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Bajaj Corp: Profits fall on amortization

Nov 7, 2013 | Updated on Oct 30, 2019

Bajaj Corp Limited has announced its second quarter financial results of 2013-2014 (2QFY14). The company has reported 16.5% YoY increase in sales and 6% YoY fall in net profits. Here is our analysis of the results.

Performance summary
  • Bajaj Corp Ltd (BCL) posted a 16.5% YoY growth in topline in 2QFY14 led by 15% YoY volume growth. For 1HFY14, revenues increased by 19.8% YoY.
  • The operating margin contracted by 1.6% in 2QFY14 due to a steep rise in ad-spends and other expenses. During 1HFY14, the operating margin reduced by 0.7%.
  • Net profit declined by 6.2% in 2QFY14 due to a brand amortization and a steep jump in interest outgo.For 1HFY14, net profit grew by 9.2% YoY.

Financial performance snapshot
Rs(m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Revenues 1,360 1,584 16.5% 2743 3286 19.8%
Expenditure 969 1,155 19.2% 1963 2375 21.0%
Operating profit (EBDITA) 391 429 9.7% 780 911 16.8%
EBDITA margin (%) 28.7% 27.1%   28.4% 27.7%  
Other income 98 101 2.9% 189 222 17.7%
Interest 0 13   0 13  
Depreciation 8 10 19.1% 16 18 9.5%
Profit before tax 481 507 5.5% 952 1,102 15.8%
Extraordinary inc/(exp) - (51)   0 -51  
Tax 97 96 -0.8% 192 221 15.2%
Profit after tax/(loss) 384 360 -6.2% 760 830 9.2%
Net profit margin (%) 28.2% 22.7%   27.7% 25.3%  
No. of shares (m)         147.5  
Diluted earnings per share (Rs)*         11.83  
Price to earnings ratio (x)*         20.5  
*trailing twelve months

What has driven performance in 2QFY14?
  • BCL recorded a 16.5% increase in revenues led by relatively subdued15% growth in offtake. The company saw volume growth of over 17% in the past 11 quarters. The muted growth has been on account of down trading as low unit packs such as sachets and 20 ml & 30 ml packs have grown at a faster pace. Its flagship brand Almond Drops Hair Oil (ADHO) grew by 17.8% in value terms during the quarter. The ADHO brand saw its market share rise to 57% in volume terms and 58.3% in value terms. BCL's cooling hair oil; Kailash Parbat maintained its market share at around 3%.

    Cost break-up
    Costbreak-up 2QFY13 2QFY14 Change in basis points
    Raw material 42.2% 39.5% -273.02
    Employee 4.9% 5.5% 52.27
    Advertisement 6.3% 8.0% 167.95
    Other expenditure 17.8% 20.0% 218.54

  • On account of slowdown, ad-spends have escalated by 47.6% during the quarter. Even other expenses rose by 31%. As a proportion of sales, ad-spends and other expenses increased by upto 2% each during the quarter. Input cost savings of 2.7% due to contract buying of Liquid Light Paraffin (LLP) remained inadequate. Therefore, the operating margin contracted to 27% in 2QFY14 from 28.7% in the year-ago quarter.

  • At the net level, margins contracted by a sharp 5.5% due to brand amortization of Rs 51 m pertaining to the acquired NOMARKS brand on a pro-rata basis for 40 days. Even the interest cost has jumped 66 folds as the acquisition had been financed by a bank borrowings of Rs 1 bn. Out of the total bank borrowings,Rs 400 m will be repaid within a year whereas the balance Rs 600 m will be payable over the next 2-3 years.
What to expect?
Bajaj Corp's profit margins are expected to dip below 20% due to brand amortisation charges as well as higher interest outgo. As the company has entered a non-compete agreement with the seller for a period of three years, the company would be writing off the NOMARKS brand value of Rs 1.4 bn over the next three years. While moderation in volume growth continues to remain a headwind, we believe the long term growth prospects of the company remain bright on the back of strong brand equity as well as huge growth potential in value added hair oils.

At the current price of Rs 243, the stock is trading at a multiple of 16 times its FY16 earnings. WE have given a BUY recommendation on this stock on 16th October 2013. As valuations continue to remain attractive, we maintain a BUY view on the stock.

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Jun 25, 2021 03:35 PM


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