary
  • Bajaj Corp Ltd (BCL) posted a 27% rise in revenues driven by 18.7% growth in volumes. For 1HFY13, topline grew by 28% on a 20.5% rise in offtake.
  • The company's operating margin expanded by 310 basis points (3.1%) led by lower raw material costs and wages (both as a proportion of sales). During 1HFY13, the operating profitability was up by the same magnitude.
  • A drop in other income and higher depreciation outgo limited earnings growth to below 40% for the 2QFY13 as well as 1HFY13.

Financial performance snapshot
Rs(m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Revenues 1,071 1,360 27.0% 2137.9 2742.5 28.3%
Expenditure 797 969 21.7% 1597.6 1,962.7 22.8%
Operating profit (EBDITA) 274 391 42.5% 540 780 44.3%
EBDITA margin (%) 25.6% 28.7%   25.3% 28.4%  
Other income 99 98 -0.5% 194 188.4 -3.0%
Interest 0.2 0.2 -19.6% 0.4 0.3 -27.3%
Depreciation 5 8 50.6% 10 15.9 57.0%
Profit before tax 368 481 30.8% 724 952 31.5%
Extraordinary inc/(exp) - -   0 0  
Tax 80 97 20.9% 152.3 191.8 25.9%
Profit after tax/(loss) 287 384 33.6% 572 760 33.0%
Net profit margin (%) 26.8% 28.2%   26.7% 27.7%  
No. of shares (m)         147.5  
Diluted earnings per share (Rs)*         9.4  
Price to earnings ratio (x)*         19.6  
* On a trailing 12-months basis

What has driven performance in 2QFY13?
  • BCL registered a 27% jump in revenues in 2QFY13 aided by over 20% rise in the offtake of its flagship brand Almond Drops Hair Oil (ADHO). During the quarter, growth in offtake of ADHO was nearly double in the rural region as compared to the urban region. The brand now has a market share of 51.8% in volume terms and 54.4% in value terms. Its recently launched Kailash Parbat Cooling Oil (KPCO) continued to grow at a healthy pace and has acquired 3% market share.

    Cost break-up
    Cost break-up 2QFY12 2QFY13 Change in basis points
    Raw material 46.2% 42.2% -393.3
    Employee 5.3% 4.9% -36.7
    Advertisement 5.9% 6.3% 37.9
    Other expenditure 17.0% 17.8% 80.4

  • BCL continued to expand operating profitability significantly during the quarter. It's operating margin increased by 310 basis points (3.1%) backed by higher realizations and controlled raw material costs. The company raised the price of ADHO by 8.7% YoY in April 2012. On the raw material front, average price of a key ingredient Light Liquid Paraffin (LLP) forming 38% of overall costs, fell by 5% on a YoY basis. However, prices of vegetable oil and glass bottles were up by 26% and 8%, respectively as compared to year-ago levels. The prices of the other ingredients remained stable. However other expenditure to sales ratio was up by 0.8% as sales promotions increased to Rs 102.5 m from Rs 70 m in the year-ago quarter.

  • On account of a marginal drop in other income earned and a 50.6% rise in depreciation outgo, earnings increased by relatively subdued 33.6% during the quarter.

What to expect?
Bajaj Corp has been riding the demand curve in the rapidly growing light hair oil category that is the second largest category after coconut oil. Being the market leader in this category with its ADHO, robust growth in both rural and urban regions has enabled the company to maintain a volume growth of 20-22% QoQ in the last five quarters. The company wants to increase market share of ADHO from 54% to 65% over the next three years and wants its cooling oil product Kailash Parbat to break-even before it can launch new products.

Despite earning more than 80% of its revenues from a single product, ADHO, the company does not have firm plans of launching new products or making acquisitions. Of the total IPO proceeds of Rs 2.8 bn raised for launching new products, only Rs 198.7 m have been utilized so far for launching cooling oil.

At the current price of Rs 184, the stock is trading at a multiple of 14.4 times our estimated FY15 earnings. WE had given a BUY recommendation on this stock which has already surpassed our target price. As all the positives have already been factored in and with no future drivers, the stock appears fairly priced and we maintain a negative view on the stock.

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