* Volumes decline due to de-stocking; OPM affected by lower operating leverage:
Bajaj Corp Ltd (BCL) revenues declined by 3.6%yoy to Rs 196.8 crore due de-stocking by wholesalers and retailers prior to the implementation of GST. The decline in revenue was mainly on account of a 6.6% volume decline in Bajaj Almond Drops hair oil (ADHO), the flagship brand of the company, followed by 20.3% volume decline in Brahmi Amla Hair Oil (BAHO). The substantial increase in raw material prices (LLP spiked by 33%yoy) led to 40BPS decline in the gross margins during the quarter. This, along with overheads on selling and distribution (other expenditure) and a rise in employee cost led to ~400BPS decline in the Operating Profit Margin (OPM) and ~15% decline in the operating profit to Rs. 60.6 crore. But higher other income and lower incidence of tax arrested sharp decline in the adjusted PAT to Rs 55.0 crore.
* Outlook – Secondary sales saw double digit growth; key trigger for likely better performance in H2FY2018:
B CL’s Q 1FY2018 was impacted by 5-7 days de-stocking by distributors/ retailers in the month of June 2017, while the month of April and May saw substantial improvement in volumes due to improvement in the off-take. With 50% of sales volume coming from wholesale channels, the sales volumes of BCL will take a little longer to improve as compared to its peers. The key positive for the quarter was a double digit growth of 12% in secondary sales in Q1FY2018 driven by a strong recovery in the rural market and steady growth in the urban market. If this sustains, we could see faster recovery in the sales volume (expected in Q3FY2018). The gross margins would remain under pressure in near term due to a spike in the LLP prices and hence OPM is expected to remain in the range of 31-32% in the coming quarters.
* Valuation – Retain Neutral stance; faster pace of recovery in primary sales would act as rerating trigger:
We have broadly maintained our earnings estimates for FY2018 and FY2019. Though we have seen substantial uptick in the secondary sales, we believe it will take another quarter for primary sales to revive as wholesalers/CSD (50-55% of sales) is yet to re-fill the stock. However, an improvement in rural consumption might lead to an early sales recovery and could be a key re-rating trigger for the stock in near future. Hence we shall keenly monitor the performance for another quarter before changing our stance on the stock. We maintain our Neutral stance on the stock.
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