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Bajaj Corp: Slow Recovery from GST Implementation - Views on News from Equitymaster
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Bajaj Corp: Slow Recovery from GST Implementation
Nov 10, 2017

Bajaj Corp Limited (BCL) has announced its results for the quarter ended September 2017. The company's revenues went up marginally, by 3.7%. However, its margins suffered and consequently net profits declined by 13% during the quarter as compared to a year ago. Here is our analysis of the results.

Performance Summary
  • After reporting weak numbers in the first quarter, BCL set out on a path to recovery in the second quarter. The company's topline increased by over 3.7% as sales volumes were supported by restocking by distributors post the goods and service tax (GST) implementation. While the destocking at the distributor level, which occurred during the month of June has been restocked. The wholesalers continue to be watchful and have not reacted positively post the implementation of GST.
  • BCL took a hit on EBITDA, which was down by over 13% YoY on account of uncertainty regarding taxation benefits enjoyed by the company in the GST era. These benefits were thus not included in the calculations. However, the government has subsequently announced that manufacturing facilities established in designated tax-free zones shall continue to enjoy the same benefits under the GST regime. With this accounted for, the management expects the EBITDA margin for the quarter to be around 32%, as against 28.6% without accounting for benefits.
  • While the company has been able to steadily increase market share in the light hair oil segment - hovering at all-time high levels of 61% in value terms in September - primary sales volume growth still remains sluggish. Destocking in the wholesale business and the canteen stores department (CSD) channel, which faced uncertainty due to GST has significantly affected the company's primary volume sales. However, a pickup in volumes in the retail and distributor level helped BCL steady the ship.
  • The overall market environment remains subdued with the Light Hair Oil market growing by only 2.6% during the September 2017 quarter. However, the company's core brand - Bajaj Almond Drops outpaced the industry, with an offtake growth of 4.8% for the quarter.
  • The acquired brand 'No Marks' recovered from a disappointing first quarter, and grew by 48% in September 2017, albeit on a much lower base. The company is actively promoting the 'No Marks' cream and has been reasonably successful in the Hindi-speaking belt - its focus market. The company is focusing on one state at a time and plans to roll out to the rest of the country on a successful test launch.
  • The international business, which has been a growth driver for the company, declined substantially during the quarter. The international business declined by 15.4% during the quarter. Economic and political uncertainty in the Middle East led to a decline in sales volumes, with volumes in the MENA (Middle East and North Africa) region declining by over 35% in the quarter.
  • On the cost front, crude oil price is staging a slow recovery. Consequently, the price of Liquid Light Paraffin (LLP) - the company's principal raw material - has also firmed up. However, the company has enough stock of LLP, that it procured when the prices hit a bottom, thereby insulating it from higher input costs until the end of the next quarter. Against an average price of Rs. 44.5 per kg in the second quarter of the last financial year the LLP price in this quarter was Rs. 51.8 per kg. Cost of raw materials as a percentage of sales declined marginally due a fall in prices of refined oil.

    Financial Snapshot
    Rs(m) 2QFY17 2QFY18 Change 1HFY17 1HFY18 Change
    Revenues 1,968 2,041 3.7% 4011 4016 0.1%
    Expenditure 1,296 1,458 12.5% 2629 2826 7.5%
    Operating profit (EBDITA) 672 583 -13.2% 1,382 1,190 -13.9%
    EBDITA margin (%) 34.2% 28.6% -5.6% 34.4% 29.6% -4.8%
    Other income 149 80 -46.7% 233 190 -18.3%
    Interest 2.24 2.48 10.9% 4.25 5.04 18.7%
    Depreciation 11 16 44.9% 21 31 48.1%
    Profit before tax 808 645 -20.2% 1,589 1,344 -15.4%
    Extraordinary inc/(exp) -66 0   -184 0  
    Tax 159 138 -13.3% 300 287 -4.5%
    Effective tax rate 20% 21%   19% 21%  
    Profit after tax/(loss) 583 507 -13.0% 1,105 1,057 -4.3%
    Net profit margin (%) 29.6% 24.8% -4.8% 27.5% 26.3% -1.2%
    No. of shares (m)         148  
    Diluted earnings per share (Rs)*         15.62  
    Price to earnings ratio (x)*         29.6  

    *trailing twelve months

  • Employee expenses for the quarter increased as the BCL continued its head hunting process for procuring new quality talent and top-level executives from FMCG companies.
  • Net profit for the quarter was down by over 13% mainly on the back of an increase in expenditure as well as the withdrawal of tax benefits in the GST regime. For the 1HFY18, revenue growth was flat and rising employee expenditure meant that the net profit for 1HFY18 declined by over 4% over the same period a year ago.

    Cost break-up 2QFY17 2QFY18 % Change
    Raw material 33.6% 33.0% -0.64
    Employee 7.4% 9.5% 2.06
    Other expenditure 24.8% 28.9% 4.15
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