* Volume decline leads to flat sales; higher other expenditure results in lower profit:
Bajaj Corp (BCL) reported revenue of Rs204.5 crore for Q4FY2017, which fell marginally by 2% YoY. The decline in the topline was mainly on account of a 7.1% drop in volume in the flagship brand Bajaj Almond Drops Hair Oil (ADHO) followed by a 13.2% decline in the volume of Bajaj Brahmi Amla Hair Oil (BAHO). Nomarks saw a substantial improvement in the sales on a YoY basis. The lower volume offtake was due to the lag effect of demonetisation on the wholesale channel (47% of BCL sales come from the wholesale channel). Benign input prices led to a 287BPS improvement in the gross margins. But, higher other expenditure (mainly Selling & Distribution overheads) resulted in a decline in the Operating Profit Margin (OPM) and a ~12% drop in the operating profit at Rs66.2 crore. Lower other income (down by ~65% YoY) resulted in the PAT being down by 17.3% at Rs52.7 crore.
* Primary sales to remain under strain for next 1-2 quarters; Gross margins may come under pressure in absence of price hike:
Though demonetisation took place during Q3FY2017, the lag effect of the same was visible in Q4FY2017 too. As a large chunk of BCL’s revenue comes from the wholesale channel, the impact of demonetisation on the company sustained in Q4FY2017 as well. Also, there was a change in the product mix with a bias towards low-value packs like sachets. The management expects the de-stocking of inventory to continue in Q1FY2018 also due to the subdued demand environment for the entire Hair Oil space as well as for BCL. Benign input costs helped BCL to post strong gross margins in FY2017. However, with the benefits of low-cost raw material inventory receding (LLP prices have risen significantly from its low), the gross margins would come under stress in the coming quarters. The company has delayed the price hike and plans to take a call post the implementation of GST (expected to kick in from July 1).
* Focus remains on enhancing direct reach to improve long-term growth prospects; Nomarks sales likely to improve in FY2018:
With wholesale channels getting hit by demonetisation, the company has decided to reduce its dependence on the wholesale trade and improve the direct distribution reach in another two years (direct distribution to reach seven lakh outlets from current level of ~6.5 lakh outlets). The same will not have any positive impact on the sales performance in the near term, but will help in de-risking the business model in the long run. With the company planning to expand the reach for Nomarks to another 4-5 states, its performance is expected to be better in FY2018.
* GST may halt sales growth for another two quarters; switch stance from ‘Positive’ to ‘Neutral’:
BCL’s management has given a cautious outlook on the short-term performance, as the implementation of GST will continue to adversely impact the wholesale trade channels for another 1-2 quarters due to the transition phase. Accordingly, recovery in volume is expected to materialise in H2FY2018 post the revival in primary sales. Also, a good southwest monsoon will be imperative in reviving rural sales for the company. We have revised downwards our earnings estimates for FY2018 by ~8% to factor in lower-than-expected revenue growth. Therefore, in view of the expected subdued performance in the near term, we have shifted our stance on the stock from ‘Positive’ to ‘Neutral’. We would monitor the performance keenly for the next two quarters to take a fresh view. We would advise investors to avoid any fresh buying in the stock at the current juncture.
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