Yet Another Tough Quarter
Bajaj Corp has delivered poor set of numbers in 4QFY17 with its net sales falling by 1.9% YoY to Rs2bn, while pre-exceptional net profit plummeted by 20.2% YoY to Rs527mn. Overall volume for the quarter has declined by 7% YoY. Considering the tough quarter, we have revised our revenue and profit estimate for FY18E downwards by 4% and 7%, respectively. We expect Bajaj Corp to report revenue and earnings CAGR of 14.5% and 18.5%, respectively through FY17-19E. Considering the Company’s market leadership and pricing power, coupled with attractive valuations, we maintain our BUY recommendation on the stock with a revised Target Price of Rs463 (from Rs481 earlier).
Volumes Continue to Decelerate
Bajaj Corp’s overall volume for the quarter decelerated by 7%. This is on the back of 6.5% drop reported in 3QFY17. Flagship brand Almond Drops Hair Oil reported 7.1% YoY volume and 2.3% YoY value sales de-growth in the same period. The management stated that urban markets recovered at a faster pace compared to rural markets post demonetisation. As the wholesale channel continues to reel under pressure, the management intends to reduce the salience of wholesale over the next two years by focusing on increasing direct distribution network. The management envisages disruption in the supply chain for couple of quarters post GST roll-out.
Gross Margins Improve, EBITDA Falters
On the back of stable LLP and vegetable oil prices, gross margins improved by 290bps to 67.2% for 4QFY17. While the average LLP prices were stable at Rs46.2/kg, vegetable oil prices declined by 5% YoY to Rs81.7/kg during the quarter. The management stated that its low-cost inventory would last till April following which it would have to hike prices to maintain its gross margins. Employee cost rose by 170bps YoY to 7.5% of sales due to addition of several management personnel during FY17. Further, other expenses also increased by 450bps YoY to 20.5% of sales due to higher cost of direct distribution set-up. The resultant EBITDA margins for the quarter fell by 390bps YoY to 32.4%.
Outlook & Valuation
Considering the tough market scenario for past couple of quarters, we have reduced our sales and earnings estimates by 4% and 7%, respectively for FY18E and now expect Bajaj Corp to report revenues of Rs9.9bn and Rs11.3bn and net profit of Rs2.7bn and Rs3.1bn in FY18E and FY19E, respectively. Based on expected EPS of Rs21, the stock currently trades at attractive valuations of 19x FY19E earnings. We maintain our BUY recommendation on the stock with a revised Target Price of Rs463, based on 22x FY19E earnings.
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